Bajaj Housing Finance IPO is open: Impacts on Bajaj Finance

The initial public offering (IPO) of Bajaj Finance’s 100% subsidiary Bajaj Housing Finance Ltd opened for public subscription on September 9. The IPO has been largely necessitated by Bajaj Housing Finance’s inclusion in the Reserve Bank of India’s (RBI) Upper Layer NBFC list and this has several implications for Bajaj Finance as investors look at its standalone financial and operating metrics.

Bajaj Housing Finance is the second largest housing finance company (HFC) in India with an AUM (assets under management) of ₹97,071 crore as of the quarter ended June. The ₹6,560-crore Bajaj Housing Finance IPO comprises a combination of a fresh issue of 50.86 crore equity shares worth ₹3,560 crore and an offer-for-sale (OFS) of 42.86 crore shares aggregating to ₹3,000 crore.

Expensive compared to peers

At the upper end of the IPO price band of ₹66-70 per share, Bajaj Housing Finance stock will be valued at ~3.2x its trailing June 2024 book value (post-dilution and adjusting for rights share allocation).

This is expensive compared to peers like LIC Housing Finance, which is valued at 1.2x, PNB Housing Finance at 1.7x valuation and Can Fin Homes valued at 2.7x.

However, Jignesh Shia of InCred Equities believes this premium valuation for Bajaj Housing Finance IPO is justified given the company’s robust yet diversified AUM growth of +30% CAGR, a sturdy asset quality with NPAs less than 1%, and a superior technology platform that enables it to remain relevant in a stiff competitive environment.

“Bajaj Finance, with its best-in-class management pedigree, strong promoter back-up, and the ability to maintain high-quality growth, has traded at a premium to peers which, we believe, applies to Bajaj Housing Finance as well,” Mr Shial said.

Impact on Bajaj Finance

With Bajaj Housing Finance listing, analysts expect Bajaj Finance standalone’s share of unsecured loans will rise slightly and hence will seem to have higher credit costs. Here’s a look at how Bajaj Housing Finance IPO will impact Bajaj Finance’s credit costs, profitability, and valuations.

Post-listing, Bajaj Finance will no longer get the benefit of risk diversification of Bajaj Housing Finance, thus leading to slightly higher GS3/NS3 metrics for the Standalone entity compared with the combined entity.

According to Avinash Singh of Emkay Global Financial Services, the Standalone entity benefits from a higher concentration of high-yield consumer loans and increased fee income, giving it a competitive edge in terms of margins.

“However, Bajaj Finance (Standalone) incurs higher operating costs due to its larger employee base and extensive branch network. Despite such 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,” Singh said.

Valuation

Any appreciation in Bajaj Housing Finance's share price upon listing will lead to an increase in the value of Bajaj Finance's stake in the company, but Mr Singh believes this will be offset by investors starting to apply for a holding company discount to Bajaj Finance’ stake in the company, post-listing.

“If the market ascribes a materially higher premium valuation to Bajaj Housing Finance versus the IPO, then that in a way would reflect the bias for high-growth secured lending and, in turn, would indicate some marginal negative perception for Bajaj Finance Standalone that has higher Unsecured,” Mr Singh said.

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