Bajaj Housing Finance coming with IPO to raise Rs 6957.58 crore

Bajaj Housing Finance 

• Bajaj Housing Finance is coming out with a 100% book building; initial public offering (IPO) of 99,39,39,392 shares of Rs 10 each in a price band Rs 66-70 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 9, 2024 and will close on September 11, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 6.60 times of its face value on the lower side and 7.00 times on the higher side.
• Book running lead managers to the issue are BofA Securities India, Kotak Mahindra Capital Company, Axis Capital, Goldman Sachs (India) Securities, SBI Capital Markets, JM Financial and IIFL Securities.
• Compliance Officer for the issue is Atul Patni.

Profile of the company

The company is a non-deposit taking Housing Finance Company (HFC), registered with the National Housing Bank (NHB) since September 24, 2015, and engaged in mortgage lending since Fiscal 2018. It has been identified and categorized as an ‘Upper Layer’ NBFC (NBFC-UL) in India by the RBI since September 30, 2022, as part of its ‘Scale Based Regulations (SBR): A Revised Regulatory Framework for NBFCs’ dated October 22, 2021. The company offers financial solutions tailored to individuals and corporate entities for the purchase and renovation of homes and commercial spaces. Its mortgage product suite is comprehensive and comprises (i) home loans; (ii) loans against property (LAP); (iii) lease rental discounting; and (iv) developer financing. Furthermore, its primary emphasis is on individual retail housing loans, complemented by a diversified collection of lease rental discounting and developer loans. Consequently, its financial products cater to every customer segment, from individual homebuyers to large-scale developers. The company is a part of the Bajaj group, which was founded in 1926 and is a diversified business group with interests across various sectors. To support its offerings, it had a network of 215 branches as at June 30, 2024, spread across 174 locations in 20 states and three union territories, which are overseen by six centralized hubs for retail underwriting and seven centralized processing hubs for loan processing. Its diversified reach helps it meet the specific needs of its target customers across geographies, in urban as well as upcountry locations. 

The company uses direct and indirect channels for origination of loans. For example, it sources direct business through strategic partnerships with developers, self-sourcing by customer engagement, leveraging leads from digital ecosystem and partnership with digital players. Under indirect sourcing channels, it originates business through a distribution network of intermediaries such as channel partners, aggregators, direct selling agents, third party agents and connectors. Simultaneously, a direct-to-customer (D2C) strategy empowers it to maintain control over the customer experience thereby enabling it to maintain consistency in its services while personalizing its customer experience. This hybrid model, leveraging both intermediaries and direct engagement with customers allows it to cater to various customer preferences and increase its market presence. The company has also developed customized credit evaluation procedures and operational workflows. Its operations comprise a tailored loan initiation system that is supported by comprehensive monitoring frameworks and mechanisms, all designed to facilitate on-boarding, maintain strong credit quality and portfolio performance. 

Proceed is being used for:

• Augmenting capital base to meet future business requirements of the company towards onward lending.
• Receiving the benefits of listing of the Equity Shares on the Stock Exchanges, including enhancement of the company’s brand name and creation of a public market for Equity Shares in India.

Industry overview

The Indian financial system includes banks and non-banking financial companies (NBFCs). Though the banking system dominates financial services, NBFCs have grown in importance by carving a niche for themselves by catering to customers in underbanked regions or those who would not be catered to by traditional financial institutions, due to absence of credit history or lack of proper collateral records. In January 2021, the RBI had proposed a tighter regulatory framework for NBFCs by creating a four-tier structure with a progressive increase in regulation intensity in a discussion paper titled ‘Revised Regulatory Framework for NBFCs -A Scale-based Approach’. Based on the inputs received, in October 2021, the RBI put in place a revised regulatory framework for NBFCs, which is in effect from October 2022. As per the RBI’s Scale-Based Regulation for NBFCs framework, the regulatory and supervisory framework of NBFCs should be based on a four-layered structure depending on their size, activity, and perceived riskiness: base, middle, upper, and top layers. The base layer NBFCs will be similar to current non deposit taking NBFC NDs and will consist of NBFCs having asset size less than Rs 10 billion. The middle layer will consist of all non-deposit taking NBFCs having asset size more than Rs 10 billion and all deposit taking NBFCs irrespective of their asset size. The upper layer will consist of selected set of NBFCs, specifically identified by RBI, which are significant from the point of view of systemic risk spill over and therefore required to be subjected to tighter regulations.

The Indian housing finance market clocked a healthy approximately 13.1% CAGR (growth in credit outstanding) from Fiscal 2019 to Fiscal 2023, on account of rise in disposable incomes, healthy demand, and greater number of players entering the segment. Over the past two Fiscals, housing finance segment has seen favourable affordability on account of stable property rates and improved annual income of individual borrowers. The overall housing finance segment credit outstanding is approximately Rs 33.1 trillion as of Fiscal 2024, which increased during Fiscal 2024, the overall housing market grew 15.2%, led by the aspirations of a growing young population with rising disposable income migrating to metro cities and elevated demand in Tier 2 and 3 cities as well. Demand for home loans remained largely unscathed despite a sudden rise in repo rates. Moreover, the income of the salaried class remained largely intact despite the economic slowdown caused by the Covid-19 pandemic and rise in inflation, thereby allaying lenders' concerns about any deterioration in asset quality. The government of India has been pursuing various social welfare schemes and initiatives to enhance the flow of credit to the housing sector and increase home ownership in India. As at Fiscal 2024, urban regions accounted for the highest share in overall housing finance credit with 65.2% share which was followed by rural regions which accounted for 19.8% share, Semi-urban regions accounted for 9.2% share in credit outstanding. 

Pros and strengths

Distinguished heritage of ‘Bajaj’ brand: The Bajaj group was founded in 1926. It is a prominent Indian conglomerate known for its diverse business interests across various sectors. The ‘Bajaj’ group of businesses are retail-focused enterprises that have gained recognition among Indian consumers through the two and three-wheelers of Bajaj Auto, financing products of Bajaj Finance including the company, insurance products of Bajaj Allianz Life Insurance Company and Bajaj Allianz General Insurance Company, mutual fund products of Bajaj Finserv Asset Management and broking services of Bajaj Financial Securities. The ‘Bajaj’ brand has consequently evolved into a recognized retail brand, which has contributed to the recognition and growth of its business. Furthermore, its market position is reflected in its strong credit ratings, underscoring its financial stability and investor confidence. The financial services businesses of the Bajaj group are primarily carried out through subsidiaries of Bajaj Finserv, one of which is Bajaj Finance, its parent company. The company, along with other subsidiaries of Bajaj Finance, conduct its operations under the ‘Bajaj Finserv’ brand. To further leverage and strengthen the brand among its customer base, it has created its website and application under the ‘Bajaj Finserv’ brand, to ensure that customers remain engaged with the brand across multiple touchpoints.

Second largest HFC in India in terms of AUM: The company has demonstrated a consistent growth trajectory over its seven-year operational history, even amid challenging events such as the NBFC crisis, the downturn of key industry players and the unprecedented impacts of COVID-19. Its business model and strong risk management policies have been crucial in sustaining this growth momentum. The company’s strength also lies in its strategic diversification, offering an extensive array of financial solutions that cater to the nuanced needs of both retail and commercial clients. For instance, in the retail domain, its products cover a spectrum of home loans tailored to various consumer profiles, loans secured against properties, encompassing a range of residential financing requirements. Further, the granular approach in its commercial loan book demonstrates its commitment to a risk-adjusted portfolio. It also offers tailored solutions for lease rental discounting and developer financing to support property owners and developers with specialized financial products. The company’s diversified product portfolio combined with its extensive customer base and focus on cross-selling allows it to benefit from the growth in the HFC industry by providing it with increased opportunities for deepening customer engagements, contributing to the growth of its business and providing comfort to its stakeholders, including shareholders, lenders and rating agencies. 

Strategic presence with omni-channel sourcing strategy: The company has a strategic presence across mortgage-centric markets with the following key components: branches, centralized hubs and active channel partners. As at June 30, 2024, its distribution network included 215 branches, six centralized hubs for retail underwriting and seven centralized processing hubs for loan processing) and 1,780 active channel partners, that is, partners with whom it has conducted at least one transaction in the last 12 months. Its diversified reach helps it meet the specific needs of its target customers across geographies, in urban as well as upcountry locations. It has adopted an omni-channel sourcing strategy of having physical presence with an option of accessing digital onboarding functionality to maximize reach, cater to different customer preferences and streamline the loan application process, thus enhancing customer experience and strengthening its market share. It follows a two-pronged sourcing strategy across retail products i.e., direct channel and intermediaries sourcing verticals separately for both home loans as well as LAP, ensuring expertise in respective sourcing channel. 

Well defined credit evaluation and risk management practices: The company has a well-defined credit evaluation framework and underwriting processes to ensure that risk performance across all products remain well within the defined thresholds. In particular, for the retail loan portfolio, its centralized underwriting process coupled with adoption of straight-through processing for salaried customers and Approved Project Finance (APF) projects, ensures quicker and more accurate loan evaluations. As at June 30, 2024, it has 6,349 APF projects. This approach is further enhanced by its digitized credit processes and the strategic use of account aggregator integration (i.e., digital access to financial data of customers from various financial institutions post customers’ consent), allowing for efficient retail underwriting. Centralized specialized underwriting teams are tasked with assessing the financial profiles of both salaried and self-employed applicants, utilizing telephonic and video personal discussions to reinforce the thoroughness of its credit appraisals. Furthermore, its risk team tracks early warning signals in accounts that have bounce track record as well those from one day past due to monitor cases that show signs of delinquency. It reviews portfolios on a periodic basis through credit bureau checks, credit databases and has set up a system of dashboard monitoring of cases by its risk team where members can review certain information of borrowers, identify areas of concern and initiate prompt action. 

Risks and concerns

Portfolio significantly exposed to real estate: The primary security for the company’s mortgage business is the underlying property/ collateral. As a result, it depends on the performance of the real estate sector in India and any decline in conditions of the real estate markets could have an adverse impact on its business, results of operations, cash flows and financial condition. Economic developments within and outside India can adversely affect the real estate market in India. It also provides retail home loans secured by properties under construction in residential real estate projects. The execution of these projects may be subject to delays or disruptions due to regulatory actions, unforeseen circumstances beyond the control of developers or failures in developers' execution. Such interruptions could lead to incomplete construction of the properties, potentially impacting the ability of retail home loan customers to service their loans effectively. Deterioration in the residential and commercial real estate market may result in reversing the growth of its loan accounts, which in turn could result in a material adverse effect on its business, results of operations, cash flows and financial condition.

Depends on external distribution network: The company relies on an external distribution network of intermediaries like channel partners, aggregators, direct selling agents (DSAs), third party agents and connectors, often individual proprietors and self-employed professionals for various tasks. These include attracting potential customers, collecting loan applications, marketing its financial products, and coordinating with its approved developers and builders to offer suitable options to potential customers based on their financial needs. The contracts with these intermediaries are typically non-exclusive. Further, the compensation it provides to them are variable and based on the commercial terms and targets agreed upon with each intermediary. There can be no assurance that this external distribution network will consistently bring it a significant number of customers or meet the monthly or similar periodic targets set in their contracts. As at June 30, 2024, it had 1,780 active intermediaries through such external distribution network. The loss of this network or inability to renew the contracts with these intermediaries or non-exclusive nature of their services may have an adverse effect on its business, results of operations, cash flows and financial condition. 

Rely on accuracy and completeness of information about customers and counterparties: In deciding whether to extend credit or enter into other transactions with customers and counterparties, it may rely on information furnished to it by or on behalf of customers and counterparties, including personal information, financial statements and other financial information. It may also rely on certain representations as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors of customers and counterparties. It also depends on credit bureaus for checking the creditworthiness of its customers. Sometimes, it may receive inaccurate or incomplete information as a result of negligence or fraudulent misrepresentation and its risk management measures may not be adequate to detect or prevent such activities in all cases. Difficulties in assessing credit risks associated with its day-to-day lending operations may lead to an increase in the level of its non-performing and restructured assets, which could have a material adverse effect on its business, results of operations, cash flows and financial condition. 

Exposed to risks related to concentration of loans to certain customers: The company cannot assure that it will be able to maintain historic levels of business from its top 10 and top 20 customers, or that it will be able to significantly reduce customer concentration in its loan book in the future. While no such instance has occurred in the past, a significant decrease in business from any such customer, whether due to circumstances specific to such customer, or sharp increase in interest rates or the real estate environment generally, may materially and adversely affect its business, results of operations, cash flows and financial condition. Its top 20 customers for each of the periods as indicated above are either customers of lease rental discounting and/ or developer financing loans. Further, its top five customers include lease rental discounting and/or developer financing customers and are each rated A+ and above by rating agencies. If the loans to any of these customers becomes non-performing, it cannot assure to make full recoveries on these loans and consequently it could result in deterioration of the credit quality of its loan portfolio. In addition, an increase in delinquency rates could result in a reduction in its interest income and as a result, lower revenue from its operations, while increasing costs as a result of the increased expenses required to service and collect delinquent loans.

Outlook

Classified as an ‘Upper-Layer NBFC’ by the RBI pursuant to Scale Based Regulations, Bajaj Housing Finance (BHFL) is a 100% subsidiary of Bajaj Finance - one of the most diversified NBFCs in the Indian market. Headquartered in Pune, BHFL offers finance to individuals as well as corporate entities for the purchase and renovation of homes, or commercial spaces. It also provides loans against property for business or personal needs as well as working capital for business expansion purposes. BHFL also offers finance to developers engaged in the construction of residential and commercial properties as well as lease rental discounting to developers and high-net-worth individuals. The company is rated AAA/Stable for its long-term debt programme and A1+ for its short-term debt programme from CRISIL and India Ratings. On the concern side, the company may face potential liquidity risks due to mismatches in the maturity of its assets and liabilities. Such mismatches, where the maturity of assets and liabilities do not match, are a key financial risk for it. Asset liability management is typical for a company in the business of lending, as some portion of its funding requirements is also met through short and medium-term funding sources such as commercial paper, cash credit or overdraft facilities. 

The company is coming out with a maiden IPO of 99,39,39,392 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 66-70 per equity share. The aggregate size of the offer is around Rs 6560 crore to Rs 6957.58 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 34.5% from Rs 56,654.4 million for Fiscal 2023 to Rs 76,177.1 million for Fiscal 2024. The company’s profit after tax increased by 37.6% from Rs 12,578.0 million for Fiscal 2023 to Rs 17,312.2 million for Fiscal 2024.  Meanwhile, to scale the company’s loan against property portfolio it has formed a dedicated team focused on enhancing its distribution network by onboarding new intermediaries, strengthening engagement with existing ones and increasing business share with established partners. Simultaneously, it aims to deepen market penetration by cross-selling to its current salaried customers, leveraging the trust and relationships already in place through its ‘Direct-to-Customer’ team, which is dedicated to directly engaging with customers to understand their financing needs and to offer them suitable financial products or services. This synergistic approach ensures a broader reach and a stronger presence in the loan against property market.