Is Bajaj Fin preparing to fight Jio Fin with fund raise? Analysts weigh in

India's biggest non-bank finance company, Bajaj Finance (BAF), is set to raise capital after a gap of four years. On October 5, the board of directors will meet to approve the fund raise by way of preferential issue and/or qualified institutional placement (QIP) subject to regulatory and shareholder approvals.

The move, analysts said, comes ahead of expectations, and could be in the wake of simmering competition in the consumer lending space, especially with the launch of Jio Financial Services (Jio Fin).

"While we still do not have finer details on the game-plan of Jio Financial, it has plans to initially foray into consumer and merchant lending.

"Some of the channel checks suggest that Jio Financial has already started consumer lending pilots in consumer durable/lifestyle stores owned by Reliance," pointed out analysts at Motilal Oswal Financial Services in a report.

Jio Fin, is the second largest NBFC by m-cap, aims to tap consumer lending, insurance broking, payments aggregator business, accounts aggregator business, and provides asset management services.

As per the management, Jio Fin's emphasis is on operational execution, backed up by a banking correspondent and merchant network, which may enable it to offer a diverse range of financial products through various distribution channels and pursue cross-sell opportunities.

This capital raise, thus, could be a tacit acknowledgment that BAF is readying its capital ammunition for how the competitive landscape is going to evolve over the next few years, analysts said.

At the bourses, shares of Bajaj Finance advanced 5 per cent intraday, before closing 4.6 per cent higher at Rs 7,819 per share.

Its sister stock, Bajaj Finserv, meanwhile, added 2.2 per cent.

By comparison, the benchmark S&P BSE Sensex ended 0.02 per cent (15 points) up at 66,023 levels.

Supporting long-term growth

In the April-June quarter of FY24 (Q1-FY24), Bajaj Finance reported a core asset under management (AUM) growth of 32 per cent year-on-year (YoY), up from 29 per cent in FY23.

The management expects the AUM CAGR will be in excess of 30 per cent for the next few years, ahead of earlier expectations of 26-27 per cent CAGR.

Besides, BAF is foraying into product segments such as auto, microfinance (MFI), tractor, commercial vehicles (CV), which may lift the AUM growth more-than-expected.

Given that there is strong buoyancy in retail lending, global brokerage CLSA believes sustainability of strong retail loan growth over the next few years could have encouraged the management to contemplate the capital raise.

It has raised its loan growth estimates by 2-3 percentage points over FY25-26.

Improving earnings per share

Bajaj Finance aims to be an 'omnipresent' financial services company, asserting dominance across all consumer touchpoints, covering physical, app-based, web, social and virtual channels.

If the NBFC decides to raise funds to the tune of 10-15 per cent of net worth, the issue size could be Rs 8,000 crore ($1 billion), Jefferies estimates.

"This would lead to FY24 earnings per share (EPS) and book value per share (BVPS) rising 6 per cent and 11 per cent, while return on equity (RoE) may see slight fall to 22 per cent," it said.

CLSA, which expects fund raise of Rs 10,000 crore, sees BVPS accretion of 10-13 per cent.

During the previous fund raising instances, that is in FY19, FY17, and FY15, Bajaj Finance's trailing leverage was 6.3x, 6.6x, and 6.8x, respectively.

At present, its consolidated leverage (assets/net-worth) stands at 5.2x, and capital adequacy is 24.6 per cent (as of Jun’23).

"BAF has clocked an annualised RoE of over 23 per cent over each of the last five quarters, and we expect the company to deliver an RoE of 24-25 per cent (pre-capital raise) in FY24 and FY25.

"The Management’s long-term RoE guidance stands at 21-23 per cent, and this capital raise could be an attempt to bring the RoE within the guided levels," MOFSL added.