Bajaj Finance – Is the stock price correction complete?

Bajaj Finance has been darling of the stock market for a very long time. While it has made money for the large investment firms (Indian and abroad), it has also done the same for unassuming retail investors, who are much less savvy while timing their investments. The consistency with which BFL has delivered growth is really commendable. Lately, though there has been much too pressure on BFL stock. 

• Will the inevitable slowness in growth hit the company – this year / next year / year after that? 

• What does it mean for the stock price?

• Can you still look at them as a blue-chip stock that covers for your principal and delivers low risk returns?

• How do you value Bajaj Finance stock?

Let us try to explore if we can find the answer to valuing Bajaj Finance stock over the coming years.

A – Using peers for comparison:

Looking at key metrics for select set of financial institutions (banks and NBFCs), Bajaj Finance stands out on all performance metrics by a huge margin: 

With the above performance in mind, it is difficult to justify any lower PE ratio for Bajaj Finance (a key method commonly cited for discovering market cap) compared to other financial institutions (table below). Price to book or price to revenue are more aligned to the perception of the different entities in the market, but when Price to Revenue is adjusted for the Growth (Revenue Growth YOY), Bajaj Finance does not look expensive. If their growth is half of the 55% YOY revenue growth posted in Sep 2022, the Price to revenue to growth ratio will stand at 52%. That is still cheaper than HDFC bank!

Thus, while industry metrics / peer comparisons are common methodology for price discovery, how do you adjust for myriad of nuances particular to a company. Bajaj Finance does not lead in just growth in revenue, its revenue translated to earnings is the most as well (least expense to revenue ratio). How do you adjust for all this in defining a simplistic ratio metric? Let us look at some more specific / innovative methodology.

B – Using BFL past performance and stock price: 

Another method to value the stock (if the stock has consistent metrics) can be valuing it against its own valuation vs. performance in the past. If the performance can be predicted in the future, the price (market cap) can also be predicted – given the other metrics (key performance ratios of the company / quality metrics) ball park remain similar to in the past. 

To this effect if one looks at the comparison of two metrics (a) PAT growth YOY, (b) Ratio of stock price to one year forward PAT for BFL – the value and trend in the two metrics is uncannily similar between FY13 and FY22 (barring FY21 where Covid suppressed PAT growth).

 

If the stock price to Fwd PAT ratio is established for BFL till FY22, the question becomes what will the ratio look like in FY23+. In the above figure, the PAT YOY for FY24 onwards has been dialled down gradually to come down to the long term PAT growth advised by BFL in its quarterly investor pack.

Assuming FY23 ending with 64% PAT growth over last year (based on already posted 3 quarter results), and stock price ending in May 2023 at 6440, this means it will be after more than a decade that the Stock price to Fwd PAT ratio will be below the PAT growth. Does this make it once in a decade chance to get the stock cheap? So what does this translate in terms of stock price? 

Below chart is how stock price will pan out with this conservative PAT growth assumption, and preserving the relationship of stock price to next year PAT over the coming years:

 

If one purchases stock at FY23 end at 6440, this translates to the below return in the coming years (CAGR):

 

The above returns do not look attractive for an equity investment, but I would see them as base line returns. There is likely upside on this in 4+ years. For investments that are targeting less than 3 years turn around, I believe there is a chance that the stock might give below market returns, but as you keep invested, the stock is likely to give higher returns. The short-term low returns can emerge if the company starts to slow down almost after FY23. Such a scenario is unlikely, and thus has been drawn above as a bottom base line. 

To give more comfort in terms of traditional valuation standards, the above stock price results in a PE ratio that gradually goes from current 30 (approximate calculations using stock price and PAT yielded PE ratio of 30 against 35 in above table taken from Google Finance) to 17 over the next 4 years. Can it be argued then that the pricing considered here is actually conservative? I think so.

 

That brings to the question, what are the assumptions the above analysis hinges on. The singular assumption (apart from the Stock price to fwd PAT ratio) is that the company makes good with its promise to deliver 23%-24% profit growth. 

Below are the various time period PAT CAGR company is likely to deliver at FY23 end:

 

There is good reason to believe that the company will be able to not just deliver but do better than the promised growth. Past performance is the best predictor of future performance. The CAGR 3Y growth is despite COVID slowing down the company in FY21.

What works to the advantage of BFL:

A. As far as slowing AUM is concerned, the higher estimated cross-sell rates by growing digital adoption, and estimated increasing aum per cross-sell base counters the decreasing new customer acquisition growth. 

B. The benefit of higher cross-sell will be seen in opex to NIM ratio, and this would deliver higher PAT to the company. Actually, the company did revise its ROA long term guidance upwards from 3.3%-3.5% to 4%-4.5% in the last 2 years. The other added cushion is that the company has raised its guidance for ROA despite putting more pressure on opex to nim ratio in the short term owing to investment in people and technology. As this investment starts to give non-linear return, the better opex to nim ratio is going to prove as an added lever to deliver the PAT growth. 

C. I believe, given the short term economic uncertainty in the country, the company is likely to carry the 1000cr management provisions to next year as well. If unused, this can help again to cushion the PAT growth in the short term.

So, what can be a spanner in the works?

A. The company cites competitive intensity being high, but does little to explain how it is fending the competition off. While BFL has been able to fend-off the competition from traditional players (banks) with traditional tools (more people, more rewards and offers); big-tech raises significant disruption risk to their new account acquisition model. 

B. A change in management at the highest level can slow down the execution machinery of the company. Mostly the company has incorporated this in the long-term growth guidance, cause this is a known risk.

C. The digital approach fails to increase the cross-sell growth. The company has created a functional super-app but that is far from the customer experience today’s consumers have come to expect. Significant investment needs to be made in this area by the company to ease this risk. Given digital adoption / cross-sell metrics are now reported quarterly by the company, how this is going can be monitored much more easily than making wild guesses.

D. RBI might suggest BFL to become a bank given it is systematically important NBFC. If that happens, BFL will need to navigate the waters. It will bring uncertain times, but the advantages and disadvantages might be balanced.

This still leaves a lot of room for uncertainties, but the attractiveness of the stock to a long-term investor at the current price might not be unjustified.

In the end, I would like to thank Rajeev (MD BFL) for sharing a rich investor pack every quarter. The intention to create transparency that encourages price discovery for the stock and thus stabilizes the same is really beyond commendable. All information in the above write-up are solely sourced from BFL investor packs and Google Finance. 

Anand

As I thought about what I was searching for, it all ultimately came to this one thing. Anand. The state of being mesmerizingly happy. The state of being completely captured, engulfed in happy thoughts. Where you are happy inside and happy outside. Where you are not looking for anything else ahead. The hindi language gave it a word long ago - Anand. What "Khushi" does not have, "Anand" has.

But, to be practical, Anand is not an ever lasting state. Anand comes and goes. You move on from Anand to Anand. Each time in search of the next one, trying to prolong each state and minimize the time interval between two such states. 

I have found Anand in a few things, and have stayed away from other few which I think can deteriorate my Anand.

I have found Anand through: 

Enabling the mind:

Travel. So much so that, I told a friend that I do not work and travel, I work from travel to travel. Before my next travel starts, I am already hatching plans of the one after it. Never leaving my mind in an empty space of not knowing what my next destination is. Travel does a lot for me. It opens up opportunities to absorb a new place, to break from the rut, and increasingly spend leisure time with family with instances of undivided attention. It just makes me feel free. Just the way I want to live, until the next travel again. 

Meaningful work. It is a necessity to work, and it is best to derive meaning out of it. The challenge in work is not just to give, but to give and gain. While money is an enabler, the amount of your awake hours required to work is just too long to ignore this aspect, and let it be a waste of time. You have to measure your work in terms of what it gets you in return. The power it grants you in bringing a change and impacting other people's lives while driving your work are important aspects. So is the importance of spending this time gaining respect of people working with you, and being able to generate respect for others around. While it is very clear to many and is pursued by many to gain others respect. It is equally important to find something and someone to respect. When you respect other's life, other's thoughts, other's decisions, other's capabilities is when you find the power and stability within that you are surrounded by people where there are opportunities of learning. Without the opportunity of learning and respect for people and organization, it is difficult to find meaning in your work. Without meaning, the feeling of wasting days after days in earning money will not take one too far and to a healthy mind state.

Enabling the body:

Running. When you are trying to get to a state of mind, you cannot leave the body far behind. The home of the mind is as important as the mind itself. It is uncanny how closely related are the two. A meaningfully tired body gets you the best sleep and throws out all undesired thoughts in the state when you are awake. 

Enabling the soul:

Family. Family and the memories of family. The past and the present. You have to have selective memory, and be choosy to pick the best of the instances. What is the fun in ruing about the times when you acted all stupid to dishearten your fiancee. Remember the times when your daughter acted all brave, and amazed you at the survival instincts of a little one made to travel in a jam packed bus sucking upon the milk bottle to restore her body energy. Remember the times when you broke into laughter together with your family on something stupid. 

In the process to reach Anand, there are lot of other enablers, necessities, compulsions, distractions, that you need to handle in life. There are a lot of choices to be made, and one should be clear about what drives these decisions. 

Enablers of your purchasing power. 

Money: Money is only as good as what it can buy for you. Good home, good school for kids, good travel plan, good amenities. It is best to know what you want and how much earning that money will tax you. Do you really want to go on the next moon mission with Space-X? May be you want to, it is your decision. Just that these decisions add up to have implications on one's financial state. It is as important to know how much can you earn, as it is to actually earn it. The rest of the plan will follow through if you are cognizant of your future needs and the tax you want to put on your mind space trying to gather this purchasing power enabler. 

Necessity to interact with others in this world. 

Humans: The other people we interact with - the servant at home, the manager in office, the team that reports to you, the customer with a want, the stake holder with an ask. All of these people are driving their own needs and choices. They interact with you in a complex environment with their own background and baggage. What is important is that how you want to interact, rather than be driven by how the other person makes you interact. You might want to be in the driver seat of the interaction, or you might want to be comfortably in the passenger seat, what you do not want is to be driven where you are in an uncomfortable zone. There is a reason for each interaction with another human. It is best to know what you want from such interaction. Each interaction is a negotiation. You need to negotiate your way through, to be left with a peaceful mind. You can rarely ask for Anand through these interactions, but what you should not give up is tranquility. 

Compulsion to be driven.
Passion: I have found it best to avoid Passions in my search of a healthy mind state and purposefulness. When you drive your passion, and when does your passion start to drive you is quite unclear to me. The servitude to passion is a big risk you run. You like things and you should be able to alter when you want to do them and when you want to step back. Too much of anything is too bad, and a passion would mean that you would be ready to cross all barriers and limits to drive your passion, or to be driven by it. My rule is not to be driven by anything, but by myself. Thus the boundations of passion are too cagey for me.

Distraction of measurement.

Comparison: I have not entirely been devoid of this sin. But a sin it is. The state of absolute is left behind the state of relative. The other guy is more respected, drives a better car, earns more money, has a happier family, is reaching financial goals sooner, has already grown up kids, knows more, speaks more, is valued more, produces more value, is a fast mover, is more fit - is all relative. May be all of these measurements need to be transformed into a new dimension of measurement which will actually matter, but I am yet to find one such. We live in a relative world, and from self to others, everyone is measuring and getting measured. To find peace and meaning within is more important than measuring with outside. Measurement should be used only when you want to find the right fit of clothes and shoes. Ultimately you do not compare yourself to your spouse, to your kids - the ones that matter the most, but we do end up comparing with the people outside. The evil continues, and this is what makes driving Anand difficult. After all, if it was not difficult would you still pursue it?

"Your mind is like this water, my friend. When it gets agitated, it becomes difficult to see. But if you allow it to settle, the answer becomes clear." Master Oogway nails it, and it is an ongoing battle to maintain the peace within. And ones you have that, may be, you will have Anand!  

Economic value of mental Harmony

We today live in a world, where we take pride in being oriented towards well being of all that concerns: animals, environment, people, states and countries. We take pride in being able to calculate the economic well being of all concerned. But our views are heavily colored by only the facts and figures available to us and represented to us. Very few states have chosen to measure the immeasurable. The economic value of mental well being.

We are living in an age where there is more information available then ever, though the world is more divided then ever. We are divided by our interests.

The most eloquent example, far from home, today is Mr Donald Trump. The people favoring him and against him, are simply people who see their interests aligned with his actions or not. The media is a glaring example of how things are changing in the US. When Trump got elected, media confronted Mr Trump and Trump bashing was a regular event in newspapers like nyt. Over time, media has learnt to live with Trump, appreciate the good he does, move over the negativity he spreads, find reason that benefits all in his actions, and over all strike a more supportive tone. This is exactly how a beaten house wife behaves, and has been behaving over the centuries. The alpha male in the house gets to get by. Why?

The answer lies in how the effected individuals calculate their well being. The apathy is that what matters most, the mental well being has no measure, but what we have all gotten so trained to work towards, earning money, economic development is more measurable then ever.

In a very interesting conversation, a sales profile person ones told me that the growth rate of a company must be measured net of attrition! A 20% attrition will net off a 30% cagr to a not so startling 10%!

This makes me think when we get so focused on economic activity, are we actually forgetting to optimize the right function? In protecting America and making it great, has Trump already lost the battle? Has he already upset good work of decades making great talent come to the US? Rather he is focused on short term gains for economic activity.

Why do we value corporates with good values, stable management, why bother about great places to work for surveys? Yes, it matters. But how do you make it matter at a local level? How do you make it bring it to life?

It's not that there is no recognition of these facts. At a corporate level, recently my company talked about emotional intelligence as the key focus area for tomorrow's success for the company. One key aspect of emotional intelligence is building psychological safety net for people around you. No wonder, Trump fails so starkly.

Unless we start to value the right pieces ourselves, there is going to be no respite. We will get beaten by the alpha male, and we will live on to see another day, thanking God for the bread we have earned!

One more for the intellectually stimulating conversation

That was then. This is now.

Where have you been. Love me how.

The wait has lasted forever.

Who cares who is the driver.

By myself I am a wreck.

But how else can I be best.

You need someone to talk to.

Was my brain bought too.

Without the brain being engaged it's a mess.

As my friend says, ignorance is a bless.

The oldies fill my heart.

Nobody needs a Cupid dart.

Just keep me busy.

And I won't turn fizzy.

The rented experience

It's a critical question to answer: which of your experiences do you want to be so ongoing, so permanent, and so personalized that you would rather buy the experience then rent it?

Let me set the context and how this thought emerged in my mind. On a recent trip to NYC sponsored by my lovely employer I stayed over in a nice apartment in downtown Manhattan. The 21st floor apartment balcony had a clean view of WTC 1 on one side and the Hudson river on the other. My 28th floor office seat had a view of the Hudson and statue of liberty. Great experience, but would I be ready to buy it? I don't think I need it that badly.

Each time we walk into a hotel, a restaurant we are fulfilling a need on rent basis. Why not get the hotel interior decorator do your home? Why not hire the restaurant chef? Renting is so cheap.

To the extent that the company "Rent the runway" runs on the concept of renting desired expensive dresses for a night.

Is there another idea hidden there? Or have we explored all frontiers? The major expenses that one needs to meet are:

For children: apparel, toys, education, sports and hobby equipment and tuitions

For independent earner (like self): apparel, food, transportation, home, marriage, entertainment

For the elderlies: health care

In today's world, while you need to build your own relationships and work hard to keep them intact, everything else is available on rent. An asset light model of living your life can really provide you with expensive experiences which are shared by many to keep the price in check.

I still wonder, is there any thing that one needs to spend there own time on? If there is at all, concierge services are there to solve for them too. Though, this one has really not reached the masses. You still end up calling one guy to fix a/c, another to fix your running tap and third one to renew your passport and forth one to book your gas. Only if all of this could come under one umbrella, life would be simpler!

Along came NYC!

This blog entry has the perfect potential to be a photo blog. Hopefully, the blogger app will post the selected photos.

Since, photos speak for themselves I will keep the narrative short.

View from office on 28th floor of 200 Vesey street. Plane flying over the Hudson between Jersey city and Manhattan with statue of liberty state park in the back ground and hoisting the GEICO advertisement. 

A day that started with amazing blue berry pancakes at Compton's pan cake house in Strasbourg. Ended at Ricketts Glenn state park in Pennsylvania.

A 7.2 mile beautiful hike. Laced with beautiful waterfalls.

A very helping SP who would always volunteer to group people taking photographs and would offer his skills. The formula was to take 3 photographs from different angles! Ever connecting attitude that involved chats with a couple dating for about an year, a uber taxi driver from Uzbekistan and a couple who dated for 25 years before getting married, have been married for 25 years and have come to picketts Glenn state park each year for the last 20 years.

A wonderful cabin park that gave us last minute shelter. A system that works in the desolated place to provide you hot water.

A night that is going to end with a good night with insect chirping in the back ground and body needing massage after a long hike.

So long!

She is so busy

The day starts like crazy
No time to lie in bed or be lazy
The first alarm goes up early
Time to get up definitely

Cook the food
Make the bed
Pack the lunch
Time is so crunch

Wake her up
Talk something sweet
Offer her some treat
She needs to finish her milk indeed

Lathe her bathe her
Freshen up Dress up
Put lotion on face
Tie the lace

Time to send off
And to get self ready
Wish I was a super mom
Or if I could get help from somebody

Time in office spent in breeze
Work lunch friends and colleagues
Check the video of day care
Everything looks fine and fair

Hoping to end the day early
Rush to home to get that hug so heavenly
But need to also finish the calls
And then put back in place all strewn dolls

Time for dinner
Can't see her any thinner
If she eats well
My heart goes swell

Thinking of starting another day early
Need to put her to bed
That is going to cost me energy dearly

But after all her well being is everything
Other charms of life have faded
Satisfaction comes from her smile
Her smile oh I have made it.

New year resolution or new life resolution?

Each year we welcome a new year into our lives. All excited about what would come our way, what we would sign up for and what we would achieve. Now, just expand that time frame to a life time – what a daunting task it would be to comprehend the complexities and think of the way forth.

But, is it really that complicated? Yes, there will be times when you will need to work hard, go out of your comfort zone to put the life back on track. But, can you put overarching goals for your life that can help you decide your today, tomorrow and the future actions?

Ultimately the goals for all us are made up of a few components:

• Build a personality for self

a.      Be loved

b.      Be respected

c.      Be smart

d.      Have the ability to stand for your convictions

• Make the people you care for successful

a.      The people who you care for most: mom, dad, spouse, kids

b.      The people who you want they care for you: friends, professional relatives

Now, each one of us would like to achieve the above. May be the formula to success for each one of us has a different flavor and weight for each of the above. But, this forms the base for why we do what we do. What we get tangled in a lot of time, is what do we need to do to provide for the above? And this question inadvertently always starts with how much money do we need to provide for the above?

So, let’s talk about money! I once happened to have a very abstract conversation with my dad. I asked him what does happiness mean to him? At age 60, close to his retirement from a job he served for 37 years he was already in the mode to reflect back. His answer was straight forward: I have raised kids who are all well settled, and I receive their love – this is happiness to me. I asked him if he knew any other person who was happy? I don’t think I got an answer to that. All the other people who I or he could think of have picked a fight their kids, or gulped their business partners share to provide for their expanding needs in the last few years. Definitely, such doings could not be the hallmark of a happy person.

So how much money, do you need after all? Each one for their own, but is there really a formula for it? The formula is difficult to get to, but here is a thought I have. Think of a time, when you could provide for all your family needs (once you have expanded your family to the extent you want to), and think were you spending a happy time with family? Meeting all major needs: kid’s education, travel and entertainment, gifts for relatives, mortgage, any thing else that makes the world go for you. Now freeze your requirement for money to that day. As you go along, you will need to adjust your need for money with the increasing needs and changing economy. But the key words here are “Adjust” and not “Expand” and “Needs” and not “Wants”.

I hope that all of us would be able to instill this in us, and think of the new year and the life ahead with the similar lens. Money and career are providers and not the end goals, and let us think of them as such.

Have a great new year, and a great life ahead!