Why Bajaj Finance Valuations Are Likely To Rebound After Fundraise

The board of the lender for appliances-to-homes approved raising up to Rs 10,000 crore—Rs 8,800 crore through a qualified institutional placement of shares and Rs 1,200 crore via a preferential issue.

The fundraise will increase the company's book value by an equivalent amount to Rs 70,000 crore. That will bring down the price-to-book ratio—a measure of valuation for financial services companies—from 7.6 times to 6.7 times.

The Bajaj Finance stock traded at 7.5 times its book value on an average in the last five years despite dropping to a Covid-19 low of 5.5 times.

Purely based on price-to-book and historical average, there is a potential upside of 15% for the stock. That’s also close to what the street expects.

76% of the 33 analysts tracking the stock recommended a ‘buy’, according to Bloomberg data. The average of 12-month price targets suggests a potential upside of 18%.

Shares of Bajaj Finance have risen nearly 14% so far this fiscal compared to a 7% rise in the benchmark Nifty 50.

The company reported a return on equity and return on assets—both measures of profitability—at 24% and 5.2%, respectively, in the quarter ended September. That’s higher than its long-term guidance of 21-23% for RoE and 4.6-4.8% for RoA.

While the equity raise will lead to a dilution in RoE and RoA, Bajaj Finance has a headroom for dilution in these profitability metrics, given its outperformance to the guidance.

The non-bank lender is raising funds when its leverage—or debt-to-equity— is at 5.4. That is still lower than 6.5, at which it has raised funds in the past.

While the company aims grow its assets at 25-27%, it clocked 33% in the most recent quarter.

The fundraise will augment its efforts to boost growth.