Is 2023 a good time to invest in Bajaj Finserv shares??

Bajaj Finserv Analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/4/20233 min read


  1. What is a good investment?

  2. What are the factors to be considered while analysing financial services companies?

  3. How does Bajaj Finserv perform on these factors?

  4. Is Bajaj Finserv a good investment at this time?


1. What is a good investment?


Ben Graham defined an investment as below:


“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”


If I had to invest any amount I would look at the following criteria.


What’s the current rate of inflation?

How much are the bonds yielding, especially the 10Y?

Are there any investments which can give me more return than the bonds above?


The answers currently as on 26-06-2023 according to me would be as follows:


Around 4-5%

Around 7%

Investing in an index ETF has returned over 7% in the last 10 years if I am not wrong.


From the above it seems that at a minimum we should target a return of more than 7% for any investment that we make at present considering the data points above.


But how do we know if Bajaj Finserv can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analysing financial services companies?


The following ratios can help us to know if a finance company is a good investment.


a. ROE over the last 10 years

b. Profit Margins over the last 10 years

c. Non Performing Assets Ratios over the last 10 years

d. Leverage (Debt / Equity) over the last 10 years

e. Coverage ratios over the last 10 years



3. How has Bajaj Finserv performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between 11% and 20% in the last 10 years.


b. Profit Margins over the last 10 years


Margins have been in the range of 11% to 44% in the last 10 years.


c. Non Performing Assets Ratios over the last 10 years


NPAs have been in the range of 0.12% to 0.75% in the last 10 years.


d. Leverage (Debt / Equity) over the last 10 years


Leverage has been between 92% and 320% over the last 10 years.


e. Coverage ratios over the last 10 years


Provision Coverage Ratio has been between 58% and 89%.


Capital Adequacy Ratio has been between 17% and 28%.


4. Is Bajaj Finserv a good investment?


Based on the above factors Bajaj Finserv seems to be satisfying the criteria of safety of principal.


Now let's look if it can provide a satisfactory return. Based on the CMP of ~1500 and EPS of 40 its yield is less than 3% which is not a satisfactory return.


Now, if we consider that sales and profits have grown at more than 15% compounded for the last 10 years it means its sales and earnings could double every 5 years if it continues at the same pace.


Current earnings - say x

Earnings in 5 years - 2x

Earnings in 10 years - 4x

Earnings in 15 years - 8x

Earnings in 20 years - 16x


At the end of Mar 2023 , EPS was around Rs.40 and price was around Rs.1500 giving a P/E of 1500/40 which is approx 37 and a bit on the higher side than normal.


If the above assumptions are correct the EPS in March 2043 would be 40*16 = Rs.640.


Assuming a P/E of 20 the price would be 640*20 = Rs.12800 which is 8.5 times the price of Rs. 1500 at the end of March 2023.


If we consider a price increase of 8.5 times in 20 years it indicates a growth of more than 11% which is a decent return.


Assuming a P/E of 30 the price would be 640*30 = Rs.19200 which is 12.8 times the price of Rs.1500 at the end of March 2023.


If we consider a price increase of 12.8 times in 20 years it indicates a growth of over 13.5% which is a good return.


If you would like to know more about growth investing by which we assumed the returns and prices above, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw



Conclusion


Although Bajaj Finserv is a good quality business the price at which it is available does not promise a satisfactory return in the short term for a period of a year or so. However, if you have a longer time horizon like buying something for your kids and holding it for a few decades then Bajaj Finserv can give decent returns if it continues to grow at the same pace as it has in the past.