Phillip Capital has issued a bullish report on Bajaj Housing Finance Limited (BHFL), projecting a potential 35%+ upside for the company following its listing. Phillip Capital has initiated coverage with a “BUY” recommendation on Bajaj Housing Finance and set a target price of Rs 210 for its shares, reflecting a 27% increase from current levels.
According to Phillip Capital, BHFL’s recent classification as an upper-layer non-banking financial company (NBFC) under scale-based regulations has paved the way for its listing within three years. The firm has developed three valuation scenarios—bull, bear, and base—while incorporating a conservative hold-co discount of 15% to account for potential uncertainties.
In the bull case, Phillip Capital anticipates a price-to-earnings (P/E) multiple of 30x for BHFL, approximately 20% lower than the +1 standard deviation of Bajaj Finance (BAF). For the base scenario, a 50% weightage is applied, with 40% for the bear case and 10% for the bull case. This approach highlights a balanced outlook, factoring in both optimistic and cautious market conditions.
Phillip Capital underscores several key aspects of BHFL’s business model:
Customer Demographics and Offerings: BHFL targets high-income salaried individuals, with an average annual salary of around Rs 1.4 million. The company enhances its appeal through strategic top-up home loans, which boost yields in a competitive market.
Loan Sourcing and Efficiency: Approximately 40% of BHFL’s home loans are sourced from existing Bajaj Finance customers, with 90% allocated to salaried individuals. This practice helps reduce costs and improve risk-adjusted spreads, resulting in superior return ratios compared to peers.
Loan-to-Value Ratios: About 70% of BHFL’s loan against property (LAP) loans are for self-occupied residential properties, with a focus on maintaining a low loan-to-value (LTV) ratio. This approach highlights the company’s emphasis on operational efficiency and strong return metrics.
Operational Metrics: BHFL’s asset under management (AUM) per branch is approaching that of LIC Housing Finance (LICHF), and its AUM per employee matches Can Fin Homes. The company’s borrowing costs are better than Can Fin Homes, contributing to favorable risk-adjusted spreads and return on equity (RoE).
Phillip Capital’s valuation of BHFL is anchored on its strategic focus on mid-sized home loans, which cater to around 65% of India’s home loan market. The company’s shift towards Lease Rental Discounting (LRD) and steady credit costs are expected to drive robust return ratios, with projected RoA/RoE of 2%+ and 12%+, respectively. With anticipated balance sheet growth to Rs 2 trillion+ over the next three years, BHFL’s scale and efficiency are poised to enhance its financial performance.
