Bajaj Finance: Capital raise on high growth visibility

25 Sep 2023 , 10:58 AM

Recommendation: Buy; Target price: Rs 9200

BAF is considering equity raise at its Board meeting on 5th Oct. Although unexpected, the decision could be due to management having high growth visibility over the medium term and the need to operate at lower leverage at scale (ala HDFC Ltd). Recently, analysts of IIFL Capital Services had highlighted that BAF has multiple levers to deliver higher growth over the medium term. If BAF were to raise Rs100bn, valuation at CMP would moderate by 10% to 5.0x (FY25) and leverage by 16% to 4.3x. BAF’s high profitability (~5% ROAs) will enable delivering sector-leading ROEs of ~23%, even at lower leverage. Retain BUY. 

BAF to consider equity fundraise: 

BAF has announced Board meeting on 5th Oct, 2023, wherein it will consider an equity fundraise. Historically, BAF has raised equity capital when its leverage exceeded 6x (assets / equity). With BAF’s current leverage of 5.1x and Tier 1 of 23%, markets may not have expected this fund raise from the company. 

Capital raise on high growth visibility; cushion of higher profitability and operating at scale: 

BAF’s decision to raise capital could be due to the management having high growth visibility over the medium term. In analysts of IIFL Capital Services opinion, BAF has multiple levers to grow at 30% Cagr over the medium term: 1) Entry into new segments (currently present in 45% of retail segments), 2) Distribution expansion for existing products (3% of BAF’s locations offer >80% of products). 3) Maturing branch vintage (60% locations have <5Y vintage). 4) Higher ATS of new segments (BAF’s Rs53k retail AUM / customer excl. mortgages ~60% lower than HDFCB’s). Besides, private NBFCs have operated at lower leverage beyond a scale (HDFC). The company’s higher profitability (5% ROAs) enables it to deliver ~23% ROEs despite operating at lower leverage. 

Historically, BAF has rerated in the run-up to capital raise: 

In the three months preceding BAF’s previous fund raises, share price rose by 25% to 35% as markets factored the BVPS accretion. Assuming Rs100bn capital raise, BAF’s valuations at CMP would moderate to 5.0x (5.5x FY25E currently) and leverage would moderate to 4.3x (FY23: 5.1x).