National Brokerage Firm Emkay Global has addressed this issue, stating that they see very limited impact on Bajaj Finance’s valuations while reiterating their ‘buy’ rating on Bajaj Finance with a target price of Rs 9,000.
“The potential premium trading of BHFL shares will be offset in BAF’s SoTP value by the introduction of a Holdco discount following BHFL’s listing. Overall, BHFL’s listing addresses another regulatory issue and is positive for BAF, but the impact on valuation is very limited, in our view,” Emkay said in its report.
BHFL’s IPO and listing, necessitated largely by its inclusion in the RBI’s top-tier NBFC list, have several implications for BAF as its investors begin to pay closer attention to its standalone financial and operational metrics.
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“With the listing of BHFL, Bajaj Finance’s (BAF) share in unsecured loans will increase slightly as consumer finance has been its primary focus. To counter this, BAF is increasing its secured loan portfolio. The combined entity has historically had strong asset quality, driven by a higher share of mortgage loans,” the domestic brokerage firm said. However, post-listing, BAF will no longer benefit from BHFL’s risk diversification, leading to slightly higher GS3/NS3 metrics for the standalone entity compared to the combined entity. These metrics are industry-best and should improve as the secured loan portfolio grows. The standalone entity benefits from a higher concentration of high-yielding consumer loans and higher fee income, giving it a competitive advantage in terms of margins. However, Bajaj Finance (Standalone) incurs higher operating costs due to its larger employee base and extensive branch network. Despite these elevated costs, its overall ROA/ROE on an adjusted basis will be 65-70 bps/140-170 bps higher than that of the consolidated entity, reflecting its strong profitability, Emkay added.
“BHFL’s listing addresses another of the regulatory issues, among many others that have weighed on BAF’s share price in recent years. However, from our valuation perspective, it doesn’t change much as the IPO assigns a value of Rs 547 billion to BHFL’s stake (88.75% post-IPO + Rs 30 billion in OFS proceeds) for BAF, which is in line with the value of Rs 545 billion assigned in our BAF target price of Rs 9,000 per share,” says Avinash Singh, Senior Research Analyst, Emkay Global.
An increase in BHFL’s share price after the listing would increase the value of BAF’s stake, but this could be offset by two factors: investors apply a holding company discount to BAF’s stake and if BHFL receives a significantly higher valuation, it may highlight a preference for secured loans, creating a slightly negative perception for BAF, which has more unsecured loans.
Meanwhile, Bajaj Finance shares were trading unchanged at Rs 7,346 on BSE around 1 pm.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own and do not represent the views of The Economic Times)
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