Bajaj Housing Finance IPO: How does it stack up against LIC Housing and PNB Housing Finance

The initial public offering (IPO) of Bajaj Housing Finance (BHFL) will open for bidding on Monday, September 9, marking one of the most highly anticipated market IPOs of 2024. This offering is not just significant due to its size but also because it is the largest public offering of the year.

Through this IPO, Bajaj Housing Finance aims to raise a total of ₹6,560 crore from the public. It will offer a combination of a fresh issue of equity shares worth ₹3,560 crore and an offer for sale (OFS) amounting to ₹3,000 crore. The fresh issue will strengthen the company's balance sheet, while the OFS will allow existing shareholders to reduce their stakes.

The company is part of the renowned Bajaj Group, one of India's most prominent and diversified conglomerates. The Bajaj Group has a strong presence across various sectors, with marquee-listed companies such as Bajaj Finance, one of the country's leading non-banking financial companies (NBFCs), and Bajaj Auto, a major player in the automotive industry.

With the backing of the Bajaj Group and its robust performance in the financial sector, BHFL’s public offering is expected to generate substantial interest from both institutional and retail investors. The shares in the unlisted market are already suggesting a stellar listing for the company. 

Founded in 2008, Bajaj Housing Finance is a non-deposit-taking Housing Finance Company (HFC) registered with the National Housing Bank (NHB) since 2015 and has been offering mortgage loans since the financial year 2018.

Bajaj Finance has a 100% stake in Bajaj Housing Finance, and Bajaj Finserv holds 51.34% in Bajaj Finance. Both these companies are classified as promoters for Bajaj Housing Finance.

Valuations appear higher compared to peers, but justified

The price band for the IPO is set at ₹66- ₹70 per share. At the upper band of ₹70, the stock will be valued at 3.2x its trailing June 2024 book value (post dilution and adjusting for rights share allocation), said domestic brokerage firm InCred Equities. 

"This is expensive compared to peers like LIC Housing Finance (1.2x), PNB Housing (1.7x), and Can Fin Homes (2.7x), but in line with our expectations, given BHFL’s robust yet diversified AUM growth (+30% CAGR), sturdy asset quality (NPAs less than 1%), and superior technology platform enabling it to remain relevant in a stiff competitive environment," said the brokerage. 

Bajaj Finance, with its best-in-class management pedigree, strong promoter back-up, and ability to maintain high-quality growth, has traded at a premium to peers, which the brokerage believes is applicable to BHFL as well.

SBI Securities noted that BHFL is the second-largest housing finance company (HFC) in India, with an AUM of ₹97,071 crore. It has the lowest GNPA and NNPA ratios among large HFCs, standing at 0.28 percent and 0.11 percent, respectively.

It also emphasised BHFL's 30.9 percent AUM growth and 56.2 percent profit growth over FY22-24, citing its strong association with the ‘Bajaj’ brand and projecting 13 percent-15 percent industry growth in the next three years, positioning the company to capitalise on the housing finance sector's expansion.

Strategic focus on prime salaried customers drives AUM growth

Being focused on prime salaried customers, competitive yields have placed the company at par with banks while enjoying an edge over smaller players, thus aiding AUM growth. However, with the cost of funds being relatively expensive to banks, the margin profile of BHFL is relatively weak, said InCred. 

However, the brokerage believes that with diversity in the AUM profile (a balanced mix of superior-yield loans against property, lease rental discounting, and developer loans), management does have room to manage yields. Also, there is enough headroom to improve operating efficiency (C/I ratio at 24 percent), which can drive RoE outperformance, it noted. 

Should you subscribe to the issue?

According to InCred, Bajaj Finance, the parent of BHFL, has been a pioneer in consumer durable financing and has remained the market leader over the years despite aggressive competition from banks and credit card companies.

There are various factors behind BAF's success. However, the brokerage primarily attributes it mainly to the continued focus of its management on the effective use of customer data to create a vast web of cross-selling, diversifying the product profile as per the needs of the borrowers, and consistent investment in upgrading the technology to suit customer needs at every stage.

Although mortgages seem like a pure vanilla product, they have multiple dimensions, especially in an emerging market like India. The brokerage anticipates BHFL’s management has the vision and capability to explore the same over the years, which makes the company attractive over the mid-to-long-term horizon. Therefore, it recommends a 'subscribe' rating to the IPO.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.