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Board Meeting to evaluate capital raise: Possible implications?

Current round of equity capital raise will be much earlier than anticipated

* Bajaj Finance (BAF), on 22nd Sep’23, reported to the stock exchanges that it has scheduled a Board Meeting on 5th Oct’23 to consider a proposal for raising of funds including by way of preferential issue and/or QIP subject to regulatory and shareholder approvals.

* Interestingly, BAF has always communicated in the past that its leverage threshold has been ~7.0x and the last three instances when BAF initiated its capital raising plan, its trailing leverage (Y/E March) was 6.3x, 6.6x, and 6.8x in Mar’19, Mar’17 and Mar’15, respectively. The company posted a consolidated leverage (assets/net-worth) of 5.2x and capital adequacy of ~24.6% as of Jun’23. Standalone leverage stood at ~4.3x.

* This equity capital raise will be indeed much earlier than what we had anticipated given our current expectations of a ~29% consolidated AUM CAGR over FY23-FY25. In this report, we intend to ponder on the possible reasons that could have prompted the BAF management to evaluate this equity capital raise despite reasonable leverage and high capital adequacy.

* Before we delve deeper, we want to emphasize that we strongly believe this capital is not for any stress that could be there in its (rural) personal loan book.

Could BAF be raising this capital to compete with Jio Financial effectively? 

* While we still do not have finer details on the game-plan of Jio Financial, 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.

Strong AUM growth outlook might have promoted this capital raise

* BAF reported a core AUM growth of 29% in FY23 and 32% YoY as of 1QFY24. This could have potentially given it the confidence that the AUM CAGR will be in excess of 30% for the next few years (ahead of earlier expectations of 26-27% CAGR). Further, now that it is foraying into newer product segments such as Auto, MFI, Tractor, CV, the AUM growth could also be 1-2% 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.

Any M&A opportunities on the horizon?

* While BAF is still shy of the ~6-7x leverage and has a healthy Tier-1 Capital of 23%, could there be some M&A opportunities where this capital can be deployed? While this possibility cannot be ruled out entirely, we would attach lower probability of any M&A opportunities in the near-term. 

* In the newer lending product segments (under its Long-Range Strategy) of MFI and Vehicle Finance, there are not many sizable assets which are available for acquisition today. So 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).

* Within the payments space – BAF’s inclination earlier has always been to build the payments stack themselves (with much less burn than some of the listed/unlisted Fintech players). However, acquisition of a payment services player (at a reasonable price) could help BAF improve its payments offerings a few notches and also give access to a large customer base.

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