Better Finance Stock: Bajaj Finserv vs Bajaj Finance

The financial services industry in India has experienced huge growth in the last few years due to the rising population, growing financial awareness, and government initiatives to promote financial inclusion.

Apart from this, the growing adoption of digital payments and fintech innovations have also contributed to the growth of the financial services industry.

As India's gross domestic product (GDP) grows, and the income levels rise, the demand for insurance products, loans, and investments is going to go up.

Two companies leading the financial services industry are the Bajaj twins, namely Bajaj Finserv and Bajaj Finance.

Both companies have a dominant presence across various financial services, making them the primary beneficiaries of this growing demand.

Today, we compare the two companies across various parameters to see who is a better finance player.

Business Overview

#Bajaj Finserv

Bajaj Finserv is the financial services arm of the Bajaj Group. It is the holding company of various financial services businesses.

It offers general and life insurance, retail financing, and investment solutions through its subsidiaries.

Some of the company's subsidiaries are Bajaj Allianz General Insurance Company, Bajaj Allianz Life Insurance Company, Bajaj Finance, Bajaj Housing Finance Limited and Bajaj Finserv Asset Management.

#Bajaj Finance

Bajaj Finance, a subsidiary of Bajaj Finserv, is one of the largest non banking finance companies (NBFC) in India. It is engaged in lending to retail, SME, and commercial customers.

Bajaj Finance's products include consumer lending, mortgages, personal loans, SME lending, gold loans, auto financing, rural lending, commercial lending, and microfinancing. The company also accepts deposits from public and corporate clients.

It is one of the largest companies in the consumer lending space, especially electronics. The company has a presence in over 4,100 locations with over 134,000 distribution points of sale.

It has one of the largest customer bases of over 83 million (m) customers and manages assets of over Rs 3,306 billion (bn).

The company's subsidiaries Bajaj Housing Finance and Bajaj Financial Securities are established players in in housing finance and stock broking space.

Particulars	Bajaj Finserv	Bajaj Finance
Market Cap (in Rs billion)*	3,013.70	4,731.70

Source: Equitymaster|*as if 18th September 2024

If we compare the two companies in terms of marketcap, then Bajaj Finance is leading with a marketcap of Rs 4,731.7 bn, as against Rs 3,013.7 bn of Bajaj Finserv.

In terms of their stock market performance, Bajaj Finserv shares are leading with a 22.8% return, as against the 1% return of Bajaj Finance shares.

However, compared to the market index Nifty 50 which gave a return of 29%, both the companies have underperformed the market index.

#Revenue

Bajaj Finserv primarily earns its revenue from the consumer lending business, followed by insurance, asset management, and other financial services.

In the last five years, the company's revenue doubled and grew at a compound annual growth rate (CAGR) of 15%.

This is primarily because of the strong growth in asset management and consumer lending business.

For Bajaj Finance, the revenue doubled in the last five years and grew at a CAGR of 15.8% on account of strong growth in its loan book.

In the last five years, the advances of Bajaj Finance grew at a CAGR of 18.2% due to expansion in customer base and geographical footprint.

As a result, net interest income also grew by a CAGR of 16.6%.

Clearly, Bajaj Finance is leading in terms of revenue growth.

Revenue

Net Sales (in Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Bajaj Finserv	5,48,326	6,05,912	6,84,061	8,20,712	11,03,819	15.00%
Bajaj Finance	2,63,740	2,66,730	3,16,410	4,14,110	5,49,720	15.80%

Data Source: Equitymaster

#Profitability

To assess the profitability, we must look at earnings before interest tax depreciation and amortisation (EBITDA) and net profit growth.

In the last five years, the EBITDA and net profit grew by a CAGR of 17.5% and 21.1% respectively for Bajaj Finserv. Strong growth in asset management and consumer lending business aided the profit growth.

For Bajaj Finance, the EBITDA and net profit grew by a CAGR of 21.3% and 22.4%, respectively. The growing scale of loans, especially to retail customers, has helped in profit growth.

In terms of profit margins, the EBITDA and net profit margin of Bajaj Finserv averaged 34.1% and 12.8%, respectively, whereas for Bajaj Finance, they averaged 31.8% and 22.6%, respectively.

Again, Bajaj Finance is leading in terms of profit growth and profit margins.

Profitability

EBITDA (in Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Bajaj Finserv	1,82,574	1,96,346	2,14,631	2,98,680	4,08,736	17.50%
Bajaj Finance	76,080	63,140	99,060	1,60,180	1,99,870	21.30%
PAT (in Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Bajaj Finserv	59,936	73,674	83,135	1,22,095	1,55,954	21.10%
Bajaj Finance	52,638	44,198	70,282	1,15,077	1,44,512	22.40%
Gross Profit Margin	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	33.30%	32.40%	31.40%	36.40%	37.00%
Bajaj Finance	28.80%	23.70%	31.30%	38.70%	36.40%
Net Profit Margin	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	10.90%	12.20%	12.20%	14.90%	14.10%
Bajaj Finance	20.00%	16.60%	22.20%	27.80%	26.30%

Data Source: Equitymaster

#Financial Efficiency

The financial efficiency of finance companies can be measured through return on capital employed (RoCE), capital adequacy ratio, and return on equity (RoE).

Capital adequacy ratio is the measure of capital against the risk-weighted credit exposures. As per the Basel III norms, the capital adequacy ratio should be a minimum of 8% to ensure the finance company doesn't face insolvency issues.

RoE and RoCE, on the other hand, measure the return a company generates on the capital invested and equity shareholders. A high RoE and RoCE are considered good.

The RoCE and RoE of Bajaj Finserv averaged 19.3% and 22.7%, respectively, in the last five years.

For Bajaj Finance, the capital adequacy ratio and RoE averaged 25.6% and 17%, respectively.

Both companies have high return ratios, indicating they are financially efficient.

Financial Efficiency

ROCE	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	19.50%	19.10%	16.70%	19.80%	21.20%
Capital Adequacy Ratio	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finance	25.00%	28.30%	27.20%	25.00%	22.50%
ROE	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	19.20%	20.70%	20.90%	26.60%	26.10%
Bajaj Finance	16.40%	12.10%	16.20%	21.40%	19.10%

Data Source: Equitymaster

#Dividend

A company pays dividends to its shareholders from its profits. A consistent dividend indicates the company's financials are stable.

However, if a company isn't paying high dividends, that doesn't mean it is in financial distress. It simply means it is reinvesting its profits rather than distributing it to the shareholders.

Bajaj Finance has consistently increased its dividend per share in the last five years. The dividend grew by a CAGR of 29.2% during the same period.

The company's dividend payout ratio and dividend yield averaged 14.7% and 0.4%, respectively, in the last five years.

Bajaj Finserv, on the other hand, pays very less dividend to its shareholders. In financial year 2024 it paid a dividend of Re 1 as against Rs 36 of Bajaj Finance.

Its dividend payout and dividend yield averaged 0.5% and 0.1%, respectively, during the last five years.

Dividend

Dividend Per Share (Rs)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	0.1	0.1	0.1	0.8	1
Bajaj Finance	10	10	20	30	36
Dividend Yield	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	0.10%	0.10%	0.10%	0.10%	0.10%
Bajaj Finance	0.50%	0.2%a	0.30%	0.50%	0.50%
Dividend Payout Ratio	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Bajaj Finserv	0.30%	0.10%	0.20%	1.00%	1.00%
Bajaj Finance	11.40%	13.60%	17.20%	15.80%	15.40%

Data Source: Equitymaster

#Valuation

Valuation ratios help assess a company's actual worth. Two important ratios that are widely used are price to earnings (PE) and price to book value (PB).

A high ratio in comparison with the peers indicates the company is overvalued, and a low ratio indicates it is undervalued.

The PE and PB ratios of Bajaj Finserv are 18.7x and 4.6x, respectively, whereas for Bajaj Finance the PE and PB ratios are 31.7x and 5.7x, respectively.

Clearly, Bajaj Finserv's shares are undervalued compared to those of Bajaj Finance.

However, if we compare the two companies with their three-year averages, then both companies are undervalued.

Valuations	Bajaj Finserv	3-Year Average	Bajaj Finance	3-Year Average
PE (x)	18.7	22.4	31.7	41.2
PB (x)	4.6	4.6	5.7	6.2

Source: Equitymaster

Which is a Better Finance Stock: Bajaj Finserv or Bajaj Finance?

In terms of revenue growth, profit growth, profit margins, and dividend payments, Bajaj Finance has the upper hand.

However, in terms of financial efficiency and valuations, Bajaj Finserv is ahead of Bajaj Finance.

Bajaj Finserv, the holding company of Bajaj Finance, has a diversified presence across insurance, consumer lending and asset management.

It is the fastest-growing insurance player in the private life insurance space and has the largest network of partners and agents for the general insurance business.

The company has been at the forefront of adopting technology and has taken multiple digital initiatives to increase customer satisfaction and ease.

It is also looking to expand its business across various verticals through acquisitions. It recently acquired a company in the healthcare space to expand its health insurance business.

Bajaj Finance, on the other hand, has adopted a multipronged strategy to grow its business.

It is focussing on expanding its product offerings and growing its customer base. It is also investing heavily in technology to improve its digital customer experience and reach a wider audience.

To expand its housing finance business, which is managed by Bajaj Housing Finance, it is expanding its distribution network, developing new digital products and services, and offering competitive products and services.

Overall, both the Bajaj twins are heavily focused on expanding their product offerings and investing in digital technology to expand their customer base.

As India's economy continues to grow the disposable income levels will grow, the middle class population will increase, and the demand for financial services especially loans and asset management will rise.

This is beneficial for Bajaj Finserv and Bajaj Finance as both are established players in the financial services space.

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...