Bajaj Finance is reportedly planning to raise up to $1 billion, and analysts suggest that this move could be aimed at securing additional growth capital to contend with increasing competition. Here are some key points:
- Capital Raising: Bajaj Finance is reportedly in the process of raising funds, and the amount could be as much as $1 billion. This suggests that the company is looking to bolster its financial resources, potentially for various strategic purposes.
- Growth Capital Ammunition: Analysts are speculating that the funds raised could serve as “growth capital ammunition.” This implies that the company might be gearing up to deploy these funds to fuel further growth, possibly by expanding its lending activities or entering new markets.
- Mounting Competition: The analysts’ perspective suggests that the move is a response to increased competition in the financial sector. To maintain a competitive edge, companies often need sufficient capital to invest in technology, talent, and market expansion.
- Jefferies’ View: Jefferies, in particular, remains bullish on Bajaj Finance, considering it as their top pick among non-banking financial companies (NBFCs). The note from Jefferies points out that while Bajaj Finance is well-capitalized with a tier-1 capital adequacy ratio of 23 percent, the capital raise could be a proactive measure to support strong growth in assets under management (AUM), which recorded a 32 percent growth in Q1.
- Ahead of Time Capital Infusion: The note from Jefferies suggests that the capital raising may be happening ahead of schedule, indicating a forward-looking approach to secure the necessary resources for anticipated growth.
- Market Dynamics: In the financial sector, access to ample capital is crucial for lending institutions, especially in an environment where competition is intense, and market conditions can change rapidly.
Bajaj Finance’s potential fundraise, including the potential size of the issue and its potential impact on the company’s financial metrics. Here are the key points:
- Potential Issue Size: Jefferies analysts estimate that if Bajaj Finance raises 10-15 percent of its net worth, the issue size could be around Rs 80 billion or $1 billion.
- Impact on Financial Metrics: While the capital infusion could provide the company with growth capital ammunition, it may also lead to some dilution in return on equity (RoE). The analysts anticipate that the RoE could decrease from 23 percent to about 22 percent as a result of the capital raise.
- Earnings and Book Value Impact: The analysts expect positive impacts on earnings per share (EPS) and book value per share (BVPS). They estimate that FY24 EPS may rise by 6 percent, and BVPS may increase by 11 percent.
- Key Risks to Valuation: Jefferies analysts identify potential risks to the valuation, including a slowdown in growth, higher-than-expected net interest margin compression, or deterioration in asset quality. These risks highlight the uncertainties and challenges that financial institutions may face in a dynamic market environment.
- Upside Potential: On the positive side, the analysts note that upside potential could arise from stronger-than-expected growth in consumer durables and rural financing businesses. Additionally, further improvements in operating efficiencies and a reduction in the cost ratio could contribute to upside potential.
