Best NBFC Stock: Bajaj Finance vs Bajaj Finserv

Non-banking financial companies (NBFCs) have been the new growth engines of Indian finance, surpassing even traditional banks in credit disbursal.

A lot of this comes from their deep regional understanding, their customized loans and services to the local market, unlike big banks with a one-size-fits-all approach.

This, in tandem with faster approvals, innovative products, and lower costs is fueling financial inclusion for millions.

NBFCs are lending across sectors, deploying the largest quantum of credit to the industrial sector, followed by retail, services, and agriculture.

Loans to the services sector (share in outstanding credit being 14.7%) and personal loans (share of 29.5%) are registering double-digit growth.

Looking ahead, NBFCs are well-suited to bridge the financing gap in a large country like India, considering their reach and expanse.

The industry is well-poised for growth, fueled by rising disposable incomes and higher aspirations, and increasing financial literacy. This translates to a golden opportunity for investors to jump on board a booming sector.

But remember, not all NBFCs are created equal. Keep your eyes peeled for the financially strong ones - that's where the real growth lies.

Focus on financially robust players, with solid capital reserves, healthy profit margins and stringent risk management practices.

Companies like Bajaj Finance and Bajaj Finserv exemplify these qualities, making them leaders in the NBFC space.

In this piece, we deep dive into the workings of these two financial giants from the Bajaj group.

Background

# Bajaj Finance

Bajaj Finance is one of the largest NBFCs with a customer base of 73 million (m). It is also the most diversified financial services company in India.

The company is mainly engaged in the business of lending and has a diversified lending portfolio across retail, small and medium-sized enterprise (SME) lending, rural, and commercial lending. It also accepts deposits from the public and corporates.

Bajaj Finance has two wholly owned subsidiaries, Bajaj Housing Finance and Bajaj Financial Securities, through which it offers home loans and brokerage services to its customers.

# Bajaj Finserv

Bajaj Finserv is the holding company for the various financial services businesses under the Bajaj group. The company offers both general & life insurance, and lending solutions, through its subsidiaries.

Bajaj Finance is their star performer where Bajaj Finserv holds a majority stake (over 52%).

Bajaj Housing Finance Ltd. is their wholly-owned subsidiary, a fast-growing and profitable company dealing with all aspects of housing finance.

Bajaj Allianz. Bajaj Finserv isn't alone in the insurance game. They've teamed up with Allianz SE, a global insurance powerhouse, for two joint ventures.

While Bajaj Allianz General Insurance Company Ltd. (BAGIC) handles general insurance needs, Bajaj Allianz Life Insurance Company Ltd (BALIC) focuses on life insurance products. Bajaj Finserv holds a controlling stake (74%) in both these ventures.

Bajaj Finserv Asset Management Ltd is their newest venture, a wholly-owned subsidiary set up in October 2021. BFSAMC is aiming to become a full-fledged asset management company.

It serves millions of customers by providing solutions for asset acquisition through financing, asset protection through general insurance, family and income protection in the form of life and health insurance, as well as retirement and savings solutions.

Revenue Growth

One of the most important indicators of a business is its revenue. The past revenue growth rate speaks volumes of a company's potential.

The revenue of Bajaj Finance grew at a compound annual growth rate of 26.5% in the last five years, driven by growth across segments.

The company focuses on eight broad categories: (i) Consumer Lending (Sales finance), (ii) Personal Loans (iii) SME Lending, (iv) Commercial Lending, (v) Loan against Securities, (vi) Rural Lending, (vii) Deposits, and (viii) Partnerships and Services including mortgages, home loans, SME loans, and rural financing.

Moreover, its geographical expansion, large customer franchise and adoption of digital technology continue to be critical pillars of the company's growth.

Bajaj Finserv's revenue, on the other hand, has been growing at a CAGR of 20.5%. The income the company has been earning is primarily through investments.

Bajaj Finance vs Bajaj Finserv Revenue Growth (2019-23)

	2019	2020	2021	2022	2023
Revenue (Rs m)
Bajaj Finance	1,85,002	2,63,856	2,67,045	3,16,481	4,14,057
Bajaj Finserv	4,26,056	5,48,374	6,05,916	6,84,390	8,20,720
Revenue growth YOY%
Bajaj Finance	44.55%	42.62%	1.21%	18.51%	30.83%
Bajaj Finserv	29.65%	28.71%	10.49%	12.95%	19.92%

Data Source: Ace Equity

Asset Quality

Net NPAs (Non-Performing Assets) are a great measure for a company's asset quality.

Net NPA refers to the total value of non-performing loans after deducting the provisions made by the bank to cover potential losses from those loans.

It represents the actual exposure of the bank to the risk of default after accounting for provisions.

In simpler terms, net NPA indicates the amount of non-performing loans that the bank has not covered with provisions.

It gives a more accurate picture of the bank's asset quality and its ability to absorb potential losses from bad debts.

Bajaj Finance vs Bajaj Finserv Net NPAs (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Bajaj Finance	0.63%	0.65%	0.75%	0.68%	0.34%
Bajaj Housing Finance	0.00%	0.10%	0.20%	0.10%	0.10%

Data Source: Annual Report

After being rangebound for a few years, Bajaj Finance's Net NPA ratio have dropped by half in the financial year 2023.

This is quite admirable as it indicates the company hasn't taken any unnecessary risks to expand its business. Moreover, these levels of NPAs are in line with that of HDFC Bank, the lowest in the banking sector.

Bajaj Finserv's Net NPAs are also very low. Two of its subsidiaries, Bajaj Finance and Bajaj Housing Finance, boast very low Net NPAs of 0.34% and 0.1% in the financial year 2023.

Profitability

Two indicators help determine a company's profitability - earnings before interest and tax (EBITDA) margin and net profit margin.

EBITDA margin is an indicator of the company's operating profits. Operating profit is the income earned after deducting operating costs.

Net profit margin, on the other hand, is the ratio of the total profit of the business after deducting all the expenses from the income of the business.

The higher the ratios, the better.

Bajaj Finance vs Bajaj Finserv Profit Margins (2019-23)

	2019	2020	2021	2022	2023
EBITDA Margin (%)
Bajaj Finance	70.60%	65.30%	59.30%	62.40%	69.40%
Bajaj Finserv	35.30%	33.30%	32.40%	31.40%	36.40%
Net Profit Margin (%)
Bajaj Finance	21.60%	20.00%	16.60%	22.20%	27.80%
Bajaj Finserv	12.60%	10.90%	12.20%	12.20%	14.90%

Data Source: Ace Equity

The operating profit margin and net profit margin of Bajaj Finance averaged 65.2% and 21.6%.

The profit margins of the company have been increasing consistently on account of higher profit from fee-based income avenues.

In the case of Bajaj Finserv, the EBITDA margin and net profit margin (at 33.8% and 12.5%) remained high primarily due to income from investments and low operating expenses.

Moreover, considering Bajaj Finance also contributes to the business in a big way, it also plays a big role.

Dividend

A company rewards its shareholders in the form of dividends. Dividends can be in the form of cash or stocks.

Ratios such as dividend payout and dividend yield are usually used to assess the dividends of a company.

The dividend payout ratio is an indicator that determines the amount of dividends paid from the earnings.

In contrast, the dividend yield tells what percentage of the share price is the dividend.

Bajaj Finance vs Bajaj Finserv Dividend History (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Dividend Payout
Bajaj Finance	8.70%	11.40%	13.60%	17.20%	15.80%
Bajaj Finserv	0.10%	0.30%	0.10%	0.20%	1.00%
Dividend Yield
Bajaj Finance	0.20%	0.50%	0.20%	0.30%	0.50%
Bajaj Finserv	0.00%	0.10%	0.00%	0.00%	0.10%

Data Source: Ace Equity

Bajaj Finance and Bajaj Finserv have paid consistent dividends to its shareholders.

For Bajaj Finance, in the last five years, the average dividend payout and dividend yield of the company are 13.3% and 0.3%, respectively.

For Bajaj Finserv, in the last five years, the same numbers have been much lower. The average dividend payout and dividend yield of the company are 0.3% and 0.1%, respectively.

Return Ratios

One of the most important return ratios is the return on equity (RoE). It measures the returns that shareholders earn on their investments during the year.

Bajaj Finance vs Bajaj Finserv Return on Equity (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Bajaj Finance	22.60%	20.40%	12.90%	17.60%	23.70%
Bajaj Finserv	24.40%	21.80%	22.10%	22.00%	28.50%

Data Source: Ace Equity, Equitymaster

The five-year average RoE of Bajaj Finance is 19.4%, whereas for Bajaj Finserve it's 23.8%.

Bajaj Finserv is clearly leading in terms of RoE against Bajaj Finance.

Financial Health

A great way to judge the financial health or strength of a lender is to analyse its capital-to-risk weighted asset ratio (CRAR).

This ratio measures the NBFC's ability to absorb unexpected losses. A higher CRAR indicates a stronger financial buffer and better ability to withstand economic downturns.

Bajaj Finance remains well capitalized with a CRAR of 24.9% in the financial year 2023, making it among the best capitalized large NBFCs in India.

Bajaj Finserv's subsidiaries, Bajaj Finance and Bajaj Housing Finance also remains well capitalized with a CRAR of 25% 22.7%, respectively, in the financial year 2023.

Valuation

The most common and effective ratios for comparative analysis and valuation are the Price to Earnings (PE) and Price to book (PB) value ratio.

While the PE ratio uses the company's earnings to determine the value a shareholder assigns against one rupee of earnings. The PB ratio uses a company's book value to determine the same.

Bajaj Finance vs Bajaj Finserv Current and Historical Valuation Ratios

	P/BV Ratio	5-year median P/BV	P/E Ratio	5-year median PE
Bajaj Finance	7.2	9.2	31.2	47.8
Bajaj Finserv	5.1	5.3	33.2	39.5

Data Source: Equitymaster

The current PB and PE ratios for Bajaj Finance is at 7.2x and 31.2x, respectively. The stocks is trading at a discount to its historical median.

For Bajaj Finserv, the PB and PE ratio is at 5.1x and 33.2x, respectively. While the stock is trading at a discount to its 5-year median PE it is trading close to its historical median PB.

Bright Prospects

Bajaj Finance, a well-diversified financial services company, is concentrating on improving its distribution network and physical presence by adding more physical offices across the country.

It is also expanding its offerings by adding new products to its already diversified portfolio.

Recently, it also added new car financing and medical equipment financing to its portfolio.

The company is also concentrating on improving its customer base to 100 m from the current 72.98 m. Given the company's vast distribution network and product offerings, this goal looks achievable.

Bajaj Finserv, being a holding company will also benefit from the growing business of Bajaj Finance.

Moreover, the company's other businesses insurance and housing finance are also well-poised to benefit from the boom in the insurance and housing sector.

Insurance as a sector continues to be a beneficiary of a relatively robust economy, stable savings trends, and favourable regulatory regime.

The rising middle-income households and the growing working population, in tandem with improving financial literacy, access to information and awareness, promise an uptick in insurance adoption.

Moreover, the surge in credit facilities also indicates the opportunity for attaching group protection products at the time of borrowing, tapping into a wider market segment.

Bajaj Finance or Bajaj Finserv: Which Stock is Better?

Both NBFCs enjoy a strong legacy with the Bajaj brand name.

Bajaj Finance has been growing steadily in the last five years while improving its margins. It's the undisputed leader in the NBFC with a robust asset under management CAGR of 25% over 5 years.

Registering robust growth revenues, the company has been charging ahead of the industry growth.

The profit margins have also been strong in comparison to Bajaj Finance, giving it a leg up. It also explains the higher dividend payouts.

However, when it comes to returns, Bajaj Finserv takes the cake away with a higher average RoE.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...