Jio Financial effect? Bajaj Finance to consider raising of funds. Motilal Oswal shares its view
Jio Financial has already started consumer lending pilots in consumer durable stores owned by Reliance. This capital raise could be a tacit acknowledgment that Bajaj Finance is readying its capital ammunition, Motilal Oswal said.
- Sep 25, 2023,
- Updated Sep 25, 2023 8:42 AM IST
The Bajaj Finance Ltd board will be meeting on October 5 to consider raising of funds. Motilal Oswal said such announcement came in much earlier than its expectations, as it already expecting Bajaj Finance to report 29 per cent annual growth in consolidated asset under management (AUM) over FY23-FY25. The domestic brokerage came out with several possible reasons that could have prompted the Bajaj Finance management to evaluate equity capital raise despite reasonable leverage and high capital adequacy. The domestic brokerage, however emphasised that it strongly felt the capital is not for any stress that could be there in its (rural) personal loan book.
Jio Financial Services
"While we still do not have finer details on the game-plan of Jio Financial Services, 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. This capital raise could then 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," Motilal Oswal Securities said.
AUM growth outlook
Bajaj Finance reported a core AUM growth of 29 per cent in FY23 and 32 per cent in the June quarter. Motilal Oswal said, the growth might have potentially given Bajaj Finance the confidence that the AUM CAGR will be in excess of 30 per cent for the next few years against earlier expectations of 26-27 per cent CAGR.
"Further, now that it is foraying into newer product segments such as Auto, MFI, Tractor, CV and the AUM growth could also be 1-2 per cent higher than earlier expectations. What this implies is that the new equity capital raise will be predominantly deployed for growth capital. There is strong buoyancy in retail across lending institutions. Sustainability of strong retail loan growth over the next few years could also have encouraged the management to contemplate this capital raise," Motilal Oswal said.
M&A opportunity
Motilal Oswal attached a lower probability of any M&A opportunities in the near-term. It noted that in the newer lending product segments of MFI and Vehicle Finance, there are not many sizable assets which are available for acquisition today and, therefore, it is unlikely there will be any M&A in the lending space in the near future.
"BAF’s gold lending franchise has been scaling up well and it would first organically build its MFI franchise before evaluating any potential M&A opportunities in MFI. BAF’s DNA has always been to build something organically, ace that product before it contemplates any acquisition (if at all)," it said.
Meeting ROE guidance
Motilal Oswal said the Bajaj Finance management’s long-term return on equity (RoE) guidance stands at 21-23 per cent. But at current leverage, it can clock RoE of 24-25 per cent. The capital raise could also be an attempt to bring the RoE within the guided levels, it added.
Disclaimer: Recommendations provided in this article and/ or any reports attached or relied on herein are authored by an external party. The views expressed herein are those of the respective authors/ entities, and do not represent the views of Business Today (BT).
The Bajaj Finance Ltd board will be meeting on October 5 to consider raising of funds. Motilal Oswal said such announcement came in much earlier than its expectations, as it already expecting Bajaj Finance to report 29 per cent annual growth in consolidated asset under management (AUM) over FY23-FY25. The domestic brokerage came out with several possible reasons that could have prompted the Bajaj Finance management to evaluate equity capital raise despite reasonable leverage and high capital adequacy. The domestic brokerage, however emphasised that it strongly felt the capital is not for any stress that could be there in its (rural) personal loan book.
Jio Financial Services
"While we still do not have finer details on the game-plan of Jio Financial Services, 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. This capital raise could then 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," Motilal Oswal Securities said.
AUM growth outlook
Bajaj Finance reported a core AUM growth of 29 per cent in FY23 and 32 per cent in the June quarter. Motilal Oswal said, the growth might have potentially given Bajaj Finance the confidence that the AUM CAGR will be in excess of 30 per cent for the next few years against earlier expectations of 26-27 per cent CAGR.
"Further, now that it is foraying into newer product segments such as Auto, MFI, Tractor, CV and the AUM growth could also be 1-2 per cent higher than earlier expectations. What this implies is that the new equity capital raise will be predominantly deployed for growth capital. There is strong buoyancy in retail across lending institutions. Sustainability of strong retail loan growth over the next few years could also have encouraged the management to contemplate this capital raise," Motilal Oswal said.
M&A opportunity
Motilal Oswal attached a lower probability of any M&A opportunities in the near-term. It noted that in the newer lending product segments of MFI and Vehicle Finance, there are not many sizable assets which are available for acquisition today and, therefore, it is unlikely there will be any M&A in the lending space in the near future.
"BAF’s gold lending franchise has been scaling up well and it would first organically build its MFI franchise before evaluating any potential M&A opportunities in MFI. BAF’s DNA has always been to build something organically, ace that product before it contemplates any acquisition (if at all)," it said.
Meeting ROE guidance
Motilal Oswal said the Bajaj Finance management’s long-term return on equity (RoE) guidance stands at 21-23 per cent. But at current leverage, it can clock RoE of 24-25 per cent. The capital raise could also be an attempt to bring the RoE within the guided levels, it added.
Disclaimer: Recommendations provided in this article and/ or any reports attached or relied on herein are authored by an external party. The views expressed herein are those of the respective authors/ entities, and do not represent the views of Business Today (BT).