Is it the right time to buy Bajaj Finance stock?

Bajaj Finance Analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/3/20233 min read


  1. What is a good investment?

  2. What are the factors to be considered while analyzing finance companies?

  3. How does Bajaj Finance perform on these factors?

  4. Is Bajaj Finance 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 25-06-2023 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 Finance can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analysing finance 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 Finance performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between 12% and 21% in the last 10 years.


b. Profit Margins over the last 10 years


Margins have been in the range of 16% to 28% 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 228% and 380% 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 Finance a good investment?


Based on the above factors Bajaj Finance 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 ~7000 and EPS of 190 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 18% compounded for the last 5 years it means its sales and earnings could double every 4 years if it continues at the same pace.


Current earnings - say x

Earnings in 4 years - 2x

Earnings in 8 years - 4x

Earnings in 12 years - 8x

Earnings in 16 years - 16x

Earnings in 20 years - 32x


At the end of Mar 2023 , EPS was around Rs.190 and price was around Rs.7000 giving a P/E of 7000/190 which is approx. 36.84 and a bit on the higher side than normal.


If the above assumptions are correct the EPS in March 2043 would be 190 * 32 = Rs.6080.


Assuming a P/E of 20 the price would be 6080*20 = Rs.121,600 which is 17 times the price of Rs. 7000 at the end of March 2023.


If we consider a price increase of 17 times in 20 years it indicates a growth of more than 15% which is a very good return.


Assuming a P/E of 30 the price would be 6080*30 = Rs.182400 which is 26 times the price of Rs.7000 at the end of March 2023.


If we consider a price increase of 26 times in 20 years it indicates a growth of around 17% which is a very 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 Finance 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 Finance can give very good returns if it continues to grow at the same pace as it has in the past.