Bajaj Housing looks well placed to benefit from rising housing demand

Bajaj Housing Finance (BHFL), the country’s second largest mortgage lender after LIC Housing Finance, plans to raise Rs 3,560 crore through fresh issue of shares to augment the capital base and Rs 3,000 crore through an offer for sale. The promoter Bajaj Finance, which currently has 100% stake in the company will dilute over 11% stake through the IPO to hold 88.7% after the issue. The company has shown rapid growth since it started mortgage operation in 2018 with a high asset quality and stable net interest margin (NIM) despite intense competition. The company look poised to take advantage of the growing mortgage penetration in the country. Investors looking for an exposure to this opportunity may consider the IPO.

Business

Pune headquartered BHFL is a non-deposit taking housing finance company having pan-India operations. It offers diversified lending services including home loans, loan against property (LAP), lease rental discounting and developer financing. Home loans constitute over 57% of the assets under management (AUM) while lease rental accounts for nearly 20%. BHFL’s AUM increased by 29.3% annually to Rs 91,370.4 crore between FY20 and FY24. It increased further to Rs 97,071.3 crore at the end of June 2024. LIC Housing Finance, the country’s largest mortgage lender had an AUM of Rs 2,88,665 crore as of June. BHFL had an average loan-to-value ratio of 69.3% with a loan ticket size of Rs 46 lakh as of June.

Financials

Net interest income rose by 35.6% annually to Rs 2,509.8 between FY22 and FY24. Net profit grew by 56.2% to Rs 1,731.2 crore. Net interest margin (NIM) remained at or above 4% while gross nonperforming assets (GNPA) ratio was under 0.3% during the period. The cost of borrowings inched up to 7.6% in FY24 from 5.9% in FY22. The return on assets (RoA) improved to 2.4% from 1.8% during the period.

Valuation

The company demands a price-book (P/B) multiple of 3.2 based on the total equity after the IPO. LIC Housing Finance and PNB Housing Finance trade at a P/B of 1.2 and 1.8 respectively. A faster AUM growth backed by diversified offerings, lower credit cost, and better asset quality justify BHFL’s valuation premium.