INSTITUTIONAL EQUITY RESEARCH

Bajaj Finance (BAF IN)

Is the juice worth the squeeze?
13 September 2023
INDIA | NBFC | Company Update
Revamped web/app to drive incremental customer acquisition: BAF’s traditional customers
mobile phones buyers, have been moving online since the last 4-5 years from brick and mortar
BUY (Maintain)
CMP RS 7,431
stores, thus slowing down its new-customer originations. This has made BAF go deeper into
TARGET RS 10,000 (+35%)
India’s geography, look at unexplored regions and products, and shore up its app and web
presence. We believe that BAF can position itself as a payments and financial services SEBI CATEGORY: LARGE CAP
company in the medium term based on an e-commerce products users base of c.210mn in
COMPANY DATA
India, a target market of c.Rs 7.5tn, and cash-on-deliveries at c.70%+ of e-commerce GMV in
O/S SHARES (MN) : 606
tier 2+ cities. BAF’s apps and revamped web interface strategies will offer new growth vectors MARKET CAP (RSBN) : 4,503
in an intensely competitive environment and high-velocity business, and drive incremental MARKET CAP (USDBN) : 54.3
52 - WK HI/LO (RS) : 8,000 / 5,486
customer acquisition (c.2mn p.a.) through better engagement.
LIQUIDITY 3M (USDMN) : 88
PAR VALUE (RS) : 2
Consumer financing and mortgages will largely drive AUM growth through FY26: BAF
originates c.15% of new to credit customers (NTC) each year, which is c.75% of NTC consumer- SHARE HOLDING PATTERN, %
Jun 23 Mar 23 Dec 22
durables customers in the credit bureau’s records. The average ticket size of its consumer
PROMOTERS : 55.9 55.9 55.9
durable (CD) loans is c.1.5x those of NBFCs and private banks, allowing BAF to capture two- DII : 12.9 13.0 12.4
thirds market share in disbursements in this segment, which leads to better negotiation of FII : 20.1 19.2 19.9
total industry volumes (TIVs) with OEMs for subvention. Favourable demographics and OTHERS : 11.1 11.9 11.8
technology-led client-mining will lead to an addition of 9-10mn customers each year. In-house
PRICE PERFORMANCE, %
loan sourcing, cross-sell opportunity to existing customers (who have c.Rs 5tn of mortgages 1MTH 3MTH 1YR
as per management) and popular ticket-size loans of Rs 4.5-5.0mn will act as key growth ABS 5.3 4.7 2.0
drivers for BHFL in the near-to-medium term, We expect consumer financing (incl. personal REL TO BSE 2.3 (2.5) (9.8)
loans) and mortgages growing to c.32% of overall book each in FY26 to c.Rs 1.8tn each. We
model 31% loan CAGR over FY23-26, leading to an AUM of Rs 5.6tn in FY26. PRICE VS SENSEX

260
We expect stable spreads at c.8.7% levels in FY24-26: Stable credit rating, positive asset-
220
liability mismatch (ALM) in the less than one-year bucket, and a favourable borrowing mix are
180
likely to keep borrowing costs largely stable at c.7.3% in FY24-26. Rural financing foray
cushions the spreads, as rural yields are 100-150bps higher than urban branches. We expect 140

spreads to remain at c.8.7% levels during FY24-26, backed by competitive debt-market pricing 100

of BAF’s papers and the company’s ability to increase its deposits profile. 60
Sep-20 Sep-21 Sep-22 Sep-23
BAF IN BSE Sensex
Non-linear growth in fee income, tapering credit costs to buoy profitability: We expect fee
income CAGR of 35% in FY23-26, to touch Rs 1.07tn, largely offsetting c.50% of operating
KEY FINANCIALS
expenses through the same period. We believe the street is underestimating BAF’s cross-sell
Rs bn FY24E FY25E FY26E
franchise and thereby fee-income potential. We expect non-linear fee income growth vs.
Net Profit 139 189 242
AUM growth, which we believe will largely offset operating expenses and allow a large part % growth 20.8 36.1 28.1
of NII (c.28% CAGR FY23-26) to flow into operating profit (c.28% CAGR). With credit cost at EPS (Rs) 229 312 400
c.135bps over FY24-26, we forecast 28% earnings CAGR for BAF. Given the non-linearity of BVPS (Rs) 1,081 1,330 1,650
fee income, ROE will improve to 24%+ by FY26 at current levels (i.e. 5.5-6.0x) of leverage. ROE (%) 23.2 25.9 26.8
ROA (%) 4.5 4.7 4.7
Outlook and valuation: Most investors look for the troika of growth, risk management and P/E (x) 32.4 23.8 18.6
high capital buffers in a lending business. BAF ticks all boxes to make a compelling investment P/BV (x) 6.9 5.6 4.5
argument. It is transitioning to a financial services and payments player in the medium term
and is entering new credit segments like microfinance, new car finance, flexi loans on QR for
Shubhranshu Mishra, Research Analyst
merchants, and tractor finance, which will scale up over the medium term. A diversified (+9196195 56381) [email protected]
funding base, the management’s deep pool of domain expertise, AAA rating, and positive ALM
in the less than one-year bucket provides tailwinds. We maintain our FY24/25 EPS estimates,
and introduce FY26 estimates. We value BAF based on a residual income model, assuming
risk-free rate (Rf) of 7.75%, cost of equity (CoE) of 12.9%, and terminal growth rate of 5%, to
arrive at a target of Rs 10,000 (7.5x FY25 BVPS). The stock trades at 5.6x FY25 BV for a FY25
RoE of 26%. Maintain rating (BUY) and increase target price to Rs 10,000 (vs. Rs 9,500 earlier).

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Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research
is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt
Securities Inc, an SEC registered and FINRA-member broker-dealer. Powered by EQUITEC
 BAJAJ FINANCE COMPANY UPDATE

Table of Contents

What’s in the price?........................................................................................... 6

Perpetual beta state of mind ........................................................................... 11
Story in charts .................................................................................................. 12
Who is a Bajaj Finance customer? ................................................................... 21
Can BAF play the fintech/super-app game? .................................................... 26
Can BAF maintain subvention market share? ................................................. 43
Where do the profit pools lie?......................................................................... 56
Risk diversifiers drive AUM growth and profit ................................................ 62
Growth drivers: Commercial lending, mortgages ........................................... 73
Building blocks for the medium term .............................................................. 86
Preferential debt pricing to manifest stable spreads ...................................... 92
Granular fee income to offset c.50% of opex .................................................. 98
Profitability to see uptick in FY24-26 ............................................................. 106
Management Profile ...................................................................................... 115

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 BAJAJ FINANCE COMPANY UPDATE

Why should you read this report?

Bajaj Finance started as Bajaj Auto Finance in late 1980s. It only changed to a diversified
financier from being a captive auto financier for Bajaj Auto in 2013. The present
management is almost solely responsible for Bajaj Finance’s present avatar, but the
role of its unobtrusive yet distinguished board cannot be denied.
We have made an earnest effort to
A discussion on Bajaj Finance (BAF) among investors is usually quite polarised. Much
present a comprehensive and unique
has already been written about the company and much more discussed within the view on the company’s stock price, a
investor community. Even so, through this report, we have made an earnest effort to medium-term view of its business, and
present a comprehensive and unique view on the company’s stock price, a medium- an attempt to dissect the depth of its
term view of its business, and an attempt to dissect the depth of its management. As management
the report’s title suggests, we are essentially trying to assess if the juice is still worth
the squeeze – do investors have enough margin for safety to enter the stock at these
valuations.

Key questions addressed in this note:

Can BAF play the fin-tech/super-app game?
BAF’s traditional entry point for customers has been point of sale (POS), especially for
mobile phones. These products have a faster replacement, and thus became a solid
entry point for BAF’s experiential-credit offering, leading to a perpetual salubrious
cycle of new customer originations. However, these customers have been moving
online since the last 4-5 years, leading to slowing new-customer originations. This has
made the company take the following steps – one, it is going deeper into the India’s
geography and looking at unexplored geographies and products, and two, it is shoring
up its app and web presence.

What is experiential credit?

Borrowers believe assets such as houses, shops, or vehicles as offer them social and
economic upward mobility. As such, they usually do not intend defaulting on payments
for these assets and as a result banks and NBFCs financed these products historically.

Over the last 13-14 years, mobile phones have taken centre stage –becoming an
extension of people’s bodies and minds, doubling up as workstations too, especially for
self-employed people. In 2009, no banks or NBFCs financed mobile-phone purchases,
as they were reducing their unsecured exposure after the retail bust in 2009 after the
Great Financial Crisis.

However, BAF did things differently. It single-handedly created the mobiles financing
market after 2009, as banks were retracting from the unsecured lending space. BAF
found that this space was less competitive and that peoples’ workplaces were
transitioning from offices to mobile phones. Also, mobile phones provided BAF with a
low-ticket ‘test’ credit exposure, where it could evaluate NTC customers at lower risk
due to lower tenors. On this ‘experiential credit’, a c.Rs 1.5tn disbursement market
spawned.

We believe BAF can position itself as a payments and financial services in the medium
term based on the following positives – c.210mn product e-commerce users in India, a
target market of c.Rs 7.5tn, and cash on deliveries being c.70%+ of e-commerce GMV
(Gross Merchandise Value) in tier-2+ cities. Its app and web strategies will offer new
growth vectors in an intensely competitive environment and high-velocity business.
We believe that there is enough space for its marketplaces – Bajaj Finserv EMI store
and Bajaj Mall.

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 BAJAJ FINANCE COMPANY UPDATE

Can BAF deliver >25% loan growth in the near term?

We model 31% loan CAGR over FY23-26, leading to an AUM of Rs 5.6tn in FY26, largely
driven by consumer financing (incl. personal loans) and mortgages. Though mobile
sales have been moving online for the last five years or so, BAF’s addressable market
for mobiles, consumer durables and furniture (c.Rs 7.5tn) is still 72% in the brick-and-
mortar and traditional-format stores in tier-2+ cities. We believe BAF’s apps and its
revamped web interface will drive incremental customer acquisitions (c.2mn p.a.)
through better engagement. Favourable demographics and technology-led client
mining should lead to an addition of 9-10mn customers each year. BAF originates c.15%
of new-to-credit customers (NTC) each year, which is c.75% of NTC consumer durable
customers in the credit bureau records.

We thus forecast consumer financing (incl. personal loans) growing to c.32% of overall
book in FY26 at c.Rs 1.8tn and 36% of incremental book growth during FY23-26. In-
house loan sourcing, cross-sell opportunity to existing customers (who have c.Rs 5tn of
mortgages as per management) and popular ticket-sized loans of Rs 4.5-5.0mn will act
as key growth drivers for BHFL in the near-to-medium term, which will lead to
mortgages growing to 32% of its overall book in FY26 at c.Rs 1.77tn, constituting 32%
of incremental book growth during the same period.

Will new business segments be building blocks for the medium term?
The company has an ambition to be a leading payments and financial services company
in the medium term. The management has plans to launch the following 5 new
products – new car finance, tractor finance, micro finance, LAP in SME finance, and
flexi loans on Quick Response (QR) Code via Electronic Data Capture (EDC). The
management intent is to build all businesses organically. We believe there remains
enough space for BAF to enter the new business segments given its large geographic
reach, tested cross-selling franchise, and strong data analytics. This diversifies risk on
its balance sheet, creates more product offerings to customers, and increases new
customer acquisition throughput. We believe BAF will be able to scale up these
businesses in a staggered manner over 4-5 years. With deep sustainable profit pools in
existing businesses, BAF can take slightly higher credit risk or spend higher in customer
acquisition for certain products and markets.

Is management transition likely as the company gains scale?

Rajiv Jain has been at helm since BAF’s management transition in 2008. He has led
execution astutely, while the late Nanoo Pamnani used to lead strategic initiatives.
With BAF expanding into new businesses and gaining scale, we are likely to see Rajiv
Jain moving into a strategic role to fill the void Nanoo Pamnani left when he passed
away. Rajiv Jain’s appointment will come up for renewal in March 2025. We don’t
foresee these events to be too game changing.

With the company reaching 1.7% of systemic credit and with multiple businesses, it is
natural to have different leaders. As an organisation, BAF has grown its leaders largely
in-house; it has a strong second-line of leadership who are domain experts in their
fields.
• Manish Jain heads Bajaj Finance Securities, hence oversees loans against securities
(LAS) – which is 6% of the total book.
• Atul Jain heads mortgages and commercial lending (excl. LAS) quite independently;
this constitutes c.38% of the total book . He oversees commercial lending (excl.
LAS) as he heads corporate relationships for construction finance (CF) and lease
rental discounting (LRD).
• Recently, Anup Saha and Rakesh Bhatt have been made Deputy CEOs of BAF. Anup
oversees c.52% of the balance sheet, which includes sales finance, personal loans,
SME finance and rural businesses. These businesses are large; of these:

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 BAJAJ FINANCE COMPANY UPDATE

o Amit Raghuvanshi heads sales finance and personal loans (c.29% of balance
sheet). Manish Jain (different from the one mentioned above) heads sales
finance, which is c.14% of balance sheet.
o Sidhant Dadwal heads SME (c.13% of balance sheet)
o Deepak Reddy heads rural businesses (c.10% of balance sheet)

Is a bank conversion likely in the near-term?

We haven’t found any evidence of an industrial house being given a banking license.
For more than a decade, BAF’s performance is a testament to diversifying risk on its
balance sheet. Utilising technology and data analytics have led to a sizeable cross-
selling franchise of c.45mn. With HDFC vacating the NBFC/HFC space, we expect BAF
to benefit from lesser competition for funds in the bond/money markets for the next
3-4 years. Also, for deposits maturing for HDFC and the bank term-loans market, we
are likely to see BAF benefiting for the next 3-4 years as it is a AAA-rated NBFC, where
banks would want to deploy their NBFC exposure in lieu of HDFC, and deposit holders
would trust BAF as a brand after exiting HDFC. Due to these two factors, raising
inexpensive funds (liability) may not be a problem for the next 3-4 years.

BAF and BHFL are in the upper layer NBFCs, as per new scale-based regulations, and
regulatory compliance has increased manifold and much closer to bank regulations.
This leaves little incentive for management to consider converting to a bank. A bank
requires granular retail savings deposits and a priority sector lending (PSL)-compliant
book. Though BAF has sizeable granular retail deposits, raising a retail-savings-deposits
franchise is a decadal activity, and will hinder growth in the near-medium term. We
believe the management could evaluate this option 3-4 years from now. c.15% of BAF’s
book is PSL compliant as of FY23, which is quite far off from the 40% requirement for
universal banks. We believe its new fledgling businesses, viz. tractor finance and
microfinance, should add to the PSL portfolio over next 3-5 years. Over the next 3-4
years, we are likely to see deposits becoming more granular and businesses such as
tractor finance and microfinance scaling up. The management has alluded to
evaluating a bank conversion 3-4 years from now; we don’t see a strong reason for BAF
converting to a bank in the near-term.

Can we see an uptick in profitability in the near-term?

Geographic expansion into 3,800+ cities pan-India, which is likely to increase to c.4,200
cities, covers 99.5% of the credit-bureau footprint and enables risk mitigation for
seasonality. With 25+ credit product offerings, BAF maintains diversification of risk on
its balance sheet and on-boards customers across demographics. We think the street
is underestimating BAF’s cross-selling franchise and thereby fee-income potential. We
would like to highlight that we expect fee income growth to be non-linear vs. AUM
growth, which will largely offset operating expenses and allow a large part of BAF’s NII
(c.28% CAGR in FY23-26) to flow into operating profit (c.28% CAGR). A granular
collection infrastructure, well aligned to its businesses, makes asset quality and credit
costs predictable. With credit cost at c.135bps in FY24-26, we forecast 28% earnings
CAGR. With non-linear fee income, we believe ROE will rise to 24%+ levels by FY26 at
current levels of leverage (which are at 5.5-6.5x).

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 BAJAJ FINANCE COMPANY UPDATE

What’s in the price?

BAF looking at transitioning to financial services and payments player
Most investors look for the troika of growth, risk management and high capital buffers
in a lending business. BAF has demonstrated risk-adjusted growth for the past 15-
years, and it is the only NBFC to demonstrate clearly diversified risk on its balance
sheet. Now, it wants to transition to a financial services and payments player in the
medium term and is building out a payments infrastructure through FY24-25. It is also
entering new credit product offerings such as microfinance, new car finance, CV
finance, and tractor finance – which will scale up over the medium term.

Wide credit product offerings, distribution mitigate seasonality

The company has 25+ credit product offerings at 3,800 cities, pan-India, which covers
99.5% of the credit bureau footprint of the country; this mitigates seasonality in the
business. No business division accounts for more than 5% of AUM, which diversifies
and de-risks its portfolio. A diversified portfolio ensures that if one segment is going
slow, the other can grow faster, thus contributing to overall growth. The business
segments are well distributed between secured and unsecured, salaried and self-
employed, retail and corporate, and high yield and slow churn. This is conducive to
reducing cyclicality in growth and making asset quality more predictable.

Well-positioned to grow its customer base and market share in consumer durables
We believe BAF apps and revamped web interface will drive incremental customer
acquisition (c.2mn p.a.) through better engagement. Favourable demographics and
technology-led client mining will lead to addition of 9-10mn customers each year. BAF
originates c.15% of new-to-credit customers (NTC) each year, which is c.75% of the
credit bureau’s records NTC consumer-durables customers.

BAF’s average ticket size of its consumer durable (CD) loans is c.1.5x those of NBFCs
and private banks, allowing BAF to capture two-thirds market share in disbursements
in this segment, which leads to better negotiation of total industry volumes (TIVs) with
OEMs for subvention. OEMs provide higher subvention of 7-9% on higher ticket sizes
vs. 3-5% on lower ticket sizes, which leads to BAF maintaining 68-70% subvention
market share, creating a strong moat that becomes difficult to replicate if the same
process vigour is not applied at the same scale.

In the medium term, BAF wants to position itself as a payments and financial services
player. Its app and web strategies will offer new growth vectors in an intense
competitive environment and high-velocity business. Hence, we model for a 31% loan
CAGR over FY23-26, leading to an AUM of Rs 5.6tn in FY26, largely driven by consumer
financing (incl. personal loans) and mortgages.

PLCS is a major profit pool; co can use it to grow its business

Personal loan cross-sell (PLCS) is a major profit pool for BAF, according to our
calculations, driving growth and accounting for an average c.33% of BAF’s consolidated
profits between FY12-23. With this large profit pool, BAF can:
1. Cross-subsidize credit costs from segments where cyclicality causes high credit
costs.
2. Pay higher cost of acquisition for products/geographies where initial opex to setup
scale is high.

BAF offers salaried personal loan (salaried PL) to mitigate credit risk from its PLCS book
during periods of stress, as salaried PL mostly has super prime and prime customers.

The management has plans to launch: (1) New car finance, (2) tractor finance, (3) micro
finance, (4) LAP in SME finance, and (5) flexi loans on QR via EDC. It intends to build all
businesses organically. We believe there is enough space for BAF to enter new business

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 BAJAJ FINANCE COMPANY UPDATE

segments given its large geographic reach, tested cross-selling franchise, and strong
data analytics.

BAF is using various costs and margins levers to keep spreads stable
Stable credit rating, positive asset-liability mismatch (ALM) in the less-than-one-year
bucket and a favourable borrowing mix have helped cut borrowing costs by c.160bps
over FY20-23. This in turn has kept spreads stable at 9.0-9.5% over this period. BAF’s
rural financing foray also augurs well for margins, as rural yields are 100-150bps higher
than urban branches. We expect spreads to remain at c.8.7% during FY24-26 backed
by benign debt market pricing of BAF’s papers and the company’s ability to increase its
deposits profile. The HDFC-HDFCB merger is likely to provide disproportionate
tailwinds to BAF’s liabilities in terms of pricing.

Fee income will see robust growth, offset half of operating expenses
BAF’s fee income has grown c.12x during FY16-23 to Rs 43.4bn, of which distribution
income is the largest at Rs 19.2bn. Fee income is evenly distributed across 17-18-line
items and has an equal split between distribution and loan-related fees. We expect fee
income CAGR at 35% during FY23-26 to touch Rs 1.06tn, which will largely offset c.50%
of operating expenses in the same period. We reckon the street is underestimating
BAF’s cross-selling franchise, and thereby its fee-income potential. We expect higher
fee income growth vs. AUM growth, which we believe will largely offset operating
expenses and allow a large part of NII (c.28% CAGR in FY23-26) to flow into the
operating profit (c.28% CAGR).

Proven track record of handling difficult situations

The management skilfully tided over the retail NPA crisis of FY09-10, cash-flow stress
due to demonetisation, and covid-hit credit stress. It has capabilities and early-warning
signals to handle threats to asset quality, and takes timely corrections. A granular
collection infrastructure, aligned as per businesses, makes asset quality and credit cost
predictable.

Robust earnings growth, RoE to improve

With credit cost at c.135bps in FY24-26, we forecast 28% earnings CAGR for BAF. Given
the non-linearity of fee income, we argue for a case of ROE improving to 24%+ levels
by FY26 at current leverage levels of 5.5-6.0x. We maintain our FY24/25 EPS estimates
and introduce FY26 estimates. We value BAF based on a residual income model
assuming risk-free rate (Rf) of 7.75%, cost of equity (CoE) of 12.9% and terminal growth
rate of 5% to arrive at a target price of Rs 10,000 (vs. Rs 9,500 earlier, 7.5x FY25 BVPS).
The stock trades at 5.6x FY25 BV for a FY25 RoE of 26%. Maintain BUY.

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 BAJAJ FINANCE COMPANY UPDATE

One-year forward P/B (x) One-year forward P/E (x)

P/B (x) Avg
Max Min P/E (x) Avg Max
10 +1SD -1SD 70 Min +1SD -1SD
9
60
8
7 50
6
40
5
4 30
3 20
2
10
1
0 0
Nov-16
Jun-17

Dec-20
Jul-14

Aug-18

Jul-21
Feb-15
Sep-15

Oct-19

Feb-22
Sep-22
Apr-16

Apr-23
Jan-18

Mar-19

May-20

Nov-15
Jun-16

Dec-19

Nov-22
Jun-23
Oct-18

Jul-20
Sep-14
Apr-15

Feb-21
Sep-21
Apr-22
Aug-17

May-19
Jan-17

Mar-18
Source: PhillipCapital India Research, Company Data, Bloomberg Source: PhillipCapital India Research, Company Data, Bloomberg

We discovered no relation between cross-sell ratio and P/BV

Various NBFCs and banks are discovering the joys of cross-selling opportunities in 2023,
while BAF had its Eureka moment a decade earlier. While its cross-sell ratio reduced to
40% in FY21 from a high of 80% in FY20, there were two solid reasons for this –
restructuring of retail spends business and covid-related slowdown. With digital assets
gaining scale and BAF’s brute force of distribution in 3,800 cities, we expect cross-sell
ratios shoring up in FY24-26 to 45%+ levels.

The street has been unduly concerned on the cross-selling ratio. However, when we
calculated the correlation of price-to-book ratio (x) to cross-selling ratio over FY15-23,
we discovered the r2 to be -0.06, implying no correlation at all.

Strong correlation between PLCS profit pool to consolidated profit

Given personal loan cross-sell (PLCS) is the largest profit pool, we calculated the
correlation between PLCS profit pool contribution to consolidated profit pool and price
to book ratio over FY12-23. The correlation (r2) was 0.78, implying strong correlation.
We expect the profit pool contribution from PLCS book to inch up to 35%+ levels in
FY24-26, implying a premium of 35%+ to present P/B.

Moderate correlation between PAT per cross-sell to consolidated profit

We calculated correlation between PAT per cross-sell customer to consolidated profit
pool and price to book ratio over FY17-23. The correlation (r2) was 0.41, implying
decent correlation. It is low because the time frame is short and the cross-selling
franchise is a stock number rather than a flow number. The number of customers
banked annually is a subset of the cross-sell customer pool and this is a flow number.

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 BAJAJ FINANCE COMPANY UPDATE

The r2 is 0.78 between P/B (x) and PLCS profit as % of consol. PAT
P/B (x) PLCS profit % of consol PAT (%, RHS)
12 50

10 40
8
30
6
20
4

2 10

0 0
Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Source: PhillipCapital India Research, Company Data, Bloomberg

The r2 is -0.06 between P/B (x) and cross-sell ratio, implying The r2 is 0.41 between P/B (x) and PAT per cross-sell
no correlation at all franchise, implying some correlation to P/B (x)
P/B (x) Cross-sell ratio (%, RHS) P/B (x) PAT per cross-sell franchise (Rs, RHS)
12 90 9 2,500
80 8
10
70 7 2,000
8 60 6
50 1,500
6 5
40 4
4 30 1,000
3
20 2
2 500
10
1
0 0
0 0
Sep-18
Sep-15

Sep-16

Sep-17

Sep-19

Sep-20

Sep-21

Sep-22
Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Jun-18
Nov-18

Dec-20
Jul-20
Sep-19
Feb-20

Oct-21
Aug-17

Apr-19

Aug-22
Mar-17

Jan-18

May-21

Mar-22

Jan-23
Source: PhillipCapital India Research, Company Data, Bloomberg Source: PhillipCapital India Research, Company Data, Bloomberg

BHFL listing in September 2025: Our bull, bear, and base scenarios
Bajaj Housing Finance Ltd (BHFL) has been classified as an upper layer NBFC as per
scale-based regulations, and so it is to be listed within three years of this classification.
We expect the listing in September 2025, as the regulator put out the list of upper-
layer NBFCs in September 2022. We have worked out three scenarios, and taken a
hold-co discount of 15% to be conservative even though present tax considerations
don’t mandate a hold-co discount.

We have taken a 60% weightage for our base scenario, 10% weightage for our bear
scenario, and 30% weightage for a bull scenario. In the bull case, i.e., scenario 3, the
P/E multiple assumed is 40x – c.5% lower than +1sd of BAF.

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 BAJAJ FINANCE COMPANY UPDATE

The calculated scenarios are below:

We estimate an upside of 26% using BHFL listing scenario analysis

Scenario 1
Rs mn Present Mcap FY25E Mcap Upside (%)
Consol 44,86,800 54,76,534 22
Consol FY25e NW 8,06,155 8,06,155
Implied P/B (x) 5.3 6.8 22

Rs mn FY25E multiple (x) FY25E Net Worth/PAT FY25E Mcap

Standalone 35.0 1,73,897 60,86,381
HFC 2.5 1,42,640 3,56,600
Note: Assumed HoldCo discount of 15%

Scenario 2
Rs mn Present Mcap FY25E Mcap Upside (%)
Consol 44,86,800 47,01,100 5
Consol FY25e NW 8,06,155 8,06,155
Implied P/B (x) 5.3 5.8 5

Rs mn FY25E multiple (x) FY25E Net Worth/PAT FY25E Mcap

Standalone 30.0 1,73,897 52,16,898
HFC 2.2 1,42,640 3,13,808
Note: Assumed HoldCo discount of 15%

Scenario 3
Rs mn Present Mcap FY25E Mcap Upside (%)
Consol 44,86,800 62,76,217 40
Consol FY25e NW 8,06,155 8,06,155
Implied P/B (x) 5.3 7.8 40

Rs mn FY25E multiple (x) FY25E Net Worth/PAT FY25E Mcap

Standalone 40.0 1,73,897 69,55,864
HFC 3.0 1,42,640 4,27,920
Note: Assumed HoldCo discount of 15%

Final Valuation Table

Rs mn Present Mcap FY25E Mcap Upside (%)
Consol 44,86,800 55,60,140 26
Consol FY25e NW 8,06,155 8,06,155
Implied P/B (x) 5.3 6.9 26

Rs mn FY25E multiple (x) FY25E Net Worth/PAT FY25E Mcap

Standalone 35.5 1,73,897 61,73,330
HFC 2.6 1,42,640 3,68,012
Note: Assumed HoldCo discount of 15%
Source: PhillipCapital India Research, Company Data, Bloomberg

Key risks we see to our thesis

• Competition from fintechs and new-age NBFCs in PLCS
• Competition from banks in salaried home loans
• Senior management attrition to competitors

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 BAJAJ FINANCE COMPANY UPDATE

Perpetual beta state of mind

After a company reaches a certain scale and decent market share, it’s pertinent for
investors to ask whether the firm can better itself. In this, Bajaj Finance stands out
because is known for its “perpetual beta state of mind” – always looking for new ways
to grow. This is mind-boggling for linear thought process of investors, and adds to the
entropy of more questions. Bajaj Finance has been at the forefront of introducing new
products and services each year, which increases its customer pool – and the bigger
the customer pool, larger is its cross-selling opportunity and higher is the customer Bajaj Finance's commitment to
continuous improvement and
engagement.
innovation, as well as its strong data
analytics capabilities, have enabled it to
As stated earlier, cross-selling is a new buzz-word for NBFCs and banks, but BAF has achieve sustained growth through cross-
been doing it from a decade when proprietary data, strong data analytics and an astute selling. Its decade-long track record of
execution engine have held BAF in good stead. It will be the only NBFC which ticks the success in cross-selling, strong
trinity of what investors demand – growth, capital buffers, and pristine asset quality. fundamentals, and ambitious goals set
it apart from its competitors.
The following excerpts from BAF’s FY23 annual report in the Chairman’s letter
encapsulates the spirit and vision of the firm for the next five years. We have covered
this opportunity in detail in our report.

Where do we go from here? I expect that the extensive digitisation accompanying

your Company’s Omnichannel strategy will allow management to not only attract
more customers but also rapidly grow various mutually profitable cross-selling
opportunities — for BFL’s, BHFL’s and BFinsec’s offerings as well as for general, life
and health insurance products. India has a huge and rapidly burgeoning middle class
and, for all our growth, we have barely scratched the surface. There is much more
growth to be captured. And many more consumer dreams to be realised. The
opportunities are endless for the next five years, if not a decade.

BAF’s expanding product and services set it up for a virtuous cycle for cross-selling in the medium term

Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Story in charts
Growing middle class… …to drive up discretionary spending
HHs with annual earnings Rs 375,000 - Rs 750,000 HHs with annual earnings Rs 750,000 - Rs 3,750,000
% of total HHs (RHS) % of total HHs (RHS)

160 50.0 200 45.0 50.0

41.2 42.5
140 37.0
40.0 40.0
120 30.9 150 30.3 31.9
100 26.5
23.8 30.0 30.0
80 17.9 100
15.2 132 143 174
60 122 20.0 14.0 20.0
9.2 10.9
40 85 50 6.3 99
61 71 10.0 5.2 89 10.0
20 36 43 38
12 15 23 29
0 0.0 0 0.0
FY09 FY10 FY12 FY14 FY15 FY18 FY20 FY30E FY09 FY10 FY12 FY14 FY15 FY18 FY20 FY30E

Source: PhillipCapital India Research, EIU, Technopak estimates Source: PhillipCapital India Research, EIU, Technopak estimates

Customers can compare and review financial products and In Q1FY22 BAF offered an omni-channel payments solution
electronics across marketplaces to customers and merchants via Bajaj Pay

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Its productivity apps will improve efficiencies of In FY22-23, BAF delivered 100+ features and 25+ adjunct app
its employees, channel partners, and merchant ecosystems ecosystems – to enhance customer stickiness

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Product commerce is dominated… …by tier 2+ cities as of CY22

400 370
Metro + Tier 1 Tier 2+
350 320 100
15
300 270
80 41
250 210 60 64
60 74
200
140
150 40 85
100 59
20 40 36
50 26
0 0
Product OTT video Shortform Gaming OTT Audio Product OTT video Shortform Gaming OTT Audio
commerce Video commerce Video

Source: PhillipCapital India Research, Redseer / Note: in mn Source: PhillipCapital India Research, Redseer / Note: in %

Despite e-commerce GMV growing to c.Rs 4tn in CY21… …it is dominated by two players and COD is c.45% of GMV

4,500 3,975
37% of e-commerce = mobile 100
4,000 90
phones; electronics and
3,500 white goods account for 60%
80 70
of e-commerce sales
3,000 2,700
2,500 2,100 60 50
45
2,000 1,650
1,350 40
1,500 1,050
825
1,000 20
225 300 c.70% market share
500 75 75 150 with Amazon, Flipkart
0 0
e-Commerce Metro/Tier 1 Tier 2 cities Tier 3+ cities
CY10

CY11

CY12

CY13

CY14

CY15

CY16

CY17

CY18

CY19

CY20

CY21

GMV cities

Source: PhillipCapital India Research, Redseer Source: PhillipCapital India Research, Bain / Note: Cash on delivery % shown

Though mobile phone sales have moved online… …BAF’s addressable market (B&M and traditional) is still are
72% of c.Rs 7.5tn market
Size (Rs tn) Share of total retail (RHS,%)
Traditional Organisized - B&M Online
5 10 100
7.9 7
20 22 18
4 8 14
80
55 24
3 6 24 26
3.8 3.6 60
3.3
2 4
1.4 40 79
1 2 18
56 52 59
4.9 0.8 2.3 2.1 2.3 20
0 0 27
Apparel & Footwear Mobile Consumer Furniture &
0
Accessories Durables Furnishing
Apparel & Footwear Mobile Consumer Furniture &
and
Accessories Durables and Furnishing
Appliances
Appliances
Source: PhillipCapital India Research, Unicommerce / Data as of FY22 Source: PhillipCapital India Research, Unicommerce / Data as of FY22

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 BAJAJ FINANCE COMPANY UPDATE

10-month average time spent (min:sec) on Bajaj Finserv …is c.2 minutes lower than Meesho, but closing in on PayTM
app… Money
Meesho Flipkart Shopsy PayTM Money Bajaj Finserv Policybazaar
Amazon Tata Neu
03:36
05:46
05:02 02:53
04:19
03:36 02:10
02:53
02:10 01:26
01:26
00:43
00:43
00:00 00:00
Jun-22

Nov-22

Dec-22
Jul-22

Aug-22

Sep-22

Oct-22

Feb-23
Jan-23

Mar-23

Jun-22

Dec-22
Jul-22

Oct-22
Sep-22

Feb-23
Aug-22

Mar-
Nov-

Jan-23
22

23
Source: PhillipCapital India Research, SimilarWeb Source: PhillipCapital India Research, SimilarWeb

BAF originates c.15% of NTC customers…. …which is c.75% of NTC consumer durables customers being
on-boarded into the system
Customers with CIBIL score >750 Consumers (mn) % of NTC (RHS)
Customers with CIBIL score 720-750 10 25.0
21.0
New to credit 19.4
8 20.0

6 12.0 15.0
15%
4 7.4 10.0
6.8
20%
2 4.2 5.0
65%
0 0.0
Consumer durable Agricultural loans Personal loans
loans

Source: PhillipCapital India Research, Company Data; NTC is ‘new to credit’ Source: PhillipCapital India Research, CIBIL / Data as of CY21

c.50% of AUMs at origination is <Rs 0.5mn ticket size c.50% of AUM is in high-income states
<Rs 0.2mn Rs 0.2-0.5mn Rs 0.5-1.0mn Rs 1.0-2.5mn Maharashtra Karnataka Tamil Nadu
Rs 2.5-5.0mn Rs 5-10mn Rs 10-50mn Rs 50-250mn NCT OF DELHI Telangana Rest of India
Rs 250mn-1bn Rs >1bn

4%
2% 3% 26%
8%
3% 42%
33%
5%
10%
12%
8%
12% 18% 7% 7%

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

c.60% of deposits are domiciled beyond metros… …leading to presence of BAF in high-income states
Deposits (Rs tn) % of total (RHS) Per Capita NSDP - constant prices ('000, FY21)

75.0 50.0 300

41.6
250
60.0 40.0

243
200
150

166
45.0 30.0

160
154
144
143
100

135
133
114
112
15.8 17.4 50
30.0 20.0

74
72
72
72
58
51
39
28
12.7 12.5
0

Odisha
Delhi

Maharashtra

Jharkhand
Uttar Pradesh
Bihar
West Bengal
Haryana
Gujarat

Andhr Pradesh

Madhya Pradesh
Telangana
Karnataka
Tamil Nadu

Kerala

Chattisgarh
Punjab
Rajasthan
15.0 10.0
72.8

27.6

22.3

21.9

30.4
0.0 0.0
Metros Next 25 Next 50 Next 100 Rest of
cities cities cities India

Source: PhillipCapital India Research, RBI / Data as of 2QFY23 Source: PhillipCapital India Research, CSO

Average ticket size of BAF’s CD loan is 1.5x that of NBFCs and …leading to stable disbursement market share as per our
private banks… calculations
Average Ticket Size (Rs) BAF CD finance disbursement (Rs bn)

40000 BAF CD finance mkt share (%)

32,500 750 67.5 68.4 66.2 75.0

63.5 64.5
30000
600 60.0
20,700 21,400
20000 450 45.0

300 30.0
10000
150 15.0
282 407 483 361 579
0 0 0.0
Private banks NBFCs BAF FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark, Company Data Source: PhillipCapital India Research, CRIF High Mark, Company Data

According to our calculations… …PLCS is the largest profit pool in BAF’s profit
Personal Loan Cross Sell (PLCS) RoA tree (%)
PLCS Profit pool (Rs mn) % of PAT (RHS)
Yield 27.0
CoF 9.0 40,000 45 50
42
Fees 1.5 39 41 40
Total income 19.5 35 35 40
30,000
Opex 1.0 31 29
PPoP 18.5 24 30
20,000
Credit cost 3.0 17 17
20
RoA 11.6
10,000
10,167
16,122

22,289

20,005
24,847

33,660

10
1,002

1,727

2,745
4,475

7,160

Source: PhillipCapital India Research, Company Data

682

0 0
FY12
FY13

FY14

FY15
FY16

FY17

FY18
FY19

FY20

FY21
FY22

FY23

Source: PhillipCapital India Research, Company Data

Page | 15 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

BAF caters to all customer segments… …to maintain similar market share through FY19-22
PL average ticket size (Rs mn) BAF PL portfolio (Rs bn) BAF PL mkt share (RHS, %)

0.7 0.60 450 7.5

0.6 0.50
0.45 5.5 5.7
0.5 0.40 6.0
0.4 4.5 4.7
0.25 0.25 0.25 0.25 300
0.3 4.5
0.2 0.15
0.10
0.1 3.0
0 150
HDFCB

SBIN
ICICIBC

KMBB

BAF PLCS
BAF Salaried PL

Cred

PayTM

Navi
IDFC First

1.5
226 305 293 374
0 0.0
FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data, CRIF High Mark

With salaried at c.75% of total BAF PL disbursements… …BAF has c.6% of the bank/NBFCs monthly PL disbursement
pool (Rs 500bn)
Salaried % of PL HDFCB SBIN ICICIBC IDFC First BAF

100 AXSB ABFL Fullerton PayTM KMBB

80 80 Navi RBL bank Clix capital Others

75 75 75
75
2 2 11
3 9
50 24
4
4
25 6
6 24
6
9
0
ICICIBC SBIN AXSB HDFCB BAF

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

According to our calculations, rural finance… …contributes to c.7% of its profit pool
Rural Finance RoA tree (%)
Rural finance profit pool (Rs mn) % of PAT (RHS)
Yield 20.0
CoF 9.0 10000 15.0
Fees 1.3 11.5
Total income 12.3 12.0
7500 9.5
Opex 5.0 8.7
7.5 8.0 9.0
PPoP 7.3 7.3
5000 5.8
Credit cost 2.7
6.0
RoA 3.5 3.6
2500
1.3 3.0
1,060

1,883

3,189

4,598

5,073

6,703

8,370

Source: PhillipCapital India Research, Company Data

462
FY15 115

0 0.0
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Fledgling portfolios will scale up in 3-4 years… …with professional loans now gaining more traction within
SME lending
Used car loans (Rs bn) Secured enterprise loans (Rs bn) Business loans (%) Professional loans (%)

35 33 100

30 28 27
80 34 38 40 39
41
25

20 18 60

15 12 12 40
73
10 66 62 60 61
6 59
5 20

0
0
FY21 FY22 FY23
FY18 FY19 FY20 FY21 FY22 FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Secured enterprise loans and used-cars are high yielding Around 63% of SME finance business is sourced beyond top-
segments 40 cities
Yield (%) Top-40 cities (%) Beyond top-40 cities (%)

20
16 16
16
13
12 37

4 63

0
Short-tenor Secured Used car loans Long-tenor Secured
business loan business loan

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

BAF SME finance business is 4% across cycles RoA …contributing c.15% of consolidated profit, which has
business… declined over the last decade
SME Finance RoA tree (%)
SME finance profit pool (Rs mn) % of PAT (RHS)
Yield 20.0
71 69
CoF 9.0 15,000 75
Fees 1.3 58
56 57
13,422

12,500 60
Total income 12.3
48
Opex 5.0 10,000
PPoP 7.3 45
18
7,500 16 18 14 12
Credit cost 2.0 15
30
RoA 4.0 5,000
15
2,266
3,366

5,108

6,182
7,430

8,778

2,500
FY18 4,545
FY19 6,264

Source: PhillipCapital India Research, Company Data

FY20 7,723

FY21 8,036
FY22 9,929

0 0
FY12
FY13

FY14

FY15
FY16

FY17

FY23

Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

c.80% of on-boarded HL customers have 750+ CIBIL score… …which largely gets driven from B2B sourcing
Customers with 750+ CIBIL (%) B2B (%) B2C (%)

90 100
85 84 84 85
83 83
85 81 81 81
79 78 78 78 78 80
48
80 77 78 54
73 69 68
60
75

70 40
65 52
20 46
60 27 31 32
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
0
FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

HL is clocking a c.Rs 35-40bn quarterly disbursement run- …with increasing focus on open sourcing
rate…
HL monthly disbursement (Rs bn) Open market customer sourcing (%)
HL monthly disbursement (RHS, % of total) Existing customer base sourcing (%)
75 72
20 67 67 66 80 100
61 70
54 57 57 55 54 80 33 37 38 38 41 42 42 41
44 46 48 51
15 48 48 51 45
60 54 54 59 59
39 50 60
10 40
17.5

15.6
14.8

40
14.3

13.8
13.7

30
13.4
13.4

12.9

12.6
12.3
12.0

11.7

67 63 62 62 59 58 58 59
11.0

10.0

56 54 52 49
9.9

5 20 46 46 41 41
20
10
0 0 0
Q3FY22

Q1FY24
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22

Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24

Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Source: PhillipCapital India Research, Company Data / Note: Monthly Source: PhillipCapital India Research, Company Data
disbursement only for last month of the quarter

Core fee income growth exceeds NII growth… …leading to higher profit pool accrual from fees
NII growth (%) Core fee income growth (%) Fee income to PBT (%)
42.2

120 108 45
38.4
36.0

100
35.6

35.6
35.4

40
33.3
32.9

80
60 35
29.9

55 54
28.4

60
27.2

44 43 42
26.4

35 35 35 30
40 25
42 40 39 25
20 37 35
28 31 31 30
-5 26 22
0 20
3
-20 15
FY24E

FY25E

FY26E
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 18 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

This has led to sustained growth in AUM per cross-sell …and doubling of profit per cross-sell customer during FY15-
customer… 23
AUM per cross-sell franchise (Rs) YoY (RHS, %) PAT per cross-sell franchise (Rs) YoY (RHS, %)
9.1
70,000 10.0 3,000 40.0
30.4 32.3
60,000 5.9 8.0 30.0
5.0 2,500
4.6 6.0 19.1
50,000 13.1 20.0
4.0 2,000 10.9
1.2 4.8
40,000 0.5 2.0 10.0
1,500 -2.9
30,000 -2.2 0.0 0.0
-6.9 -24.8
-2.0 1,000
20,000 -10.0
-4.0
51,856

52,095

54,724

53,521

55,985

61,059

60,199

60,931
56,858

1,506

2,143
1,437

1,670

1,621

1,931

2,184

2,834
10,000 500 -20.0

1,643
-6.0
0 -8.0 0 -30.0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Recovery cost as % of opex is coming off from covid highs… …and was an average 71bps in FY10-23
Recovery cost (Rs mn) % of opex (RHS) Recovery cost % of AUM (bps)
21.7

Average of FY10-23 = 71bps

21.0

20,000 25.0
150 139
17.5

16.9

16.7

20.0
15.4
15.0

15,000
14.6
14.3

125
14.0
13.3

13.0
12.6

12.4

15.0 100
77 75 81
10,000 68 68 70 63 65 68
10.0
75 56 53 60 56
50
5,000
11,508
15,904
16,868

5.0
1,196
1,679
2,044
2,475
3,180
4,914
6,469
9,594

25
561
583
891

0 0.0 0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Monthly recovery cost per bounced customer is coming off… …leading to uptick in PPoP per new loan excluding recovery
cost
Monthly Recovery cost per bounced customer (Rs) PPoP per new loan less recovery cost (Rs)

600 YoY (RHS, %)

537
70
475 7,000 75
500
6,000
400 337 50
302 5,000
292 284
262 268 25
300 229 4,000
12 25
3,000 9
200 5 -19
-1
2,000 0
-13
5,153
3,041

3,307

3,285

2,864

2,994

3,756

6,396

5,757

100
1,000
0 0 -25
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data / FY21 is high as new loans
sourced declined

Page | 19 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Gross slippage ratio on a lag basis is coming off from covid …a trend that is visible in write-offs as % of AUM on a lag
highs… basis as well
Gross slippage ratio (% 1-year lag) Write-off as % of AUM (% 1-year lag)
Gross slippage ratio (% 2-year lag) Write-off as % of AUM (% 2-year lag)

7.50 7.50

6.87
6.00 6.00

6.44
5.46

5.44
4.50 4.50

4.79
4.42
3.85
3.00

3.71
3.00

3.27
3.10

2.73
1.50

2.21
2.52

0.37
2.76
3.07
5.81
4.05
0.89
1.67
0.64
0.34
0.46
0.21
0.29
0.60
0.81
0.88
1.20
1.57
2.13
1.17
1.60
1.94
3.77
3.14
1.71
2.34

1.50
2.11
1.13

2.40
1.53
1.72

1.55

1.84

3.88

5.41

5.23
-
-

FY10
FY08
FY09

FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Though advertisement costs show c.10x increase in FY15- …PBT less advertisement cost per new loan is on an upward
23… trend
Advertisement cost (Rs mn) % of opex (RHS) Adv. Cost per new to BAF customer (Rs)

4,000 6.0 PBT less Adv. Cost per new loan (RHS, Rs)
5.1

5,130
3,500 400 6,000
4.4 5.0

2,403
3,000 4.0 3.9

3,779
2,591
350 5,000

3,484
3.5 4.0
2,500
2,764

300 4,000
2,722
2,615

2,552
2.6

305
2,000 2.5 2.3 3.0
2.0 250 3,000
1,500
2.0
238

200 2,000
274

221

1,000 274

196
1,669

1,832

2,219

1,042

1,764

3,530

1.0 150 1,000

500 174
352

753

679

157

166

0 0.0 100 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Who is a Bajaj Finance customer?

BAF’s management has frequently highlighted that it focuses on the mass affluent BAF targets the mass affluent segment
segment. BAF defines mass affluent as incomes above Rs 350,000 in rural areas and Rs with incomes above Rs 350,000 in rural
500,000 in urban areas. We set out to understand who this customer is and how this areas and Rs 500,000 in urban areas
target market will shape up in the medium term.

The consumption desires of millennials and Gen Z

We believe India’s consumer story is one of the world’s most convincing ones for the India's youth and education are driving
next 20 years. The total size of India’s youth – with 440mn millennials and 390mn Gen significant consumer spending growth
Z teens and children – along with better education pave the way for continued growth potential
in purchasing power.

Millennials and Gen Z preferences

Consumer Segments Persona Attitude and Preferences Millennials/Gen Y: Tech-savvy, focus on
product/experience, value social media
Mainstreamed technology for Receptive to social media for feedback, seek distinct experiences,
purchase, look for innovative reviews, less likely to be brand
Millennials / Generation Y exhibit lower brand loyalty
products, place value of product/ loyal, perceive shopping as a social
(Born between 1981 and 1996)
experience at top of priority across activity, like unique customer
price segments experiences

Prefers a brand with ethical or Gen Z: Ideological consumers, willing to

Generation Z (Born between Ideological purchase, willing to pay green ideology, look for online invest in quality, prefer ethical/green
1997-2012) high price for high quality accessibility, prefer tailored brands, seek online convenience, want
customer service and experiences
personalized service/experiences
Source: PhillipCapital India Research, Ethos watches RHP

As per industry sources, the seven consumption needs of millennials and Gen Z Indians
are: (1) wellbeing (health/education), (2) eating better, (3) mobility/connectivity, (4)
looking better, (5) better homes, ((6) travelling, and (7) luxury.

Private final consumption expenditure (PFCE) likely to …driven by the 7 consumption needs of millennials and Gen
remain at similar levels as % of GDP by FY25E… Z
Nominal PFCE (Rs tn) as % of GDP (RHS)

250 70
59 59 59 59 61 61 61 61 60 59
56 56 58 58
60
200
50
150 40

100 30
20
50
10
100
112
122
122
143
165
176
197
91
49
56
65
72
81

0 0
FY17
FY12
FY13
FY14
FY15
FY16

FY18

FY20
FY21
FY22
FY23
FY24E
FY25E
FY19

Source: PhillipCapital India Research, RBI

Source: PhillipCapital India Research, Industry Data

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 BAJAJ FINANCE COMPANY UPDATE

c.65% of India’s population belongs to the key consuming …which will drive the consumption growth till FY30
cohort of 18 to 55 years…

>65, 6
Strugglers Next Billion Aspirers Affluent Elite
50-64, 13 0-14, 26 100
8
14 22
14
80
19
22 29
60
26
40 24
42

20 34
15-24, 18
23
25-49, 37 14
0 6 3
FY10 FY19 FY30

Source: PhillipCapital India Research, Ministry of Health and Family Welfare, Data Source: PhillipCapital India Research, BCG
as of CY21

Note 1: Annual Gross Household income – Strugglers: Rs <0.15mn; Next Billion: Rs 0.15-
0.5mn; Aspirers: Rs 0.5-1.0mn; Affluent: Rs 1.0-2.0mn; Elite: Rs >2.0mn

A slim urban middle class

India has a small ‘Urban Middle Class’ relative to its population, which comprises
largely of 10mn government employees (including state-run enterprises), 0.85mn
small/medium enterprise (SME) owners, and 16mn working professionals (with post-
graduate or technical degrees). To put it in perspective, the Urban Middle is just 5% of
the total working population of 519mn people and 17% of the urban workforce.

IT = 25% of India’s private sector – the urban middle class

The IT industry employs c.5mn Indians and adds c.500K net jobs per year. Landing an
IT job is like a ticket into the urban middle class, which is a key reason why 20-25% of
the total college graduate pool is pursuing engineering. IT professionals comprise 25%
of India’s urban middle class employed in the private sector.

Consumption to be driven by the urban mass-affluent sections

The urban mass affluent in India represents a fourth of the total workforce with 129mn
people. The urban mass affluent can be further divided into educated urban mass
affluent of 32mn people, who have an undergraduate degree and are employed in non-
labour-intensive jobs. The rest of the urban mass affluent are blue collar workers or
migrant labourers.

In India, growth in the urban middle class is unlikely to be very rapid as the number of
government jobs keep shrinking (there are 1.7mn fewer government jobs since 2000)
and our IT services industry analyst Karan Uppal is seeing a slowdown in high-paying IT
sector jobs (which formed about 25% of the urban white-collar jobs). However, with a
slew of service-sector jobs emerging in areas such as food services, logistics, and
manufacturing, we expect the urban mass-affluent class to grow the fastest over the
next 5 years.

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 BAJAJ FINANCE COMPANY UPDATE

Key cohorts of the Indian consumer

Source: PhillipCapital India Research, VII pay commission report

Increasing number of tax payers (mn)… …and IT sector jobs augur well for the urban middle class
90 IT Employees (mn) Net hiring ('000, RHS)
80.4
80 6 600
70.4
70 65.6
58.0 5 500
60 53.8
49.6 4 400
50
40 3 300
30
2 200
20
1 100
10
2.3

2.5

2.8

3.0

3.3

3.5

3.7

3.9

4.1

4.2

4.5

5.0
0 0 0
FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22
FY14 FY15 FY16 FY17 FY18 FY19

Source: PhillipCapital India Research, Income Tax Source: PhillipCapital India Research, NASSCOM

% share of household spends… …will move towards more discretionary spends by FY30
Food, beverages, tobacco Clothing & Footwear
Strugglers Next Billion Aspirers Affluent Elite
Housing & household products Health
100 1 3
Transport & Communication Education 5 7
15 9 16
Leisure Other goods & services 80 21

Elite 14 8 24 5 20 6 4 19 26
60
45
Affluent 22 8 21 6 18 5 3 17 45
40
Aspirers 30 7 20 5 17 43 14 40
Next Billion 43 7 15 3 14 3 2 12 20
33
22
Strugglers 47 6 15 3 12 3 2 12 11
0
0 25 50 75 100 FY10 FY19 FY30E

Source: PhillipCapital India Research, BCG / Data as of FY19 Source: PhillipCapital India Research, BCG

Drivers of robust household consumption growth

In the coming decade, we expect strong growth trajectory in household consumption
(at Rs 120tn in FY19) based on four key pillars: (1) Affluence (sustained rise in average
household incomes). (2) Attitude (positive sentiment towards economy and personal

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 BAJAJ FINANCE COMPANY UPDATE

financial situation). (3) Awareness (due to enhanced connectivity, travel, and media).
And (4,) access (both digital and physical). According to Boston Consulting Group
estimates, the total household consumption spending in India is likely to reach Rs 300tn
by FY30.

Drivers of middle-class growth and premium goods across categories

Rising incomes leading to a large middle-class population, is a key driver of private
consumption. There is significant upward mobility, with lower-income households
increasingly shifting towards becoming middle class. The per-capita consumption
expenditure of middle-class households is >3x than that of low-income households and
their consumption pattern is relatively (in comparison with the lower income
Strong growth in household
households) more skewed towards branded products and the organized channels. consumption driven by rising incomes,
positive attitude, enhanced awareness,
This trend is expected to fuel rising income levels per household, as well as higher levels and increased access. Rising middle-
of discretionary expenditure. Consequently, spends on premium products will rise, class driving consumption of branded
leading to higher expenditure in various categories, including food and beverages, products and towards organized
apparel and accessories, luxury products and consumer durables. channels. Preference for premium goods
is visible

Growing middle class… …to drive up discretionary spending

HHs with annual earnings Rs 375,000 - Rs 750,000 HHs with annual earnings Rs 750,000 - Rs 3,750,000
% of total HHs (RHS) % of total HHs (RHS)

160 50.0 200 45.0 50.0

41.2 42.5
140 37.0
40.0 40.0
120 30.9 150 30.3 31.9
100 26.5
23.8 30.0 30.0
80 17.9 100
15.2 132 143 174
60 122 20.0 14.0 20.0
9.2 10.9
40 85 50 6.3 99
61 71 10.0 5.2 89 10.0
20 36 43 38
12 15 23 29
0 0.0 0 0.0
FY09 FY10 FY12 FY14 FY15 FY18 FY20 FY30E FY09 FY10 FY12 FY14 FY15 FY18 FY20 FY30E

Source: PhillipCapital India Research, EIU, Technopak estimates Source: PhillipCapital India Research, EIU, Technopak estimates

The composition of consumption in households – skewed towards urban…

Household consumption in India is skewed towards the urban population.
Socioeconomic classifications (“SEC”) A, B and C1, which account for c.45.5% of urban
population and c.12.3% of rural population is referred to as the “top-20%” of Indian
households by income. In FY20, these households accounted for 40-50% of total Household consumption in India is
household consumption expenditure and c.44% of household income. The next 40% of concentrated among the urban
households accounted for 40% of the overall household expenditure, while the bottom population, particularly the top 20%
40% (largely comprising SEC E) made up 10-20% of household consumption. The per- income group, which accounts for a
capita consumption for the top-20% was twice the national average. significant portion (nearly half) of total
expenditure and income.
The top-8 cities in India – Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Ahmedabad,
Pune, and Kolkata – account for c.9% of India’s population of 1.3bn. The consumption The top-8 cities contribute a large share
of discretionary retail is quite concentrated in these top-8 cities as they contribute of discretionary retail consumption in
c.30% of the total discretionary consumption in India. the country

…but tier-2’s contribution is rising rapidly

However, with the proportion of high-income households becoming widely distributed
across c.100 cities in the country, the contribution of tier-2+ (populations <1mn) to the
consumption boom is likely to increase.

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 BAJAJ FINANCE COMPANY UPDATE

Top-20% Indian households generate 40-50% of Top-8 cities contribute c.30% of discretionary retail
consumption expenditure consumption
Population (%) Discretionary Retail Consumption (%)
25 Urban Rural 90 84
22.2
20.1 80
20
70
15.6
60 53
15 12.9 13.2 12.6 12.8
11.6 50
10.2 10.7
9.8
10 8.6 40
7.6
6.2 30
5.1 5.1 4.7
5 3.2 20 14 16
2.3 2.6
1.1 1.3 8 9
0.04 0.4 10 4 5 3 4
0
0
A1 A2 A3 B1 B2 C1 C2 D1 D2 E1 E2 E3
Top 2 cities Next 6 Next 16 Next 50 Rest of India

Source: PhillipCapital India Research, Economic Survey, World bank, Data as of Source: PhillipCapital India Research, Technopak
FY20

Note 1:
• Top 2 Cities: Delhi and Mumbai
• Next 6 Cities: Bangalore, Chennai, Hyderabad, Ahmedabad, Pune, Kolkata
• Next 16 Cities: Amritsar, Bhopal, Chandigarh, Coimbatore, Indore, Jaipur, Kanpur,
Kochi, Lucknow, Ludhiana, Madurai, Nagpur, Patna, Surat, Vadodara,
Vishakhapatnam
• Next 50 Cities: Mostly Tier II cities such as Agra, Aurangabad, Dehradun, Dhanbad,
Guwahati, Gwalior, Jalandhar, Jamshedpur, Kota, Meerut, Rajkot, Ranchi,
Trivandrum, Vijayawada

Note 2: Socio-economic classification is a stratification of Indian households; it is widely

agreed that consumption behaviour in India is better predicted by SEC (socioeconomic
class) classification, which is based on education of the chief earner and number of
consumer durables (from a predefined list) that a family owns. The list has 11 items,
ranging from ‘electricity connection’ and ‘agricultural land’ to cars and air conditioners.

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 BAJAJ FINANCE COMPANY UPDATE

Can BAF play the fintech/super-app game?

New web/app strategies to increase the pace of new customer originations
BAF’s traditional entry point for customers has been financing purchases of mobile
phones at point of sales (POS), i.e., loans are normally processed at the retail outlet or
showroom. Mobile phones have a faster replacement cycle and are an entry point for
BAF’s experiential-credit offering, leading to a perpetual and healthy cycle of new
customer originations. However, these customers have been moving online since the BAF aims to expand its reach, explore
last 4-5 years, slowing down new customer originations. To counter this, the company new markets, and enhance its app and
has gone deeper into India’s geography, begun to look at unexplored geographies and web presence to become a leading
products, and started shoring up its app and web presence. The fruits of these new payments and financial services
vectors are already visible in terms of an increase in new customer originations. provider in a competitive market

We have gone through the internet funnel (c.210mn product e-commerce users), the
target market (c.Rs 7.5tn), and cash on deliveries (c.70%+ of e-commerce GMV in tier
2+ cities) to conclude that there remains enough space for a marketplace such as Bajaj
Finserv EMI store and Bajaj Mall in tier 2+ cities, to compete with incumbent online
marketplaces. In the medium term, BAF wants to position itself as a payments and
financial services player. Its app and web strategies will offer new growth vectors in an
intensely competitive environment and high-velocity business.

What’s a FinTech?
According to Financial Stability Board (FSB), of the Bank of International Settlement 'BAF omnipresence' is the seamless
(BIS), “FinTech is technologically enabled financial innovation that could result in new integration of its online and offline
business models, applications, processes, or products with an associated material channels to provide financial services,
effect on financial markets and institutions and the provision of financial services”. and enhance customer experience and
operational efficiency.
What is the concept of ‘BAF omnipresence’?
In its long-range planning (LRP) exercise in November 2019, the company ideated to
provide financial products and services to its existing customers in a seamless manner
by creating an ‘omni-channel’ framework, which will provide flexibility its customers to
move between online and offline channels seamlessly. This, BAF believes, will enable
it to become a single-point interface for its customers, thereby giving it the potential
to deliver superior business velocity, eliminating friction, and reducing operational
costs. The omni-channel strategy has six domains: (1) Geographic expansion, (2) Bajaj
Finserv app, (3) Bajaj Finserv website, (4) Payments, (5) Productivity apps, and (6)
customer data platform (CDP).

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 BAJAJ FINANCE COMPANY UPDATE

For ‘omnipresence’ to work, BAF is working towards intermingling of all five pillars in
the near to medium term

Source: PhillipCapital India Research, Company Data

How did BAF use automation to drive business transformation?

The company started with restacking the core, which took the most amount of time
other than focusing on a good UI-UX. Restacking the core is an important step to being
able to deliver at scale. This also meant investing in core infrastructure such as high
availability infrastructure and deeper investments in disaster recovery. In addition, to
deliver this in a time frame of c.15 months, BAF hired 600+ people laterally, along with
freshers.

Digitizing high velocity business to have better throughput

High-velocity business is where technology plays a big role and automation benefits To drive business transformation, BAF
corresponding to the investment pay-out. The in-app programs are mostly application invested in core infrastructure,
programming interface (APIs). As the company analyses which API is generating restacked the core, improved UI-UX,
velocity, it will keep integrating tighter. hired talent, and leveraged APIs for
automation

Customers can compare and review financial products and Bajaj Pay will offer an omni-channel payment solution to
electronics across marketplaces customers and merchants

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Productivity apps to improve efficiencies of employees, 100+ features and 25+ adjunct app ecosystems were
channel partners and merchant ecosystem delivered in FY22-23 to enhance customer stickiness

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

BAF's apps are streamlining operations and enhancing customer experience

BAFs productivity apps connect employees and distribution partners, while its
collections apps enable end-to-end journeys of on-boarding agency staff, entire cash
receipting, trading, communication, compliance features, dialler integration, and call BAF's productivity apps streamline
recording. Its collection app also enables the debt-management staff to service operations, connect employees and
customers on a host of service-related queries, and can instantly trigger numerous partners, facilitate debt management,
menu options to help customer with their requirements. and support geographical expansion for
enhanced customer experience
Sales One app helps the consumer lead go to a call centre or a sales person and enables
the staff to help customers with a host of service-related queries, thus transitioning
the customers to offline from online. The partner app is needed as the company goes
deeper into geographical expansion – BAF will have c.1mn people wanting to be its
partners, and these could be direct selling agents (DSAs), or independent financial
agent (IFAs), collection agents, or debt management agencies.

Sales One app provides BAF’s sales teams with a single Debt-management app provides a unified experience to debt-
gateway to customers management teams

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

BAF has invested in domain talent to build a web platform Insurance marketplace allows customers to compare, review
that will run as a business asset and buy policies

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Investments marketplace scaling up Reward management system to drive higher conversion

rates, had an expense of c.Rs 2bn in FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Aims to increase payments presence, target 75% of its merchant-network GMV

BAF aspires to reach 75% of its merchant-network GMV in the medium term – via its
credit and payments solutions, from financing c.10% of the gross merchandise value
(GMV) of the total Rs 7.5tn from the c.150,000+ merchants in its network, spread
across c.3,800 cities. c.30% of this GMV is on cash/digital payments, i.e. UPI, which are
mostly low-ticket-size merchandise – these have highest potential to convert to
payment solutions offered by Bajaj Finserv app.

BAF wants to increase its presence in payments space and for the company, its
merchant app will be its second largest app-ecosystem out there, which will enable
both peer-to-merchant (P2M) and peer-to-peer (P2P) segments across on-boarding
transaction, promotion, rewards and settlement. It will weave its earlier Retail EMI
(REMI) business into this app. When we aggregate these points, we see BAF as a large
player in both P2M and P2P in the medium term. We believe this would firmly entrench
it as a payments and financial services company.

As it is expanding its payment stream, it has applied for payment aggregator (PA) and
payment gateway (PG) licenses, given the long-term strategic nature of its applications.
BAF has accelerated QR deployment at small and medium format merchants by
mobilising its distribution channels. Bajaj Pay QR enables merchants to accept
payments by way of UPI, PPI (Bajaj Pay Wallet), and Bajaj EMI (where eligible). The

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 BAJAJ FINANCE COMPANY UPDATE

company has deployed over c.627,000 merchant QRs in FY23. In FY24, BAF plans to
deploy Electronic Data Capture (EDC) terminals for a ‘personalised checkout
experience’. We expect BAF to add c.3mn merchants per annum via at the point of sale
(POS) EDC terminals and merchant QR codes.

Today, payment companies have dedicated staff to on-board merchants, but BAF
already exists in marketplaces with 17,000+ feet-on-street (FOS) across the 3,400+
cities in which it has a presence – no other large payment aggregator has this. It is
adding 7,500 to 8,000 merchant quick response (QR codes) on a daily basis. QR will be
followed by the POS and the PG business. QR, POS, and PG are the ‘acceptance’ part of
its payments business, while the company needs to build out its digital strategy for
both app and web with a 3-to-5-year view. Though the management has indicated that
payments will not add to the bottom-line, its goal is to increase customer engagement.

While BAF’s peer-to-merchant segment would be the starting point in its merchant BAF's merchant app drives business
ecosystem. it plays all four parts of the payment business. It is hiring talent in the growth by allowing P2P and P2M
payment space with a 3-to-5-year view. To counter cashbacks that other payment transactions, increasing payment
players offer, BAF has built a reasonably large partnership frame with merchants and potential, and developing reward-based
created a voucher-management infrastructure, which it will use to create and power merchant partnerships
its rewards business – which should provide velocity to the its financial-services
business.

Payments business has to become viable for the customer BAF finances c.10% of the GMV (Rs 7.5tn) of its c.150,000
franchise merchant network in c.3,800 cities
BAF Cash/UPI Other financiers

10

55 35

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

BAF wants to be c.75% of the GMV payments and financing BAF plays all four parts of a payments business with a 3-5-
mix of its merchant network in the medium term year view
BAF Financing volume share (%)
BAF aspirational payment mix (%)

80 75
70

60

40

20

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Bajaj Finserv Direct's dual role as vendor and distributor

BAF is not allowed to operate an e-commerce venture under its NBFC licence, so it
seeded Bajaj Finserv Direct (BFSD), which adheres to e-commerce guidelines and is fully
compliant as a payment tool. BSFD is a different company with its own priorities, and
as such, on an arm’s-length-basis, it plays two roles for BAF – (1) it builds marketplaces
for BAF as a technology vendor, and (2) distributes its products.

BFSD offers services through the ‘Bajaj Finserv Markets’ app, an open-source market
place for financial products and electronics. Like any digital distributor, BFSD runs a
credit engine that determines where (based on the segmentation of a customer) it
should send an enquiry (to the best-suited financial partner). Similarly, it uses BAF’s
authorization engine for BAF products.

However, while both are consumer-facing, the Bajaj Finserv app and Bajaj Finserv BFSD operates as a technology vendor
Markets have different roles, different responsibilities, and different competitive and product distributor for BAF, running
landscapes. The Bajaj Finserv app is mostly used for only BAF products While the Bajaj the Bajaj Finserv Markets app while
maintaining its own priorities and
Finserv Markets app is an open market sourcing agent, which also adds throughput to
customer base
BAF’s pipeline.

Bajaj Finserv App: This started off as a consumer-facing app to check on loan account
statements and make repayments. Today, it has apps within apps, a payment gateway,
insurance marketplace, investment marketplace, and Bajaj Mall for higher customer
engagement. For example, the app has the ‘Ferns and Petals’ app within it, so
customers can order flowers and cakes for any occasion from within the app.

Bajaj Finserv Markets: This started off as a captive Bajaj eco-system digital DSA, which
has transitioned to an open-source digital platform for personal loans, home loans,
gold loans, insurance, mutual funds, etc. It has also started providing technology
partnerships to various NBFCs. For example, if customers want to apply for an SBI credit
card, they can do it on Bajaj Finserv Markets bypassing the need to go to the SBI Cards
website or for a branch visit.

Bajaj Finserv App payments metrics… …and QR deployment gaining scale

Wallet accounts cumulative (mn) QR deployment at merchant PoS ('000)
UPI handles cumulative (mn) 600
20 Rewards issued In the quarter (mn) 513
500
413
18.1
17.3

15
16.7

16.7

400
15.5
14.4

13.5
13.0

300
11.8

10
10.4
9.1

200
8.9

136
7.2

5
6.4

100 60
4.8

18
1.7
0.8

3.6

0 0
Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

78-80% of digital EMI customers get active in 60-90 days… …along with increasing SKUs and merchants on EMI store
Pay fee at onboarding (%) Become active in 60days (%) Stock-keeping units (SKUs) Merchants
Become active in 90days (%) 35000
30,000
60
30000
50 25,000
50 25000
40 20000
30
30 15000
22
20 10000

10 5000

0 0

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

EMI store and scaling up of EMI cards to boost customer engagement

BAF introduced digital EMI (existing member identification) cards in 2016, but these
saw limited success. Since then, India has digitized dramatically and the regulatory
ecosystem is supportive of making India truly digital. BAF has now partnered with
Flipkart for digital EMI on-boarding, which it offers to prospects selected over time,
BAF launched digital EMI cards, recently
which BAF mines and then targets through using various digital means before on-
started partnering with Flipkart,
boarding them. targeting curated prospects and
leveraging the growing online consumer
Over the last few years, BAF has developed this ‘prospects ecosystem’ by working with base in India
its retailer ecosystem; to these curated prospects, it offers a pre-approved finance
option across multiple products. While BAF has reached out to them through
traditional channels so far, with the app/web, it will be able to do so through a fully
digital channel.

Bajaj Mall: This has listings of various consumer durables, electronics, 2Ws and cycles,
which can be bought using the Bajaj EMI card. Earlier, only existing BAF customers were
offered a digital EMI card. Now, if a non-BAF customer downloads the Bajaj Finserv app
and wants to buy EMI Card, BAF offers it – for new customer acquisition and higher
engagement of the app.

EMI store drives digital strategy, boosts personal loans and credit cards
EMI store is an online platform for Bajaj Finance available on the web and app, to
EMI store is a key component of BAF's
distribute electronics as well as lifestyle products, using BAF’s EMI card. EMI store is a
digital strategy, leveraging consumer
strategic call that BAF has taken, as consumers incrementally move online. It will online behaviour and driving
originate c.2.0-2.2mn accounts, and as the asset gets warmed up, it will provide a host momentum in personal loans and credit
of features. BAF is making continued technology investments to make the EMI store cards
better. By enabling purchases at point of sale (POS), the EMI store increases the
engagement rate of clients and should become a reasonably strong asset for BAF.

As EMI store grows, it will help the merchant ecosystem as well, because BAF bring to
the merchant an asset to compete against the large e-commerce players such as
Amazon/Flipkart.

For BAF, the point-of-sale transformation has started to deliver good momentum to its
personal-loan and credit-cards distribution business. The EMI store disproportionately
favours manufacturers who have created an entire inventory management
infrastructure for themselves in order to manage order flows from a high-velocity
digital store such as BAF’s EMI Store. The EMI Store not only offers manufacturers an
incremental low-cost distribution, but also gives them consumers that can be engaged
on financing and payments options with a trust-worthy partner. We will see the
benefits of manufacturers collaborating with BAF on its EMI store in the medium term.

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Digital EMI cards are on-boarding new-to-BAF customers Bajaj Mall is gaining scale with partnerships
Digital EMI card acquisition ('000) Bajaj Mall loans ('000)
B2B loans from digital EMI cards (%, RHS) Insurance Bazaar policies sold (RHS, '000)
700 63 70 Investments Bazaar MF A/C (RHS, '000)
1000 200
600 51 60
49 154
500 43 45 50 800
41 150
108 112
400 40 600
100
300 30
400 826
200 20 645 619 607
526 562 50
200
100 10 10 24 25
20 24
455 522 664 637 598 665
10 21
0 0 0 0
Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Why does Bajaj Finance need a FinTech pivot?

At c.780mn, India is home to the second-largest internet-users base in the world, which
is more than twice the entire population of the United States. This has been possible
due to the Indian government’s ‘Digital India’ push, combined with the affordable data
pricing that telecom majors began to provide. By CY30, India’s internet user base will
touch a landmark figure of a billion, almost mirroring China’s number.

Most internet users consume OTT video platforms, product commerce, short-form
gaming, and OTT audio platforms. With the increasing Digital India push and explosive
growth of UPI transactions, internet users are becoming comfortable paying online on
digital platforms, thus shifting their wallet spending to online from offline (currently
only 10% of Indians have shopped online). This is visible in the c.110mn paid online
gamers in India, second only to e-commerce customers, also highlighting the appetitive
for digital entertainment.

Internet users in India… …to see c.4% CAGR over CY22-30

1200 1200
1,020 1,030
1000 1000
780 780
800 800

600 600

400 307 400

205
200 200
55 72

0 0
Thailand Vietnam Indonesia USA India China CY22 CY30E

Source: PhillipCapital India Research, Redseer / Data as of CY22 Source: PhillipCapital India Research, Redseer

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Not all internet users are alike… …only 10%+ Indians have shopped online vs. China’s 50%
1600
1,360
1400 Tier 2+ Metro+Tier 1
1200 100
14 20 21 22
1000 780 80 30
40
800 630
560
600 60
400 275 210 86
40 80 79 78
200 70
60
0 20
Internet Users

Online Transactors
India Population

Smartphone Users

Social Media Users

Online Shoppers
0

Smartphone
Internet Users
India Population

Transactors
Social Media

Online Shoppers
Online
Users

Users
Source: PhillipCapital India Research, Redseer / Data as of CY22 Source: PhillipCapital India Research, Redseer / Data as of CY22

Product commerce is dominated… …by tier-2+ cities as of CY22

400 370
Metro + Tier 1 Tier 2+
350 320 100
15
300 270
80 41
250 210 60 64
60 74
200
140
150 40 85
100 59
20 40 36
50 26
0 0
Product OTT video Shortform Gaming OTT Audio Product OTT video Shortform Gaming OTT Audio
commerce Video commerce Video

Source: PhillipCapital India Research, Redseer / Note: in mn Source: PhillipCapital India Research, Redseer / Note: in %

Despite e-commerce GMV growing to c.Rs 4tn in CY21… …it is dominated by two players and cash on delivery is
c.45% of GMV
4,500 100
3,975 90
4,000 37% of e-commerce = mobile
3,500 phones; Electronics & White 80
70
Goods account for 60% of e-
3,000 2,700
60
2,500 2,100 50
45
2,000 1,650
1,350 40
1,500 1,050
825
1,000 20
225 300 ~70% market share
500 75 75 150 with Amazon, Flipkart
0 0
e-Commerce Metro/Tier 1 Tier 2 cities Tier 3+ cities
CY13

CY19
CY10

CY11

CY12

CY14

CY15

CY16

CY17

CY18

CY20

CY21

GMV cities

Source: PhillipCapital India Research, Redseer Source: PhillipCapital India Research, Bain / Note: Cash on delivery % shown

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E-commerce dominated by Amazon and Flipkart, COD prevalent in tier-2+ cities

E-commerce GMV grew to c.Rs 4tn in CY21, but it was dominated by Amazon and India's e-commerce market, led by
Amazon and Flipkart, reached Rs 4tn
Flipkart who held 70% market share together. Cash on delivery (COD) was c.45% of e-
GMV in CY21, with cash on delivery
commerce GMV as of CY21. Slicing and dicing the data further showed that in tier2+
prevailing. Tier-2+ cities hold potential
cities COD order were 70%+, which implies that these are latent markets where both for financing and inventory
financing for aspirational products can be offered and the financiers can manage management
inventory as well. This will be especially helpful in tier-2+ cities.

India currently has c.350mn digital payments users across e-commerce, shopping,
travel and hospitality, and OTT, which is likely to double by CY30; 40-45mn internet
users spend more than 50% of their wallets online. Mature users, the faster-growing
group, will account for Rs 30tn in online spending by CY30.

India’s internet users’ (mn) digital maturity journey… …will reflect in household consumption (%) by tier-2+ cities

Metro Tier 1 Tier 2 Tier 3/4 Rural

700 CY22 CY30E 100
600
600
80 41
500 52 47
440

400 60
300 23
300 270
40 19 21
5
200 160 4 4
20 10 12 15
100 40
16 16 16
0 0
Explorers Transactors Mature users CY10 CY19 CY30

Source: PhillipCapital India Research, Redseer Source: PhillipCapital India Research, BCG

Note 1: Explorers: Digital media users who don't transact online

Transactors: Opportunistic transactors buy standard and low-involvement
products online and also make offline UPI payments
Mature users: Frequent online service users, 50%+ of wallet spent online
Note 2: Town class basis population – Metro (> 4 mn), Tier 1 (1-4mn), Tier 2 (0.5-1mn),
Tier 3 / 4 (<0.5mn)

c.52mn transactor households represent c.50% of India’s …and still e-commerce remains under-penetrated in these
GDP… households
Households (mn) Per Capita Income (Rs mn, RHS) E-commerce penetraton (%)
2.80
300 3.00 40 37
240

200 2.00
30

100 0.60 1.00

0.24 19
0.12 20
5
25 22
0 0.00
Transactors

Transactors

Low-monetisable
Regular Transactors

Occasional

8
Premium

10
2
Users

0
Low income Mid-income (Rs High Income Total
(<Rs 0.3mn) 0.3-0.6mn) (>Rs 0.6mn+)

Source: PhillipCapital India Research, Blume/ Data as of FY22 Source: PhillipCapital India Research, BCG

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Annual spending per online shopper in Tier 2+ cities is c.50% …despite similar aspirations, leading to higher new to credit
of metros… customer share (%) for FinTechs
Annual spending per online Shopper (Rs) New to credit customer share (%)

50,000 40 36
40,000
40,000 35,000 30
24
30,000 22
20
20,000 17,500

10
10,000

0 0
Metro Tier 1 Tier 2+ FinTech NBFC Bank

Source: PhillipCapital India Research, Redseer, Fintrakr Source: PhillipCapital India Research, Redseer, Fintrakr

Though mobile sales have moved online… …BAF’s addressable market (brick-and-mortar and
traditional) is still 72% of the c.Rs 7.5tn market
Size (Rs tn) Share of total retail (RHS,%)
Traditional Organisized - B&M Online
5 10 100
7.9 7
20 22 18
4 8 14
80
55 24
3 6 24 26
3.8 3.6 60
3.3
2 4
1.4 40 79
1 2 18
56 52 59
4.9 0.8 2.3 2.1 2.3 20
0 0 27
Apparel & Footwear Mobile Consumer Furniture &
0
Accessories Durables Furnishing
Apparel & Footwear Mobile Consumer Furniture &
and
Accessories Durables and Furnishing
Appliances
Appliances
Source: PhillipCapital India Research, Unicommerce / Data as of FY22 Source: PhillipCapital India Research, Unicommerce / Data as of FY22

Direct sales via brand websites and marketplace growth drive e-commerce
Deeper analysis of the changing e-commerce landscape reveals an evolving market. Brands prioritize direct sales, investing
Across segments, brands are building a strong online presence with a focus on selling in websites for an enhanced shopping
directly to consumers. Companies have realized that it’s important to invest in a strong experience.
website for their brand in order to develop a connection with consumers. Brands now
Marketplaces report higher growth in
focus on the delivery of an elevated shopping experience for their consumers using
online commerce
their websites, more so because shoppers are aware of the potential deals on various
channels.

In electronics, the order volume growth is fairly distributed between brand websites
(38%) and marketplaces (33%), but ecommerce marketplaces report higher growth of
75%. This implies that customers like to compare pricing and product features and
want easy payment and financing options, so they prefer marketplaces.

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There’s still scope for BAF to roll out its EMI store and Bajaj …despite steep yoy (%) increases in electronics and home
Mall across cities… appliances e-commerce GMV in FY22
Traditional B&M Online Electronics & Home Appliances
40
35

Tier 3+ cities 92 54 30
30

Tier 2 cities 76 15 10
20

Tier 1 cities 66 22 12
10

Top 8 cities 53 34 13
0
0 25 50 75 100 Volume YoY (%) Value YoY (%)

Source: PhillipCapital India Research, Unicommerce / Data as of FY22 Source: PhillipCapital India Research, Unicommerce / Data as of FY22

Tier 2 and 3 cities drive growth and transformation in e-commerce

Shoppers from tier-2 and 3 cities are commanding a rapidly increasing share of India’s
e-commerce market, growing at double the rate of tier-1 cities. Annual demand from Tier 2 and 3 cities are driving India's e-
these smaller cities is turning into the real growth lever for India’s e-commerce commerce growth, leading to
industry. According to e-commerce technology platform Unicommerce, tier 2/3 cities investments in infrastructure and omni-
reported scorching 92%/85% yoy growth in FY22, which has come at the cost of lower channel strategies to cater to rising
growth from tier-1 cities at 47%. Rising order volumes from tier-2/3 cities have led to demand from these places
the establishment of warehouses and fulfilment centres in these places. Brands with
strong offline presence are deploying omni-channel technology to leverage local stores
to fulfil rising order volumes.

Though tier 1 cities still hold a lion’s share of e-commerce… …tier-2 and tier-3 cities have seen higher growth in FY22
driven by festive season mobile sales (Rs bn)
Tier 1 (%) Tier 2 (%) Tier 3 (%) 450 415
100 400
350 320
34 38
75 300 260
250
20 190
50 24 200
148
150
25 46 100
39
50
0 0
FY21 FY22 FY18 FY19 FYFY FY21 FY22
Source: PhillipCapital India Research, Unicommerce Source: PhillipCapital India Research, Redseer

While festive week shopping is rising, online shopper participation is tepid

While the number of shoppers during the festive week has significantly increased over
the years, the proportion of online shoppers participating in the festive week
compared to the total number of annual online shoppers has only seen a moderate
increase. To illustrate, the total number of shoppers during festive week grew four
times in FY22 vs. FY18, but the participation of online shoppers during this week (vs.
overall annual online shoppers) only doubled to 38% in FY22 from 18% in FY18.

The rise in festival week shopping is driven by multiple factors – such as increasing
awareness of festive sales among shoppers, growing reach and targeted selection for

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 BAJAJ FINANCE COMPANY UPDATE

shoppers across city type, and growing expansion of the affordability constructs Rising participation in festive-week
(schemes or offers). In addition, the rise of new e-commerce models such as video shopping reveals untapped potential for
commerce is also driving the growth of online shoppers during the festive period. e-commerce retailers, driven by
awareness, affordability, offers and new
E-commerce retailers recorded sales worth Rs 760bn during the FY22 one-month sales models such as video commerce
festival sale event, almost twice the pre-covid pandemic sale of Rs 400bn in FY19. Tier-
2 and 3 cities drove this, and a significant portion came from electronic products and
mobile phones.

Festive season shoppers as % of annual e-commerce …and mobile sales incrementally dominate festive season
shoppers has doubled in FY18-22… sales

Festive season sales (Rs bn) Mobile sales % of festive season (RHS)
40 38 800 60
700 55
48
30 600 45
500
20 18 400 30
300
10 200 15
100
400 760
0 0 0
FY18 FY22 FY19 FY22
Source: PhillipCapital India Research, Redseer Source: PhillipCapital India Research, Redseer

Online retail is entering into a massive growth phase on the back of ever-expanding
penetration to smaller cities in India and incremental yoy GMV growth across
categories.

As of FY21, PIN codes served by online retail are 20x those …leading to quicker delivery of e-commerce parcels
that organized brick and mortar serve…
Average time for delivery in e-commerce (days)
25000 10
9
20,000 8
20000 8
7
6
15000 6
5
4
10000 4
3 3

5000 2
1,000
0 0
Organised B&M retail Online retail FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Source: PhillipCapital India Research, Redseer Source: PhillipCapital India Research, Redseer

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How does the Bajaj Finserv app stack up vs. other apps?
We have taken app statistics data from Similarweb, which is a leading analytics tool
used to understand key metrics of apps and websites across the world. We infer that
over last 10-months, the monthly downloads of the Bajaj Finserv app are c.12% of
Amazon India and Flipkart put together, but much better than downloads of financial
services apps like PayTM Money and Policybazaar. The DAU-to-MAU ratio (daily-to-
monthly active user ratio), which depicts stickiness of active customers, is c.50% when
compared to Flipkart and Meesho, but closing in on PayTM Money. This is clearly
demonstrated by average session time spent on the Bajaj Finserv app – which is closing
in on Amazon India. We infer that with growing features, both stickiness and average
session time will increase for the Bajaj Finserv App.

Though 10-month average monthly downloads (mn) of Bajaj …are c.11% those of Meesho, they are c.3.5x of other
Finserv app… financial services apps combined
Meesho Flipkart Policybazaar PayTM Money
70 Amazon India Tata Neu 1 Bajaj Finserv (RHS) 8.0
60 7.0
0.8
50 6.0

40 0.6 5.0
4.0
30
0.4 3.0
20
2.0
0.2
10 1.0
0 0 0.0
Jun-22

Nov-22

Dec-22
Jul-22

Oct-22
Aug-22

Sep-22

Feb-23

Mar-23
Jan-23
Jun-22

Nov-22

Dec-22
Jul-22

Oct-22

Feb-23
Sep-22
Aug-22

Mar-23
Jan-23

Source: PhillipCapital India Research, SimilarWeb Source: PhillipCapital India Research, SimilarWeb

DAU is a measure of user engagement and potential customers

Daily Active Users (DAU), a term used for the total number of people who open and
engage with a mobile app or web product in a given day, can measure the growth rate
of a product. It reveals trends, and even indicates user behaviour.
While DAU is a useful measure of app
Measuring the daily traffic of an app or website gives a good sense of how many people and web engagement, showcasing it as
are checking out the products and, hopefully, valuing what it does for them. Active a vanity number could mislead
users on the platform are potential customers, and retaining and serving them is the evaluators
key to business success. DAU shows how many people are looking into the service, but
it is important to engage those people, so they keep returning to the app.

App downloads have become a vanity metric in the app space. Many app developers
showcase these numbers, but they do not reflect the success of the app. An app with
10,000 downloads and 1,000 active users could be more successful than an app with
100,000 downloads and 100 active users. It is easy to fall into a trap of chasing a DAU
goal for the wrong reasons. It can become a vanity number, and many companies like
to share impressive DAU data that may not have any actual bearing on the success of
their businesses.

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10-month average DAU (mn) for Bajaj Finserv app is c.11% …but 6x that of all financial-services apps
vs. Amazon India…
Flipkart Meesho PayTM Money Policybazaar
Amazon India Tata Neu (RHS) Bajaj Finserv (RHS)
45 0.7 0.4 3.0
40 0.6
35 2.5
0.5 0.3
30 2.0
25 0.4
0.2 1.5
20 0.3
15 1.0
0.2 0.1
10 0.5
5 0.1
0 0.0
0 0.0

Jun-22

Nov-22

Dec-22
Jul-22

Oct-22

Feb-23
Aug-22

Sep-22

Jan-23

Mar-23
Jun-22

Nov-22

Dec-22
Jul-22

Oct-22
Sep-22

Feb-23
Aug-22

Jan-23

Mar-23

Source: PhillipCapital India Research, SimilarWeb Source: PhillipCapital India Research, SimilarWeb

MAU reflects user engagement, app downloads could be just a vanity metric MAU measures unique app users, app
Monthly Active Users (MAU) is another popular metric to measure user engagement, downloads can be misleading, active
users could be a better indicator of
and it measures the number of unique app users in a given period (e.g., 1 day, 7 days,
success
30 days). The DAU-to-MAU ratio, also called stickiness, is the proportion of monthly
active users that engage with an app in a single day; a ratio of 50% would mean that
users engage with an app 15 out of 30 days on an average.

10-month average DAU/MAU (%) for Bajaj Finserv app… …is 0.5x that of Flipkart and closing in on PayTM Money
Flipkart Meesho
Shopsy Amazon PayTM Money Bajaj Finserv Policybazaar
35 Tata Neu (RHS) 8.2
20
30
8.0 16
25
20 7.8 12

15 7.6 8
10
7.4 4
5
0 7.2 0
Jun-22

Nov-22

Dec-22
Jul-22

Oct-22
Sep-22

Feb-23
Aug-22

Mar-23
Jan-23
Jun-22

Sep-22

Nov-22

Dec-22
Jul-22

Oct-22

Feb-23
Aug-22

Jan-23

Mar-23

Source: PhillipCapital India Research, SimilarWeb Source: PhillipCapital India Research, SimilarWeb

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 BAJAJ FINANCE COMPANY UPDATE

10-month average time spent (min:sec) on Bajaj Finserv …is c.2 minutes lower than Meesho, but closing in on PayTM
app… Money
Meesho Flipkart Shopsy PayTM Money Bajaj Finserv Policybazaar
Amazon Tata Neu
03:36
05:46
05:02 02:53
04:19
03:36 02:10
02:53
02:10 01:26
01:26
00:43
00:43
00:00 00:00
Jun-22

Nov-22

Dec-22
Jul-22

Aug-22

Sep-22

Oct-22

Feb-23
Jan-23

Mar-23

Jun-22

Dec-22
Jul-22

Oct-22
Sep-22

Feb-23
Aug-22

Mar-
Nov-

Jan-23
22

23
Source: PhillipCapital India Research, SimilarWeb Source: PhillipCapital India Research, SimilarWeb

What we think about a FinTech angle to BAF…

BAF aims to expand its market presence
E-commerce dominates retail, gaining market share and relevance through its EMI store and Bajaj Mall,
Although traditional and organised retail are expected to see yoy growth, all retailers, but is also considering credit cards,
D2C brands, and manufacturers are pursuing e-commerce opportunities in their focus which could contribute significant
profits, along with co-brand
markets. Consumers will shop across platforms. To be able to cater to demanding
partnerships with RBL Bank and DBS
shoppers, a retail player must integrate all its sales channels, and offer a consistent Bank
experience across online and offline channels. E-commerce is no more a metropolitan
concept, as consumers across India are shopping online. Companies are focusing on
consumers from tier-2 and tier-3+ cities, which saw twice the growth tier-1 cities did.
The marketing strategy pursued by companies and operations should be well in place
to target consumers from these regions.

Tech solutions drive efficiency, enhance customer acquisition and retention

Companies are investing in technology solutions that improve business efficiency and
fulfil rising consumer expectations. Right-fit cloud solutions mitigate problems across
the business cycle. Technology platforms transform aspects such as customer
acquisition cost reduction and repeat purchase rate enhancement. This is possible with
the deployment of an integrated tech stack that enables seamless information flow
across the value chain.

BAF shifts focus to online sales, expands geographically

BAF’s traditional entry point for customers has been financing purchases of mobile
phones at point of sales (POS), i.e., loans are normally processed at the retail outlet or
showroom. Mobile phones have a faster replacement cycle and are an entry point for
BAF’s experiential-credit offering, leading to a perpetual healthy cycle of new customer
originations. However, these customers have been moving online since the last 4-5
years slowing down new customer originations. This has made the company go deeper
into India’s geography, look at unexplored geographies and products, shore up its app
and web. We are already witnessing the fruits of these new vectors in terms of increase
in new customer originations.

Bajaj Finserv EMI store and Bajaj Mall compete in e-commerce

We have gone through the internet funnel and the target market. Cash on deliveries
are still taking place on e-commerce websites, especially in tier 2+ cities. Based on this
we believe that there is enough space for e-commerce market places such as Bajaj
Finserv EMI store and Bajaj Mall. On these, traditional retailers, organized B&M
retailers, and OEMs can participate in the inventory listings and maintain competitive
pricing vs. other e-commerce players. BAF’s introduction of an insurance marketplace,
investment marketplace, in-app programs and rewards, and Bajaj Pay should increase

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customer engagement and act as funnel for acquiring new customers. The merchant
app, Sales One app, partners app, and collections app will ring-fence productivity gaps
in a high velocity and intense competitive environment.

Non-grocery e-commerce online GMV is likely to grow c.16x …driven by c.3x increase in online shoppers in the same
in CY22-30… period
Online share (Rs tn) Online shoppers (mn)

5 600
520
500
4 3.6
400
3
300
210
2
200

1 100
0.2
0 0
CY22 CY30E CY22 CY30E

Source: PhillipCapital India Research, Google Kantar Source: PhillipCapital India Research, Google Kantar

This will lead to c.5x growth in digital payments… …and c.3-7x increase in digital lending/ investments/
insurance in CY22-30
Payments CY22 (Rs tn) CY30E (Rs tn)

300 15
258
250 12 10.4
200
9
150 6.2
6
100
2.8
52 3 1.6 1.7
50
0.2
0 0
CY22 (Rs tn) CY30E (Rs tn) Lending Investments Insurance

Source: PhillipCapital India Research, Google Kantar Source: PhillipCapital India Research, Google Kantar

BAF’s own credit card business should boost medium-term profits

RBL Bank and Bajaj Finance tied up for a credit card in 2015, which makes the RBL Bank-
BAF co-branded credit card offering an 8-year vintage portfolio. However, RBL Bank
plans to de-risk itself from BAF credit card originations over the next 12-18 months
(based on our discussions with RBL’s management). Presently, BAF credit-card
originations form c.75% of monthly credit card originations for RBL Bank.

In any case, we believe BAF will need its own credit card business in the medium term,
in order to complete the acquisition puzzle in the payments business. The management
has confirmed that BAF has applied for a credit-card license and is waiting for a
regulatory approval. Our calculations suggest that if BAF were to receive a regulatory
nod for a credit card license, then, its own credit card business, RBL Bank’s co-brand
credit cards, and DBS Bank’s co-brand credit cards could lead to 500,000 originations
per month over the next 4-5 years. The three credit card businesses could contribute
to c.Rs 23-25bn after scaling up, which could become a significant profit pool in the
medium term.

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 BAJAJ FINANCE COMPANY UPDATE

Can BAF maintain subvention market share?

Significant customer growth, market share dominance in CD financing • Customer base to reach 100mn
We estimate BAF’s customer base to rise to c.100mn over 3-4 years aided by favourable • Market share retained with higher
loan amounts
demographics, a newly developed app that can originate c.2.0-2.2mn customers and
• Strong subvention position
the company’s technology-led client mining, which can add 9-10mn customers
• Consumer financing to grow
annually. BAF’s average ticket size of consumer durable (CD) loans is c.1.5x those of
NBFCs and private banks, allowing BAF to capture two-thirds market share in
disbursements in this segment. This leads to better negotiation of total industry
volumes (TIVs) with OEMs for subvention. OEMs provide higher subvention of 7-9% on
higher ticket sizes vs. 3-5% on lower ticket sizes, which leads to BAF maintaining 68-
70% subvention market share, creating a strong moat that becomes difficult to
replicate if the same process vigour is not applied at the same scale. We forecast
consumer financing to grow to c.32% of BAF’s overall book by FY26, at c.Rs 1.79tn, and
36% of the incremental book growth in FY23-26.

c.50% of AUM at origination is <Rs 0.5mn ticket size… …and c.50% of AUM is in high-income states
<Rs 0.2mn Rs 0.2-0.5mn Rs 0.5-1.0mn Rs 1.0-2.5mn Maharashtra Karnataka Tamil Nadu
Rs 2.5-5.0mn Rs 5-10mn Rs 10-50mn Rs 50-250mn NCT OF DELHI Telangana Rest of India
Rs 250mn-1bn Rs >1bn

3% 4%
2% 8% 26%
42%
3% 33%
5%
10%
12%
8%
12% 18% 7% 7%

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

c.60% of deposits are domiciled beyond metros… …leading to presence of BAF in high-income states
Deposits (Rs tn) % of total (RHS) Per Capita NSDP - constant prices ('000, FY21)

75.0 50.0 300

41.6
250
60.0 40.0
243

200
150
166
160
154

45.0 30.0
144
143

100
135
133
114
112

50
74
72
72
72
58
51
39
28

15.8 17.4
30.0 20.0
12.7 12.5 0
Odisha
Delhi

West Bengal

Jharkhand

Bihar
Maharashtra
Andhr Pradesh

Uttar Pradesh
Haryana

Madhya Pradesh
Gujarat

Telangana
Karnataka

Kerala

Chattisgarh
Tamil Nadu

Rajasthan
Punjab

15.0 10.0
72.8

27.6

22.3

21.9

30.4

0.0 0.0
Metros Next 25 Next 50 Next 100 Rest of
cities cities cities India
Source: PhillipCapital India Research, CSO
Source: PhillipCapital India Research, RBI/ Data as of 2QFY23

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 BAJAJ FINANCE COMPANY UPDATE

Traction in consumer financing to continue

Consumer financing: Strong growth, high-IRR products, and operational efficiency

Over the past decade plus, BAF has established a strong position in the under-
penetrated consumer-financing segment by strategically adding product lines,
targeting mass-affluent customers, and underwriting risk via technology platforms.
Banks were vacating this space after the Great Financial Crisis (GFC), which gave BAF
an opportunity to make a mark.

This segment’s business registered a healthy 30% CAGR between FY11 and-1QFY24 to
reach an AUM of c.Rs 920bn, and currently contributes to 34% of its loan book. FY18
was an aberration with 14% yoy growth due to the after-effects of demonetization and
GST rollout. Similarly, FY21 was an aberration due to a covid-related slowdown.

BAF offers high-churn, short-tenor, and high-IRR products – a mix that facilitates faster
re-pricing of the back book, especially amid rising interest rates. Although opex for
credit acquisition is higher in granular consumer loans, it is offset by robust product
IRR of 24-25% and scale-led operating leverage.

B2B financing: Primary acquisition and growth driver

We expect consumer sales financing (B2B) to be a primary consumer-acquisition and
growth driver for BAF and see 43% CAGR in this book over FY23-26. This segment is
likely to grow to c.9% of BAF’s overall book in FY26 to touch c.Rs 516bn and constitute
c.11% of incremental book growth.

Consumer-financing loans are granular with high IRRs

IRR (%) Avg. ticket size (RHS, Rs lacs)
7.5 28
30 8.0
25 25 25 25
25
6.0
20
14
15 4.0

10 1.6
2.0
5 0.6 0.5 0.5
0.2
0 0.0
2W & 3W Consumer Digital product Lifestyle Salaried Personal loan
durable finance product personal loans cross-sell
finance finance
Source: PhillipCapital India Research, Company Data

Some key points about BAF’s consumer finance segment

• Consumer financing serves as a robust funnel for customer acquisition, facilitating
cross-sales of the company’s credit and fee-based products.
• BAF currently caters to c.70mn customers and is present in c.3,750 locations with
a population coverage of c1.10bn (out of India’s c.1.4bn). With this geographic
reach, BAF is covering a massive 98% of the credit bureau’s footprint.
• It offers financing for various end uses – such as, vehicles (2/3-wheelers),
consumer durables, digital/lifestyle products, personal-loan cross-selling, e-
commerce financing, life-care financing, and personal loans for the salaried.
• Notably, two-thirds of its new customers have a strong credit history (CIBIL scores
of more than 750), implying significantly low credit-loss probability for the
company; a third of its new customers are actually new to credit (NTC) itself. The
approval rates for NTC customers are c.45%.
• The company targets customers between 32-45 years of age, aiming to build long-
term relationships, and therefore business.

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 BAJAJ FINANCE COMPANY UPDATE

• The management has been alluding to higher competitive intensity in consumer

financing since the last 3-4 quarters, but indicated that it would give precedence
to margins over growth.

BAF originates c.15% of NTC customers…. …which constitutes c.75% NTC (new-to-credit) consumer
durables customers being on-boarded in the system
Customers with CIBIL score >750 Consumers (mn) % of NTC (RHS)
Customers with CIBIL score 720-750 10 25.0
21.0
New to credit 19.4
8 20.0

6 12.0 15.0
15%
4 7.4 10.0
6.8
20%
2 4.2 5.0
65%
0 0.0
Consumer durable Agricultural loans Personal loans
loans

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, CIBIL / Data as of CY21

Gen Z and millennials consist of… …71% of NTC customers, thus making experiential credit a
good entry point
New to credit customers (mn) Gen Z Millennials Gen X Baby Boomers Silent

40 1
35.6 35.1
35
7
28.5
30
29
25 21
20
15
10
5
42
0
CY19 CY20 CY21

Source: PhillipCapital India Research, CIBIL Source: PhillipCapital India Research, CIBIL / Data as of CY21

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 BAJAJ FINANCE COMPANY UPDATE

NTC customers who took credit cards in the subsequent six …and fared better than the existing to credit (ETC) 2018
months had similar 90dpd+ delinquencies as ETC personal loan cohort in 30dpd+ delinquencies
customers…
NTC 90dpd+ delinquency (%) ETC 90dpd+ delinquency (%) PL - 2018 cohort
2 7.5

5.6
1.5 1.4 1.4 4.9
5

1 0.9
0.8

2.5
0.5

0 0
Near Prime Prime NTC 30dpd+ delinquency (%) ETC 30dpd+ delinquency (%)

Source: PhillipCapital India Research, CIBIL / Data as of CY21 Source: PhillipCapital India Research, CIBIL

Significant growth in the consumer sales finance customer-base

We estimate the customer base to grow to c.100mn over 3-4 years, aided by: (1)
favourable demographics and increasing finance penetration, (2) high-value sales of
consumer durables, (3) new re-built app, which can originate c.2.0-2.2mn customers,
and (4) the company’s innovative credit outreach in the form of affordable EMI
schemes and technology-led client mining can add 9-10mn customers each year. We
thus forecast that consumer sales finance (B2B) is likely grow to c.9% of BAF’s overall
book in FY26, to touch c.Rs 516bn and constitute c.11% of incremental book growth.

Consumer financing grew c.28x during FY11-1QFY24… …contributing to c.37% of incremental AUM in 1QFY24
Consumer business (Rs bn) YoY (RHS, %) % of AUM Incremental contribution to AUM (RHS, %)
51
1,000 60 50 47 46 49 60
49 42 38
45 35 34 37
42 42 44 43 50 30 40
800 40 22
36 17
32 40
20
600 27 26 30
30
18 0
14 20
400 20
-5 -20
10 (50)
200 10 -40
0
132
190
272
309
450
570
541
639
807
919
33
50
71
93

38 40 39 41 43 45 38 39 39 35 32 33 34
0 -10 0 -60
1QFY24
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
1QFY24
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

The customer-acquisition engine

Focus on consumer durables, digital, and lifestyle product financing

Higher in-store presence, focus on consumer durables and lifestyle

BAF’s strategy is to ensure deeper penetration in the product categories that are
performing well. So over FY17-23, it increased its in-store presence in consumer
durables/digital products/lifestyle retail points-of-sale by 3x/5x/3x. Over the same
period, its consumer durables loans doubled to c.15mn (c.50% of total loans originated
in FY23), underlining its clear focus on volumes over value. In lifestyle-finance, it
concentrates on large-ticket discretionary spending, which saw higher growth in FY23.

Through its marketplace, its focus is on driving the adoption of digital acquisition of
customers, which is why it has on-boarded 51 large OEMs and has listed 10,000+
products for its large existing customer franchise. Furniture, stem cells, low speed
bikes, coaching, cameras, mattresses, bicycles are part of 27-28 different categories
that the company continues to develop with OEMs.

The retail-spends-financing business offers easy instalment options to customers for

small-ticket purchases such as fashion, eyewear, cycles, tyres, car accessories, vehicle
servicing, power back-up and small appliances. The company focuses on higher-ticket
spends (Rs 15,000+) which are economically more viable. This business is operational
in 126 locations with a footprint of over 35,500 partner stores across India. BAF
financed c.832,000 transactions in FY23, up 27% Yoy.

During FY23, BAF launched ‘Bajaj +’, a variant in its mobile financing business to expand
its reach to a larger customer segment. ‘Bajaj+’ is likely to help BAF increase its
customer acquisition momentum and further its market presence in mobile financing.

B2B segment’s contribution as a balance sheet business IS falling

The seasonality that used to exist for the consumer-finance business (B2B) 2-3 years
ago has increasingly reduced, particularly in 1Q and 3Q. The contribution of the B2B
segment as a balance-sheet business will keep falling to 8-9% of AUM in 12-15 months
from c.10% at present because of reducing seasonality.

As BAF’s balance sheet becomes shorter and churn rises, the B2B segment will continue
to generate a large pool of customers to whom BAF can cross-sell. BAF's consumer
financing is reasonably distributed both geographically and from a concentration of
retailer contribution. Top-20% retailers would continue to have 20% market share of
the B2B business, for a long time.

Expanding online customer acquisition, de-risking through digital channels

BAF plans to partially move the customer-acquisition engine to the online mode from
offline, of which digital EMI cards is one example. – since 3QFY22, BAF has been on-
boarding customers by providing them digital EMI cards on its re-built app/web – and
this should accelerate. BAF has curated this pool of prospects by working with its
retailers over the last 7-8 years and it is now capable of offering pre-approved financial
products to new customers across multiple products through a fully digital channel.
This is likely to de-risk customer acquisition and the movement to online mode (from
the present offline mode) and will gain scale over the next three years.

Expanding in untapped markets (north, east India) for reduced risk and growth
The company is increasing its geographic footprint in north and east India, as the
contribution of these regions to BAF’s portfolio is lower than their current contribution
to India’s GDP. BAF has 575 branches in Uttar Pradesh (UP), of which 475 branches are
in urban centers. This focus will help the company to reduce its concentration risk and
create new growth opportunities, because these are unchartered and virgin markets.

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 BAJAJ FINANCE COMPANY UPDATE

Urban branches grew c.9x, rural c.10x during FY15-1QFY24 Wider in-store presence indicates clear focus on volume
growth
Urban locations Rural locations FY15 FY16 FY17 FY18 FY19

3,000 90,000 FY20 FY21 FY22 FY23 1QFY24

80,000
2,500
70,000
2,000 60,000
1,500 50,000
40,000
1,000
30,000
1,035
1,357
1,298
1,680
1,368
2,136
1,392
2,341
1,422
2,406
500
161
232
262
397
377
538
730
602
927
903

20,000

12,600

15,900
19,500
23,700
34,900
43,800
50,400
60,400
70,950
76,700

22,500
26,400
23,800
29,500
33,000
35,250

11,000
13,200
13,950
8,500

2,650
5,200
5,900

1,150
3,200
3,900
6,000
7,700
9,500
9,800
0 10,000
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

1QFY24
0
Consumer durable Digital product Lifestyle retail
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Lifestyle/e-commerce loan transactions up 2x/4x during …though consumer durables loan contracts grew 50% in the
FY17-23… same period
Lifestyle products (mn) Ecommerce (mn) CD financing contracts (mn)
% of total loans (RHS, %)
3 2.8 16 YoY (RHS, %) 100
2.6 2.5 14 80
2.5 89
2.1 12 77 60
2 1.7 65
10
54 53 51 40
49
1.5 8
20
6
1 0.7 0.6 0
0.5 0.5 0.5 4
0.5 0.2 0.2 0.3 0.3
2 -20
5.3 9.0 9.9 12.7 13.4 8.9 12.7
0 0 -40
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Organised furniture industry likely to see c.20% CAGR in …driven by increasing organized retail penetration (ORP)
FY22-26…
Furniture industry market size (Rs tn)
2.5 Organised furniture industry market size (Rs tn)
Furniture 21
2.1
2

1.5 1.3 Apparel 25

1.2
1.1
1 0.9

0.5
0.5 0.4 Consumer Durables 59
0.2 0.2 0.2
0.1
0
FY11 FY16 FY20 FY21 FY22 FY26E 0 20 40 60 80

Source: PhillipCapital India Research, CRISIL Source: PhillipCapital India Research, CRISIL / Data as of FY21

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 BAJAJ FINANCE COMPANY UPDATE

Average quarterly disbursement of c.Rs 144bn… …despite increasing competition

Consumer finance B2B disbursements (Rs bn) Competitors in consumer finance (B2B) business

250 226 20
17
200
161 160 159 15
151
132 139
150 121
104
88 10
100

50 5
5
0
Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q3FY23

Q4FY23

Q1FY24
0
FY19 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Consumer durables to remain a key customer-acquisition engine

Rising share of organised retail good for the CD financing segment
The consumer durables segment, backed by the rising traction for electronics, Tata Capital has existence largely in
especially mobiles and personal computers, is expected to continue to dominate the Croma stores and lags in other retail
organised retail segment. With c.60% organized retail penetration (ORP), majority of formats
the demand for this segment comes from the organised sector.

NBFCs continue to dominate consumer durables disbursements

With c.75% market share, NBFCs dominate consumer durables disbursements, as these
largely involve point-of-sale (POS) financing, i.e., loans are normally processed at the
retail outlet or showroom (for televisions, kitchen appliances, etc.). Customers prefer
the convenience of on-the-spot EMI schemes while making a purchase rather than
approaching banks for a loan.

BAF holds c.70% of the market in consumer durables and digital products, so we believe
it will grow in line with the market’s growth (like it has been for some time). BAF
conceptualized its lifestyle business 5-6 years ago, to expand into new categories large
enough to offset its reliance on consumer-durables financing.
BAF is developing new categories
Characteristics of BAF’s consumer financing business because of changing consumer needs
• BAF’s consumer financing (B2B) business has automated and proprietary credit and to de-risk itself from its dominant
position in electronics and mobiles
parameters, different SKUs, and stores.
• BAF is attached to 40,000-50,000 stores in consumer durables. Each store is ranked
for its performance on various parameters each month. This way, BAF can focus
on category expansion or on increasing throughput at weaker stores.
• Credit limit offered to customers depends on whether a store is a multiple-product
or single-brand one.
• Every month, the management team performs a portfolio asset-quality check for
consumer durables.
• BAF offers its e-commerce EMI option only to existing customers.
• The loss-given default (LGD) of the CD business has been at c.80% historically.

BAF’s cashbacks did not work in FY23 festive season, customers spent elsewhere
Our channel checks suggest that in the FY23 festive season, despite BAF offering
cashbacks, high-ticket demand was low, as customers wanted to spend more on travel.
BAF has been rolling out more cashbacks vs. previous years due to competitive
intensity in metros and tier-1 cities.

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 BAJAJ FINANCE COMPANY UPDATE

Consumer durables financing: Value growth was higher… …than volume growth
Consumer durable portfolio (Rs bn) YoY (RHS, %) Active Loans (mn) YoY (RHS, %)

400 84 100 50 22 25
350 80
40 20
300
60
250 30 30 15
40
200 10
20 20 10
150
-17 0
100 10 5
2
50 -20
188 345 287 374 33.8 37.3 38.2 46.7
0 -40 0 0
FY19 FY20 FY21 FY22 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark Source: PhillipCapital India Research, CRIF High Mark

FY21-22: NBFCs losing market share to private banks … …albeit more in volume than value
Pvt. Banks (%) NBFCs (%) Pvt. Banks (%) NBFCs (%)

100 100

75 75

76 73 73
82
50 50

25 25

27 27
24 18
0 0
FY21 FY22 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark / Data for portfolio Source: PhillipCapital India Research, CRIF High Mark / Data for active loans

Volume growth of banks is reflective… …in originations of consumer durable loans via fintechs
Pvt banks (%) NBFCs (%) Pvt banks (%) NBFCs (%)

100 100

75 75

82 78 82 78
86 86 90 88
50 50

25 25

22 18 22
14 14 18 10 12
0 0
FY19 FY20 FY21 FY22 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark / Data for disbursements Source: PhillipCapital India Research, CRIF High Mark / Data for active loans

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 BAJAJ FINANCE COMPANY UPDATE

Consumer durable (CD) disbursement likely to rise… …with increasing finance penetration

Disbursement Value (Rs bn) Disbursement Volume (RHS, mn) Consumer durable finance penetration (%)
1000 41.2 45
37.0 45 40
40
800 40 35
31.3 35
28.8 35 32
29 30
30
30 26
600 23 24
21.5 25 25
20 20
400
11.6 15 15

200 10 10
5 5
242 444 631 715 527 875
0
0 0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY25E
FY17 FY18 FY19 FY20 FY21 FY22
Source: PhillipCapital India Research, CRISIL
Source: PhillipCapital India Research, CRIF High Mark

FY22-26: Organised consumer durables industry CAGR of …with mobile phones dominating the market
14% to touch Rs 3tn…
Consumer durable industry market size (Rs tn) Large Household Appliances Mobile and PCs
Other Small Appliances
Organised consumer durable industry market size (Rs tn)
100 6
9 9 8
5
4.1 80
4
2.9 60 61 64 64 68
3 2.5 2.6
2.3
1.7 1.7 40
2
1.2 1.4

1 0.7 20
30 27 28 26

0 0
FY16 FY20 FY21 FY22 FY26E FY16 FY21 FY22 FY26E

Source: PhillipCapital India Research, CRISIL Source: PhillipCapital India Research, CRISIL

Increasing penetration to give tailwinds to the CD financing …leading to 10-15% CAGR across categories in FY21-26
market…
FY15 FY21 FY26E 100
100 90
Product penetration FY21, (%)

Mobile
79
Phones,
75 65 75
57 Color TV, 230 1,446
54
48
50 40 45
30 30 50
24 21 Refrigerator,
25 12 11 16 224
25 Washing
0
Machine, 83 ACs, 129
Washing Machines
Refrigerators
Color TVs

Mobile Phones
ACs

PCs, 98
0
8 10 12 14 16 18 20
Projected growth (FY21-26E, %)

Source: PhillipCapital India Research, CRISIL Source: PhillipCapital India Research, CRISIL / Size of balls indicate market size in
Rs bn as of FY21

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 BAJAJ FINANCE COMPANY UPDATE

Consumer durables industry will become more organized by …as c.50% of the market is in tier-2+ cities, leading to
FY26… tailwinds for financiers
Organised (%) Unorganised (%) Tier-1 Tier-2 Tier-3 Balance

100
23
7.5
42 41
75 51
19.5
42.5
50
77
58 59
25 49
29.5

0
FY16 FY21 FY22 FY26E

Source: PhillipCapital India Research, CRISIL Source: PhillipCapital India Research, CRISIL / Data as of FY21

Drivers of penetration and expansion in consumer durables finance

Finance penetration in India’s consumer durables industry is estimated to increase to
40% in FY25 from 29% in FY19, as per a CRISIL study. Currently, easy finance schemes
available at interest-free EMIs help push up consumer durables sales and entice
customers into buying aspirational premium products. As all consumer durables
financiers, including banks, offer such schemes, we believe aggressive expansion by
lenders in terms of point-of-sale (POS) infrastructure and a presence in more product
segments are among the primary drivers that will increase finance penetration.
Finance penetration in the consumer
Zero-interest finance and EMI cards create customer stickiness durables sector is rising due to interest-
NBFCs offer zero-interest finance by charging interest to the manufacturer or dealer. free EMIs and lender being aggressive in
Interest cost on loans is distributed across three levels – manufacturer, dealer and their expansion
customer. The charge varies depending on the product, EMI financing option, and the
sourcing dealer. A majority of the interest cost is typically borne by the manufacturer
(subvention of c.5% of the product price).

Existing member identification (EMI) card is another offering by NBFCs that has
supported the consumer-durables financing business by creating customer stickiness.
These cards come with a credit limit and offer zero-down-payment options and other
promotional offers to customers.
NBFCs provide zero-interest finance by
B&M stores provide a tactile experience to customers charging interest to
Brick and Mortar (B&M) players dominate the large consumer-durables category manufacturers/dealers. EMI cards and
because they hold the unique advantage of being able to provide a tactile experience, promotional offers are driving growth in
consumer-durables financing
which online retail cannot match. This is one of the primary reasons consumers prefer
to buy large durables, particularly higher-value household appliances, through B&M
retail outlets. Organised B&M players have been able to build a strong connect with
customers by providing one-on-one advisory services from both in-store and
authorised brand personnel. They provide much faster and efficient installation and
after-sales service for products that they sell. Also, trust factor plays an important role
in after-sales service, unlike in the faceless online format.

Online channel accelerated in the mobile segment, given the standard products, wider
choices, competitive pricing, easy delivery owing to size, exclusive online sale of some
brands, flash sales, etc. However, even in the online mobile market, the share of
relatively low-value products is significantly higher. For high-value purchases, people
still prefer retail outlets.

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 BAJAJ FINANCE COMPANY UPDATE

Tier-1 cities dominate the consumer durables market; drivers in each tier
Tier-1 and 2 cities have higher traction in consumer durables despite having a lower Tier-1 and 2 cities lead consumer-
population than the tier-3+ regions. This is due to the significantly higher disposable durables sales due to higher disposable
incomes of consumers, their better awareness, their higher aspiration levels, incomes and aspiration levels here,
uninterrupted electricity/water supply and shorter replacement cycles. Not where premiumisation drives demand.
Tier-3+ cities offer untapped potential,
surprisingly, tier-1 cities (population of 1 mn+) currently dominate the consumer
where low penetration will drive sales
durables market, accounting for c.45% of consumer durables sales, followed by tier-2
cities (population of 0.5-1.0mn) contributing c.30% to sales. Tier-3+ regions contribute
c.25%. In tier-1 and 2 cities, replacement demand drives demand, especially colour TVs,
refrigerators, and washing machines. In tier-3+ cities, new demand is the primary
driver. Going ahead, premiumization, due to rising aspirations, will drive demand for
consumer durables in tier-1 and 2 cities, while low penetration should drive sales in
tier-3+ cities.

Consumer durables financing disbursement value and… …and volume market shares have been stable over FY18-22
<Rs 25K Rs 25K- Rs 50K >Rs 50K <Rs 25K Rs 25K- Rs 50K >Rs 50K
100 100 4 3 3 3 5
16 16 15 14 19
20 17 16 15
20
80 80
28 28
32 29
32
60 60

40 40 77 79 81 82
75
55 57 58
52 49
20 20

0 0
FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark / Data shows value Source: PhillipCapital India Research, CRIF High Mark / Data shows volume

Your analyst bought an iPad… …and an Apple watch on BAF CD loan

Price of iPad 18-06-2022 29,900 Price of Apple Watch 18-06-2022 44,900
Fees 18-06-2022 0 Fees 18-06-2022 0
Down-payment 18-06-2022 0 Down-payment 18-06-2022 8,982
OEM Subvention 18-06-2022 2,586 OEM Subvention 18-06-2022 3,974
EMI 1 02-07-2022 3,323 EMI 1 02-07-2022 2,994
EMI 2 02-08-2022 3,323 EMI 2 02-08-2022 2,994
EMI 3 02-09-2022 3,323 EMI 3 02-09-2022 2,994
EMI 4 02-10-2022 3,323 EMI 4 02-10-2022 2,994
EMI 5 02-11-2022 3,323 EMI 5 02-11-2022 2,994
EMI 6 02-12-2022 3,323 EMI 6 02-12-2022 2,994
EMI 7 02-01-2023 3,323 EMI 7 02-01-2023 2,994
EMI 8 02-02-2023 3,323 EMI 8 02-02-2023 2,994
EMI 9 02-03-2023 3,323 EMI 9 02-03-2023 2,994
IRR 28% EMI 10 02-04-2023 2,994
OEM Subvention 9% EMI 11 02-05-2023 2,994
Source: PhillipCapital India Research EMI 12 02-06-2023 2,994
IRR 27%
OEM Subvention 9%
Source: PhillipCapital India Research

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 BAJAJ FINANCE COMPANY UPDATE

Despite increasing competition… …BAF has higher throughput than competition in large retail
stores in metros
Files disbursed Disbursment to login ratio (%) Monthly onboarded customers at a large format store in metro

14 80 300
250
12 70 250
75
60 200
10 200
58 50
8 150
40
6 100
30 60 50 40
4 50 30
20
2 10 0
7 12
0 0 BAF IDFC First HDFCB KMBB HDB ICICIBC
Weekdays Weekends financial

Source: PhillipCapital India Research

Source: PhillipCapital India Research

Average ticket size of BAF CD loan is c.1.5x that of NBFCs and …leading to stable disbursement market share as per our
private banks… calculations
Average Ticket Size (Rs) BAF CD finance disbursement (Rs bn)

40000 BAF CD finance mkt share (%)

32,500 750 67.5 68.4 66.2 75.0

63.5 64.5
30000
600 60.0
20,700 21,400
20000 450 45.0

300 30.0
10000
150 15.0
282 407 483 361 579
0 0 0.0
Private banks NBFCs BAF FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark, Company Data Source: PhillipCapital India Research, CRIF High Mark, Company Data

BAF commands an impressive share of the subvention market

The average ticket size of a BAF CD loans is c.1.5x that of NBFCs and private banks, and
it holds two-third of the disbursement market share in CD financing, which allows it to
better negotiate total industry volumes (TIVs) with OEMs for subvention. In any case,
OEMs provide better subvention rates at 7-9% on higher ticket sizes vs. the 3-5% on
lower ticket sizes. Since BAF’s average ticket size is c.1.5x that of NBFCs and private
banks, it consistently holds 68-70% subvention market share. Even mature credit card
users opt for BAF’s CD loans as it helps them to keep their credit-card limits unblocked.
BAF’s geographical reach also provides tailwinds in maintaining subvention market
share.

We don’t foresee credit cards being a serious threat to BAF’s CD loans

Top-four spending categories for credit cards are fuel, rentals, travel, and
entertainment. Also, recently credit card issuers have been mitigating rewards for
consumer durable financing, which forms 14-15% of credit-card spends. We believe
BAF should be able continue its dominance despite increasing competition from credit
cards in metros and tier-1 cities based on the following five reasons: (1) increasing
geographical reach, (2) penetration of products, (3) finance penetration in consumer
durables, (4) category expansion, and (5) reducing seasonality and geographical
concentration. Omnipresence will help source new customers and BAF’s customer
acquisition engine will remain strong with high-churn and high IRRs, creating a strong

Page | 54 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

moat that would be difficult to replicate without the same process vigour at the same
scale.

Credit cards in metros and tier 1-2 are used for CD financing because of the following
five reasons: (1) they offer lower subvention pay-outs for OEMs, (2) cash-flow TAT for
dealers is faster, (3) they provide faster checkout for customers, (4) customers that
have 2-3 credit cards benefit, and (5) customers can chose credit card EMIs, foreclose
later.

However, as tier-3+ cities have lower credit card penetration, sparse POS
infrastructure, and customers here are newer to credit, they prefer BAF’s CD financing.
BAF also trumps credit cards in terms of longer tenures of no-cost EMIs (schemes can
go up to 36 months), which lures customers despite the cash-back that credit cards
offer. c.50% customers who are on-boarded for BAF’s CD loans have credit cards but
prefer BAF for better offers. These customers don’t want to block their limits on credit
cards and sometimes don’t have as much limit.

A typical NBFC CD financing is a 4-way transaction, hence difficult to replicate

Source: PhillipCapital India Research, Company Data

Page | 55 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Where do the profit pools lie?

Consumer finance (B2C) to be a primary growth and profit driver for BAF
We expect consumer financing (B2C) to be a primary growth and profit driver for BAF
and see 37% CAGR in this book over FY23-26. B2C is likely to grow to c.23% of its overall
book in FY26, to touch c.Rs 1.28tn, constituting c.25% of the incremental book growth
in that period.

PLCS is BAF's major profit pool, driving growth and diversification

BAF's personal loan cross-selling is a
According to our calculations, personal loan cross-sell (PLCS) is the largest profit pool
major source of profits, allowing it to
for BAF, and accounted for an average c.33% of its consolidated profits between FY12-
invest in other high-growth areas. It
23. With this large profit pool, BAF can: offers personal loans to salaried
1. Cross-subsidize credit costs from segments where cyclicality leads to high credit individuals to manage risk. Sees
costs. consumer financing as a primary
2. Pay higher cost of acquisition for products/geographies where initial opex to setup profitability driver.
scale is high.
BAF offers salaried personal loan (salaried PL) to mitigate credit risk from its PLCS book
during periods of stress, as salaried PLs mostly have super prime and prime customers.

PLCS is a pre-approved loan-origination program for existing BAF customers

PLCS relies on risk analytics, campaign management, and a digital-acquisition strategy PLCS business proven to be profitable
for success. BAF has revamped its loan origination, underwriting, and loan booking and low-risk for BAF. Flexi offering
systems for its PLCS business. It has invested in a campaign-management tool on the during the pandemic not a standard
customer data platform for horizontal campaign governance and promotional practice.
campaign management.

PLCS is a sustainable risk-reward equation

BAF has migrated its PLCS business to eight new regional call centres across India, with
multi-linguistic capability. The company launched a new three-click self-service ‘get it
now’ disbursal process for customers on its new platforms. As a result, it sourced a
sizeable 1.15mn customers through this business in FY23. The operational expenses
needed to offer PLCS are negligible and the credit loss it incurs is a third of that
sustained for new customers, making the risk-reward favourable.

The one-time flexi offering during covid was only to standard accounts
There has been much discussion among investors about BAF’s PLCS customers getting
flexi offering during covid (Apr-May 2020), which seems an incongruent practice.
However, BAF had extended tenures for only select PLCS customers –all standard
accounts that were reported as restructured accounts later. In business as usual, BAF
does not offer the flexi feature to PLCS customers.

Page | 56 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Personal loans cross-sell portfolio grew c.14x during FY15- …and increased use of data analytics led to lower
1QFY24… delinquencies even in stressed periods of covid
PLCS (Rs bn) YoY (RHS, %) PLCS (0dpd+, %)

350 61 60 60 59 70 15

11.9
300 48 51 50 60
42 43 50 12
36 38 35
250
40
200 24 9
30

5.9
4.6
20

4.3
150

3.9
6

3.1

3.1
3.0
10

2.7
2.7
2.4
(10)

2.2
100

1.5

1.3
1.2
0 3
50
139
192
172
214
290
329
-10
12
16
24
38
62
87
3
5
8

0 -20 0
FY10

1QFY24
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

1QFY24
FY23
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Sourcing mix of PLCS loans is kept prudent… …which led to mitigation of covid-induced spike of gross
stage 3 (GS3) for consumer B2C loans
Salaried Self-employed Consumer B2C GS3(%)

5.0

3.3
4.0

2.8
3.0

2.1
40
1.7
1.6

1.6

1.6

1.6
1.5

1.5
1.4

1.4
1.3

1.3
2.0

1.1
1.0

0.9
0.9

0.9
0.8
0.8

60 1.0

0.0
Q2FY19

Q3FY20
Q1FY19

Q3FY19
Q4FY19
Q1FY20
Q2FY20

Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

We believe asset quality stress has peaked in this portfolio… …with a calculated cumulative write-off of c.Rs 6bn (1.2% of
consumer finance B2C) over the last three years
Consumer B2C provisions (Rs bn) Stage 1 Stage 2 OTR Stage 2 Normal Stage 3
Consumer B2C provisions % fo consumer B2C AUM (RHS, %) 100
13
10 5.0 33 27 26 29 32 27 28
34
75 45 43 42
3.4

8 4.0
2.9

26 25 22 20 24 27
6 3.0 63 26
2.1

50 35
1.8

26
1.7

1.7

1.7

1.6
1.5

33
1.5

29
1.4

2
1.4

1.3
1.3

4 2.0
5.0 1.1

5.1 0.9
3.6 0.9

4.6 0.9
4.0 0.9

5 2
2.4 0.9

3.4 0.8

25 2 46 49 49 48 48 46
2 1.0 38
24 26 27 29
3.0
3.2
3.2
3.3
4.2
4.2
4.1
5.2
3.8

9.8
5.0
9.0
7.1
4.8

23
0 0.0 0
Q1FY23
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q2FY23

Q3FY23

Q4FY23

Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 57 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

BAF uses FOIR and pre-approved offers for PLCS customers

BAF uses ‘fixed obligation to income ratio’ (FOIR) as a credit filter for its PLCS
customers; it maintains FOIR at 60-70% at the point of origination – when they first
borrow. There are c.30mn urban customers, of which c.13mn get a pre-approved offer,
from which c.72% get their loan sanctioned. In FY23, BAF sourced 1.15mn PLCS
customers (+40% yoy). PLCS customers are not given a flexi feature, and in some cases,
yield from them can be as high as 42%.

Working with account aggregators; other features of PLCS

• Onemoney and Karza: When scaled up, these relationships can be big loan-
sourcing pools.
• The company is also working with National Payments Corporation of India (NPCI)
for e-mandates.
• The ceiling for its PLCS loans is Rs 700,000. BAF caters to prime and near-prime
customers, mostly in the <Rs 500,000 ticket size segment in PLCS book.
• The prime customers being on-boarded are essentially bank customers who would
have to be underwritten, leading to higher turnaround time (TAT).
• With digital disbursement and e-KYC, BAF can take higher risks.
• In the Rs 500,000 or less segment, chances of balance transfer (BT) are lower,
leading to faster turnaround time (TAT), as underwriting is easier.
• BAF will have to necessarily operate at 13-14% minimum yield to make money.

PLCS book to grow 25-30%, disbursements to recover, focus on smaller loans

We expect overall PLCS book to increase by a healthy 25-30% backed by a robust 50-
55% improvement in disbursement. Growth will revive with disbursements recovering
to pre-covid levels with the following:
1. Increasing size of small ticket loans (<Rs 100,000) by borrowers in lower age
bracket.
2. Rising digital penetration of low-ticket size loans.
3. Share of tier-2 and below towns/cities constantly on a rise; higher focus of BAF in
these areas to drive incremental growth.

According to our calculations… …PLCS is the largest pool in BAF’s profit

PLCS RoA tree (%)
PLCS Profit pool (Rs mn) % of PAT (RHS)
Yield 27.0
CoF 9.0 40,000 45 50
42
Fees 1.5 39 41 40
Total income 19.5 35 35 40
30,000
Opex 1.0 31 29
PPoP 18.5 24 30
20,000
Credit cost 3.0 17 17 20
RoA 11.6
Source: PhillipCapital India Research, Company Data 10,000
10,167
16,122

22,289

20,005
24,847

33,660

10
1,002

1,727

2,745
4,475

7,160
682

0 0
FY12
FY13

FY14

FY15
FY16

FY17

FY18
FY19

FY20

FY21
FY22

FY23

Source: PhillipCapital India Research, Company Data

Page | 58 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

PLCS is c.12% of BAF’s consolidated book… … and charges c.2.5x interest rate as that of HDFCB PL
PLCS % of AUM PL interest rates (%)

13.0
15 35 30.0

12.0

11.7
27.0

11.3
30

10.8
10.6
10.2
12 8.7 25 22.0 21.0
20 15.0 14.0 13.4
12.7 12.0
7.3

9 15 10.5 10.5
6.2

10
4.9
4.5

6 5
0

HDFCB
BAF PLCS

SBIN
Cred

ICICIBC

KMBB
BAF Salaried PL

AXSB
PayTM

Navi
Fullerton
3

0
FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22
Source: PhillipCapital India Research, Company Data FY23 Source: PhillipCapital India Research, Company Data

PLCS is the largest pool in BAF’s profit

According to our calculations, PLCS is the largest profit pool in BAF’s profit at c.12% of
consolidated book and accounts for c.33% of consolidated profits through FY12-23. We
have been conservative in our calculation of PLCS’ RoA (RoA tree above), by taking PLCS enables BAF to cross-subsidize and
cross-cycle cost of funds at 9%, opex at 1%, and credit cost at 3%. achieve super-normal profits in good
cycles and provides resilience in bad
cycles.
With such a large profit pool, BAF can achieve these two things – one, it can cross-
subsidize credit costs from segments where cyclicality brings high credit costs, and two,
it can pay higher cost of acquisition for products/geographies, where initial opex to
setup scale is high. PLCS’ profit pool enables BAF to ride through bad cycles (where
profitability dips due to high credit costs) and make super-normal profits in good cycles.

Due to the adverse impact of covid, and increasing contribution of mortgages profit
pool, BAF’s PLCS’ book’s contribution to consolidated profit dipped to 29% in FY23 from
45% in FY21. We expect this figure to rise to above 35% levels in FY24-26.

Salaried personal loans (Sal PL) offer prudent risk mitigation

To diversify its personal loan offerings, BAF launched personal loans for the salaried
class (salaried PL) in FY12, which targets affluent salaried employees above a threshold
income range of Rs 500,000 from category-A companies. BAF maintains an end-to-
digital process for this, with the help of multiple APIs (Perfios, Credit Vidya, NSDL etc.)
and has developed an application scorecard that enables automated credit decision-
making and a straight-through process. It has logged a c.120-fold rise in outstanding BAF offers personal loans for affluent
personal loans over FY12-1QFY24, to c.Rs 220bn from Rs 2bn. salaried employees from category-A
companies; outstanding personal loans
have increased significantly over the
BAF sources customers via direct selling agents (DSA), an in-house sales team, and years
through the online portal of its group company – Bajaj Finserv Direct. BAF was among
the early entrants into online loans and offers eligible customers loan approvals for
sums up to Rs 1.5mn within 15 minutes. It offers salaried PL to mitigate credit risk
emanating from the PLCS book during stressed periods, as the salaried PL book offers
stability despite lower profit contribution to the consolidated profit.

Page | 59 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Salaried PL book has grown c.120x over FY12-1QFY24… …and will remain a prudent risk mitigating hedge for BAF’s
PL AUM
Salaried PL (Rs bn) YoY (RHS, %) Salaried PL % of PL book
250 120
219 50
195 41 43
100 39 39 40 39 40 40
200 36 38 37
40
160 33
80
150 30
113 121 60
100 87 20
40
54
10
50 26 35 20
7 15
2 6
0
0 0

1QFY24
FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
1QFY24
FY16
FY12
FY13
FY14
FY15

FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Though salaried PL book contributes to <1% of …it offers stability to the PLCS book in stressed times
consolidated profits according to our calculations…
Salaried PL Profit pool (Rs mn) % of PAT (RHS)
Salaried PL RoA tree (%)
Yield 14.0 750 1.5
CoF 9.0
Fees 1.5 600 1.0
Total income 6.5 0.9 1.0
0.8 0.8 0.8 0.8
Opex 5.0 450 0.7
0.6 0.6
PPoP 1.5
300
Credit cost 1.0 0.4 0.4 0.5
RoA 0.4
150

601
131

202

326

425

454

732
56
21

28

98

Source: PhillipCapital India Research, Company Data

0 0.0
FY15

FY22
FY13

FY14

FY16

FY17

FY18

FY19

FY20

FY21

FY23
Source: PhillipCapital India Research, Company Data

Salaried PL contributed to c.8% of consolidated book… …and is >50% sourced from direct channels
Salaried PL % of AUM Direct channel (%) DSAs (%) E-channels (%)

10
7.9 8.1 7.9 8.1
8 7.5 7.7
6.5 15
5.9 5.8
6
4.6
4 3.2 3.1

30 55
2

0
1QFY24
FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Salaried PL: Some key takeaways

• Salaried PL mostly has super prime and prime customers.
• The yield is higher as c.95% of salaried PL customers are offered a flexi feature.
• BAF operates in FOIRs of 60-70%.
• Flexi-loan benefit include over-draft (OD) to customers.

Page | 60 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

• Utilisation of flexi salaried PL is at 60-70%. In the Bajaj Finserv eco-system, there

are c.140mn prospective customers from retailers, two-wheeler, BAGIC, BALIC, of
which to c.15mn BAF makes a salaried PL offer, which it does not make to NTC
customers.
• Rs 3.5mn is the ceiling for salaried PL.

With portfolio growing slower than… …active loan volumes, average ticket size has dipped
Portfolio Outstanding (Rs tn) YoY (RHS, %) Active Loans (mn) YoY (RHS, %)

9 31 35 70 61 70
8 30 60 60
7 47
22 25 50 50
6 21
5 20 40 40

4 15 30 30
3 17
10 20 20
2
5 10 10
1 21 34 40 58
4.1 5.4 6.5 7.9
0 0 0 0
FY19 FY20 FY21 FY22 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark Source: PhillipCapital India Research, CRIF High Mark

BAF caters to both ends of customer segments… …to maintain similar market share through FY19-22
PL average ticket size (Rs mn) BAF PL portfolio (Rs bn) BAF PL mkt share (RHS, %)

0.7 0.60 450 7.5

0.6 0.50
0.45 5.5 5.7
0.5 0.40 6.0
0.4 4.5 4.7
0.25 0.25 0.25 0.25 300
0.3 4.5
0.2 0.15
0.10
0.1 3.0
0 150
HDFCB

SBIN
ICICIBC

KMBB

BAF PLCS
BAF Salaried PL

Cred

PayTM

Navi
IDFC First

1.5
226 305 293 374
0 0.0
FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data, CRIF High Mark

With salaried as c.75% of total BAF PL disbursements… …it remains c.6% of monthly PL disbursement pool (Rs
500bn)
Salaried % of PL
HDFCB SBIN ICICIBC IDFC First BAF
100 AXSB ABFL Fullerton PayTM KMBB
80 80 Navi RBL bank Clix capital Others
75 75 75
75 11
2 2 9
3 24
50
4
4
25
6
6 24
0 6
ICICIBC SBIN AXSB HDFCB BAF 9

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 61 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Risk diversifiers drive AUM growth and profit

BAF's risk diversification and growth driven by rural, SME, and auto finance
BAF is among the few NBFCs that have seriously diversified the risk on their balance
sheet, while continuing to see good growth and risk management. In this, we believe
rural finance, SME finance, and auto finance have helped BAF in the following four
ways: (1) reduced its dependence on top-40 markets, (2) reduced seasonality, (3)
maintained a healthy pipeline for NTC customers, and (4) diversified its product mix.
At a larger scale, too, BAF has demonstrated that it can identify and manage risk at a
granular level, and make profits through cycles. During covid, auto finance posed
concentration risk for BAF, which the management is trying to diversify by financing
other OEMs. We expect rural financing/SME finance/auto finance to have
35%/28%/32% CAGR over FY23-26 and these are likely to grow to c.11%/13%/5% of
overall book in FY26 to touch c.Rs 592/713/296bn. We expect rural financing, SME
finance, and auto finance to be c.11%/12%/5% of incremental book growth during the
same period.

Rural finance: Generates higher yields, diversifies geography BAF has diversified risk through rural,
SME, and auto finance, which has
Rural lending has grown significantly, contributes to 10% of AUMs with higher yields reduced its dependence on top markets
and mitigated seasonality; it expects
BAF launched its rural lending business in FY14, offering consumer durables, lifestyle,
significant growth in these segments
and personal loans, SME and gold loans, and fixed deposits. Rural lending has grown and for them to contribute to healthy
c.19x between FY16 and 1QFY24 to reach an AUM of Rs 258bn and now contributes pipeline maintenance and product-mix
10% of consolidated AUMs vs. 3% in FY16. Although consumer durables ticket sizes are diversification as well
10% lower than urban branches, yields are 100-150bps higher. These offsets the impact
of high customer acquisition costs and credit losses.

Rural lending: Hub-and-spoke model, widespread presence, specialized teams

BAF uses a hub-and-spoke model to source customers. As of FY23, its rural business is
spread out over 2,300+ locations in 16-17 states and union territories in India, through
37,000+ store relationships. Its rural team include four business heads who manage
these four verticals – consumer durables and digital product financing, personal loans
cross-selling, salaried personal loans and professional loans, gold loans, and retail fixed
deposits. These businesses are supported by a centre of excellence (COE) unit for
creating capabilities and for product management of each area. BAF’s rural business
has a 7,000+ sales team along growth national sales managers for each of the verticals.

BAF stays away from farmer loans; rural collection efficiency better than urban BAF avoids loans to farmers and focuses
Management has prudently chosen to stay away from farmer loans while judiciously on strategic rural locations where it can
selecting rural locations to build its presence. Though the EMI bounce rates are higher achieve better collection efficiency with
in rural areas, collection efficiency is better than in urban locations – reflected in benign low delinquency rates
delinquencies in the rural business (0+dpd 1.2% as of 1QFY24).

Rural finance should yield significant growth and profits

Rural finance helps BAF diversify geography, reduce seasonality, and make inroads into
the high-yielding rural segment in a profitable way. At a larger scale too, BAF has
demonstrated that it can select risk from the bottom up, and make profits through
cycles. We expect rural financing (B2B and B2C) to be a significant growth and profit
driver for BAF; expect 35% CAGR over FY23-26. Rural finance is likely to grow to c.11%
of its overall book in FY26 to touch c.Rs 592bn and should constitute c.11% of
incremental book growth in FY23-26.

Page | 62 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Rapid growth in rural branches and franchises Rural lending has grown a strong c.19x since FY16
Rural Branches Rural Franchises Rural lending AUM % AUM (RHS)

2,000 300 15.0

1,750
250 12.0

9.8

9.8
9.6

9.6
1,500

9.1
200

8.0
1,250 9.0

6.6
1,000 150

5.1
750 6.0

3.0
100

0.2
500

1.0
3.0
1,163

1,498

1,634

1,678
50
182
105
292
177
361
219
383
347
556
527
830
527

638

707

728
250
50

1 13 31 55 92 133 147 194 243 258

3
0 0 0.0
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

1QFY24

FY18

FY21

1QFY24
FY14

FY15

FY16

FY17

FY19

FY20

FY22

FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Exposure to farmers is miniscule Delinquencies are tapering from covid highs

Exposure to farmers (%) Rural lending 0+ dpd (%)

2.5 2

2
2
1.5
1.5 1.3
1.2 1.2 1.2
1.1
1 0.9
1 0.8 0.9

0.5

0
0 0.5
Rural B2B Rural B2C FY17 FY18 FY19 FY20 FY21 FY22 FY23 1QFY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

BAF has comparable rural penetration to large banks We calculate a write-off of Rs 3.3bn (c.1.3% of rural book)
over the last three years due to covid impact
Total branches Rural branches % of total branches Stage 1 Stage 2 OTR Stage 2 Normal Stage 3

25000 80 90 100
80 15
29 27 25 24
20000 63 39 37 33 35
70 75 46 48
53
52 60
15000 28 27 32
50 60 28 25 21
36 39 50 26
35 28
31 18 40
10000 21 16 29 23 1
16 30 24 2 1
25 0 45 48 44
22,381

10,048

5000 20 37 43 42 43
1,752
9,720

8,178

7,179

5,633

4,969

3,714

2,901

1,166

25 31 24 28
10 23
0 0 0
Q3FY23
Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q4FY23

Q1FY24
SBIN

PNB

KMBB
HDFCB

ICICIBC

AXSB

BAF

SHFL

CIFC
BOB
CANBK

Source: PhillipCapital India Research, Company Data, RBI Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

According to our calculations, rural finance… …contributes to c.7% of its profit pool
Rural Finance RoA tree (%)
Rural finance profit pool (Rs mn) % of PAT (RHS)
Yield 20.0
CoF 9.0 10000 15.0
Fees 1.3 11.5
Total income 12.3 12.0
7500 9.5
Opex 5.0 8.7
7.5 8.0 9.0
PPoP 7.3 7.3
5000 5.8
Credit cost 2.7
6.0
RoA 3.5 3.6
2500
1.3 3.0

1,060

1,883

3,189

4,598

5,073

6,703

8,370
Source: PhillipCapital India Research, Company Data

462
FY15 115
0 0.0

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
Source: PhillipCapital India Research, Company Data

SME finance offers growth and pricing support in 2,000+ cities

BAF gets c.40% of its business from top-10 cities and anticipates higher risk from here SME financing spreads out BAF's
due to the migratory population and heightened competition from banks and fintech concentration risk, offering high-volume
companies. BAF’s longstanding strategy has been to focus on affluent SME customers and profitable lending across regions
with an average turnover of Rs 85mn, established financials, and a robust borrowing
track record. To mitigate geographic concentration, SME financing (c.13% of BAF’s
consolidated AUM) offers high-volume, profitable, and favourable lending prospects
with a wide footprint. The portfolio is fairly granular, giving the company the flexibility
to go slow on one segment or region, depending on risk parameters. The SME lending
business offers secured loans (average Rs 1mn ticket size) and unsecured loans (Rs
1.2mn) to customers, and has grown c.2.5x to c.Rs 350bn over FY14-1QFY24.

Though SME finance has reduced as proportion of …BAF’s market share in business loans has remained steady
consolidated BAF AUM…
SME Finance (Rs bn) % of AUM (RHS) Portfolio Outstanding (Rs bn) BAF market share (RHS, %)

400 53 60 8 5.0
48 48 4.1 4.1 4.0
350 43 42 50 3.7
350

300 4.0
338

37 6
40
250
200 30 3.0
221

4
150
187

14 14 13 13 13 14 13 20 2.0
156

100
129

10 2
50
85
57

FY19 158

1.0
FY18 114

FY20 194
FY21202
FY22250

0 0
3.9 4.7 5.5 6.2
1QFY24
FY12
FY13
FY14
FY15
FY16
FY17

FY23

0 0.0
FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data, CRIF High Mark

Product offerings in SME lending

• Secured lending: Till January 2018, BAF offered secured lending through three
products: (1) loans against property (LAP), (2) lease rental discounting, and (3)
home loans for the self-employed. Thereafter, its mortgage arm Bajaj Housing
Finance (BHFL) took over incremental loan sourcing in these three categories as
well as ‘developer financing’.
• Unsecured lending: This is via two products: (1) business loans to SMEs and to the
self-employed, and (2) professional loans.
• New products: BAF launched two new products in the SME lending in FY19:
o Used-car financing

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 BAJAJ FINANCE COMPANY UPDATE

o Secured enterprise loans.

Used-car financing: BAF expects used-car financing and

• BAF offers used car financing for both refinancing and purchase financing of used secured enterprise loans to contribute
cars. significantly to the growth of its SME
lending business over the next few years
• It has a tie-up with Cars24 for providing end-to-end digital financing for the
customers transacting on the online platform.
• Of India’s used-car finance, c.50% is refinance (at 130% LTV) and the rest is sale
purchase (at 85% LTV).
• Loss on sale of vehicles has reduced after covid. Some overhangs on this business
include chip shortage, BS6 transition and air bags regulations are some overhangs
on the business.
• Used car finance is done via a hub-and-spoke model. BAF has 620 ‘on-roll’
employees in this segment. Each employee handles three spokes, which are
managed by feet-on-street people (off-roll).
• BAF’s used car financing has monthly disbursement run-rate of Rs 900mn. The two
largest used-car financing players have a monthly disbursement run-rate of Rs 3bn
and Rs 5bn respectively. The rest of the used-car financing market is a long tail.
• BAF wants to be among the top-3 used car financing players within three years. It
is investing to understand the business. The company is in 14-15 cities in India as
of now and wants to templatize the business for easy rollouts into more cities.
• The management expects this business to touch Rs 90bn in AUMs in three years.

Secured-enterprise loans:
• BAF offers small-ticket loans of c.Rs 1mn against mortgage of self-occupied
residential (SORP) and commercial property in smaller towns.
• It offers secured business loans only beyond top-40 cities, because of paucity of
organised credit beyond top-40 cities in enterprise lending. This is an entirely cash-
flow-based lending engine.
• The portfolio as of FY23 was Rs 32bn, run at 38-40% loan-to-value (LTV).
• Customers are eligible for top-ups after one cycle. Minimum on-boarding ticket
size is Rs 0.7mn and minimum collateral value is Rs 2mn.
• Rs 10bn is the estimated monthly disbursement run-rate for secured business
loans (BL), which can grow c.3x in 2-3 years.
• PSBs ignore this market. AU SFB and Shriram Housing are other pan-India players.
• Cash-flow-based underwritten secured business loan (BL) customers have loss
rates that are similar to LAP customers priced at 8-9%, leading to similar
profitability.

Fledgling portfolios will scale up in 3-4 years… …with professional loans now gaining more traction within
SME lending
Used car loans (Rs bn) Secured enterprise loans (Rs bn) Business loans (%) Professional loans (%)

35 33 100

30 28 27
80 34 38 40 39
41
25

20 18 60

15 12 12 40
73
10 66 62 60 61
6 59
5 20

0
0
FY21 FY22 FY23
FY18 FY19 FY20 FY21 FY22 FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

Secured enterprise loans and used-car are high yielding Around 63% of SME finance business is sourced beyond top-
segments 40 cities
Yield (%) Top-40 cities (%) Beyond top-40 cities (%)

20
16 16
16
13
12 37

4 63

0
Short-tenor Secured Used car loans Long-tenor Secured
business loan business loan

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Medical financing business started in FY20, gained traction in FY23

In FY20, BAF started its medical equipment financing business by entering into tie-ups
with top-tier medical equipment manufacturers and their dealers. This business is
ancillary to its professional loans business. For this, BAF offers hybrid flexi loans, which
provides its customers with an option of servicing only interest in the initial 12-24
months of the loan tenor and the flexibility of multiple repayment and withdrawals
within the contracted repayment plan. In FY23, the medical equipment financing
business gained traction through field distribution, OEM network, and dealer network.
Currently the business has 450+ empanelled dealers and 19 OEMs for sourcing and was
at Rs 3.1bn, as of FY23.

We estimate c.Rs 2.5bn (70bps of SME book) of write-off …which looks benign when compared to PAR numbers for
during the last three years… total business loans
Stage 1 Stage 2 OTR Stage 2 Normal Stage 3 PAR 31-90 (%) PAR 91-180 (%)

100 PAR 180+ (RHS, %)

20 24 3.5 20.0
43 38 40 38 43 44 39 39
75 48 49 3
27 15.0
2.5
50 53 19 15 15 16
22 29 21 15 10
9 1 13 2
5 1
7 10.0
3 1.5
25 46 44
36 40 38 41 40 39 41
27 29 32 1 5.0
0 0.5
Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q3FY23

Q4FY23

Q1FY24

0 0.0
FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data, CRIF High Mark

Strong domain competence in SME finance

After consumer finance (B2B) business, SME finance is a business where BAF has built
tremendous domain competence. This is why it has survived through many cycles in
this business. Factors driving SME market expansion include inflation increasing the
working capital needs of the traders, emergence of new SME finance players, and
presence of unserved/underserved SME customers. BAF's commitment to SME finance
is long-standing. It is one of the few financiers that has stayed steady for the last 12+
years (not been a fair-weather friend to SMEs). It has seen new players entering/exiting
across cycles.

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 BAJAJ FINANCE COMPANY UPDATE

BAF has a deep presence in SME finance, and has been creating significant granularity
in the SME business, as it conducts business in more than 2,000 cities in India where it
has strong expertise competence and capability. This has allowed the company to
diversify and maintain margin profile. BAF stays with top-of-the-funnel customers,
mines the franchise, and runs a campaign to deliver a high level of efficiency using its
risk-management capabilities.

In fact, after the consumer durables (B2B) business, its expertise in SME finance is one
of the most distinctive skills that it developed over the past 15 years. Its business has a
dedicated audit staff to check for any frauds and it has underwriters in c.350 locations.
BAF is gearing up for centralised underwriting for used car finance, so as to accelerate
approval rates in this segment, which is a market dominated by unorganised players.

The portfolio is fairly granular with low average ticket sizes Traders dominate the bulk of customers for BAF
across key products
Traders (%) Manufacturers (%)
Average ticket size (Rs mn)

1.5
1.2
1.0 1.0 35
1

0.5
65

0
Unsecured business Professional loans Secured business
loans loans
Source: PhillipCapital India Research, Company Data
Source: PhillipCapital India Research, Company Data

BAF's flexible unsecured business loans: Quick approvals, geographic diversification BAF’s unsecured business loans have a
monthly disbursement run-rate of Rs
• Business loans help spread portfolio concentration risk beyond the intensely
60bn pan-India
competitive top-40 markets and come at a lower cost of acquisition.
• Out the total unsecured business loans (BL), c.28% have the flexi-feature (where
borrowers can choose their repayment schedule to an extent).
• BAF offers these at c.2,000+ locations, leading to geographic diversification.
• c.80% of its customers in this segment, are business owners who provide bank
statements when they apply for loans, which makes the underwriting easier.
• Transporters, hotels, contractors, restaurants, and agri-allied services are
negative-list customers, i.e., BAF does not provide loans to them.
• HDFCB, ICICIBC, AXSB and Tata Capital are BAF’s main competitors in this field.
• In this segment, banks’ TAT (turnaround time, usually for loan approvals) is slow
while BAF’s TAT is just 2-3 hours. This is because c.97% of BAF’s credit policy is
automated, thereby decreasing TAT vs. banks, which are more bureaucratic.

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 BAJAJ FINANCE COMPANY UPDATE

The geographic reach in unsecured business loans… …makes the business turn-around faster despite adverse
conditions like covid

2,500 SME cities Unsecured business loans (Rs bn) YoY (RHS, %)
75
200 80
2,000 180 70
58 57

2,000
160 60
48
1,500 140 50
120 37

1,500
32 31 33 40

1,400
100 24 25
1,000 30
80

1,100
17 15
60 20
-4 10
500 40
650

104
119
114
142
189
0
119
262
296

20

10
13
21
25
43
56
83
23
15

31
58
80

5
7
0 0 -10

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY11
FY10

FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY20
FY21
FY22
FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Professional loans help ease macro risks with low opex

• BAF carved out professional loans targeted at chartered accountants, doctors, and
engineers as a separate business structure in Q4FY15. This client segment is largely
independent of macro events, limiting the probability of credit losses.
• Doctors, dentists, and CAs have a total portfolio of c.Rs 120bn with BAF and c.90%
of them have been provided the flexi feature.
• No documents are needed for disbursal, as BAF has proprietary underwriting
practices for this portfolio based on qualification, city of practice, and leverage of
the customer.
• The business is aided by geographic expansion and analytics-based credit
outreach.
• Loans are directly disbursed to eligible customers, which keeps the cost of
customer acquisition low.
• HDFCB is a major competitor in this segment, although of late CIFC and few
fintechs have also started entering this segment.

Professional loans picking up pace after covid… …with 0+dpd coming off covid highs
Professional loans (Rs bn) YoY (RHS, %) 0+ dpd of SME loans (incl. professional loans)

150 90 2
78 76
73 1.7 1.7
80
125 1.6
70 1.5
56 1.5 1.3 1.3 1.3 1.3
100 60 1.3
1.2
50 1.1
75 39
1.0 1.0
40 1
27
50 30 0.7 0.8
17
9 20
25
0.5
119

10
11

17

31

53

73

80

94

FY14

1QFY24
FY10
FY11
FY12
FY13

FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
6

0 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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 BAJAJ FINANCE COMPANY UPDATE

BAF has a pre-approved offer for almost all doctors and CAs Doctors have lower loss rates due to consistent and higher
in India income than dentists
Pre-approved by BAF (mn) Live (%) Loss rates (%)
2 15
1.2
12 1.0
1.5 10 10 1

9 0.8
1
0.6
1.5 6
1.2 0.4
0.5 0.3
3
0.2

0 0 0
Doctors CAs Doctors Dentists

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Operational aspects and risk management practices of BAF's SME finance business
• BAF works with formal economy companies which are GST registered with a
turnover of Rs 10mn+.
• All SME branches have an underwriting and a collection officer.
• SME finance has a cheque-bounce rate of 7-8%. However, 95%+ of customers pay
up by the end of the month.
• The company has 1,000+ credit-risk metrics, which senior management review
c.10 times every month.
• BAF has a differentiated customer-targeting approach. It prefers to assess
customers even before they apply for loans, after which it offers them pre-
approved loans.
• SME finance business has a c.65% rejection ratio, so it grows at a similar rate as
the overall company’s growth rate through cycles. Through cycles, SME business
is a c.2% credit cost and c.4% RoA business.
• During covid, BAF offered flexi conversion to existing customers. However, not all
customers took the offer, only c.30% converted. After covid, customers had to pay
a fee for flexi conversion – 1% flexi fee for one year.
• HDFCB does not have a dedicated team beyond top-40 cities and mostly does
branch sourcing. Its life insurance attachment contract is with HDFC Life and
general insurance attachment contract is with BAGIC.
• c.65-70% of BAF’s SME loans have an insurance attachment. This leads to steady
fee income and low loss-rates.

Loss rates were c.3x during covid c.10% of opex is the cost of collections, implying strong risk
selection
3.5 Loss rates during covid (%)
3.0 Cost of acquisition (%) Cost of collection (%)
3
Business as usual cost (%)
2.5

1.5 35

1 0.8
55
0.5
10
0
Business loans Doctor loans

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 69 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

BAF plans to start LAP in its SME business from FY24

The MSME financing sector in India is Rs 23.5tn, of which the business loan market is
c.4%. The management has indicated that of all business loans booked in India on a
one-quarter lag basis, 21-23% were with BAF, and all from small businesses or
professionals. The company wants to dominate the MSME space, so it plans to offer
LAP in its SME finance business, apart from offering LAP in Bajaj Housing Finance
(BHFL). LAP in SME will be more B2B in which BAF is strong from a geography and
distribution standpoint. LAP business margins within SME will be large enough, as price
for tier-2+ cities are priced differently from tier-1 cities’ markets.

Potential of SME finance to drive growth, profitability, and diversification for BAF
SME finance helps BAF diversify its product mix, reduce dependency on top-40
markets, and make inroads into the high-yielding unorganized SME segment in a
profitable way. At scale, BAF has demonstrated that it can evaluate risk from the
bottom up, and that it can make profits through various cycles. We expect SME
financing to be a significant growth and profit driver for BAF; see 28% CAGR in the book
over FY23-26. This segment is likely to become c.13% of BAF’s overall book in FY26 to
touch c.Rs 713bn, and 12% of incremental book growth during the same period.

BAF SME finance business is 4% across cycles RoA …contributing c.15% of consolidated profit, which has
business… declined over the last decade
SME Finance RoA tree (%)
SME finance profit pool (Rs mn) % of PAT (RHS)
Yield 20.0
71 69
CoF 9.0 15,000 75
Fees 1.3 58
56 57

13,422
12,500 60
Total income 12.3
48
Opex 5.0 10,000
PPoP 7.3 45
18
7,500 16 18 14 12
Credit cost 2.0 15
30
RoA 4.0 5,000
Source: PhillipCapital India Research, Company Data
15
2,266
3,366

5,108

6,182
7,430

8,778

2,500
FY18 4,545
FY19 6,264

FY20 7,723

FY21 8,036
FY22 9,929
0 0
FY12
FY13

FY14

FY15
FY16

FY17

Source: PhillipCapital India Research, Company Data FY23

Diversifying risk concentration in auto finance

Reduced its exposure to the auto finance segment over time

BAF started as a captive auto financier for Bajaj Auto (BJAUT)’s two-wheelers (2W) and
three-wheelers (3W). The legacy auto-finance book has remained a captive financier for
the parent. However, management deliberately slowed down channel expansion in
FY14-17 due to higher delinquencies in the period. We believe the risk concentration
largely started increasing after the IL&FS crisis. Before that BAF used to be 35-40% of
Bajaj Auto’s financing mix, and in 3Q due to a festive-season 45-50%. However, after the
IL&FS crisis, this figure went up to 50%+.

Thereafter, in FY23, BAF decreased the financing of the company’s 2Ws to 40% (vs.
54% in FY20) and 44% of 3Ws (vs. 51% in FY20), thus bringing down auto finance from
c.9% of AUM in FY20 to c.5% of AUM in 1QFY24.

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 BAJAJ FINANCE COMPANY UPDATE

The auto finance 0+dpd spiked during covid… …leading to our estimated Rs 9bn (c.6% of auto portfolio) or
write-off in the last 3 years
2W & 3W 0+dpd (%) Stage 1 Stage 2 Stage 3
100
25
22.0
31
75 55 55 53 56 52
20 62 58 59 57
76 71
14.3 14.8
14.0 50
15
11.2 54
10.1 9.8 22 23 24
33 29 27
10 25 33 28
6.7 29
5.7 18
17 25 24
15 18 22
5 9 10 11 12 13 14
0 6

Q2FY21

Q1FY24
Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q3FY23

Q4FY23
0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 1QFY24
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Some noteworthy aspects of BAF’s auto finance business

(1) 2W/3W has low credit penetration (40-45%), implying a high cash-purchase
behaviour; (2) it’s also a high Loss Given Default (LGD) segment as repossession of
2W/3W is difficult and post-possession liquidation is difficult, and (3) Bajaj Auto has
c.50% market share in the 3W segment, with BAF financing 45% of Bajaj Auto 3Ws,
implying BAF is financing 25% of total 3W population.

BAF has diversified auto-finance risk, but was slow to finance other OEMs
BAF is among the few NBFCs that have shown serious diversification of risk on the balance
sheet along with good growth and risk management. However, the management took a
long time to start financing other OEMs’ 2Ws/3Ws as a way to diversify its risk. Auto
finance is 25% of gross non-performing assets (GNPA) in 1QFY24 vs. 51% GNPA 1QFY22.
It has increased to 21% of stage-2 assets in the same period (from 14% in 1QFY22).

Auto finance concentration still weighs on GNPA/NNPA… …and stage 2 assets

Auto finance % of GNPA Auto finance % of NNPA Auto finance % of stage 2 assets
28 28 27
75 30
62 24
56 55 25 22
60 21
47 47 46 20
20 17
40 38
45 51 14
47 15
42 44
30 40
35 10
29 28
15 5

0 0
Q3FY23
Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q3FY23

Q4FY23

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q4FY23

Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 71 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Diversification into other OEMs taking root… …though parent OEM pressure still remains
Bajaj Auto dealers Non-captive 2W dealers BAJAUTO 2W financing (%) BAJAUTO 3W financing (%)

6,000 60 54 54
51

6,000
5,900
5,500
50

5,350
44 44 44

5,150
4,500
39 40

4,600
40 37 37
33 34
3,900
3,000 30 31
28 28

3,300
27
3,200

30
3,000

3,000

23

2,650
2,600

1,500 20 15
12
10
0

1QFY24
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
0
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Bajaj Auto – BAF relationship: Trying to reduce the dependence

• Bajaj Auto has started captive finance to de-risk its dependence on BAF, though it
will continue to work with BAF, as Bajaj Auto Finance scales up over the next 6-8
quarters.
• BAF remained the largest financier of Bajaj Auto motorcycles and three wheelers
in FY23, and sourcing from Bajaj Auto will continue to dominate its book for the
next 6-8 quarters.
• BAF launched two-wheeler financing for non-captive OEMs in 1QFY23, as a part of
its new online market place, where various companies’ products across
mechanical and electric 2Ws are available to customers to compare and shop.
• Additionally, BAF is evaluating starting open-architecture 2W financing, given its
huge geographic coverage and depth, in 2QFY23.

Auto finance has a declining share in consolidated AUM… …and declining market share in 2W finance
2W portfolio (Rs bn) BAF 2W mkt share (RHS, %)
2W & 3W financing (Rs bn) % AUM (RHS, %)
1000 15.0
150 20
11.2
15 10.2 12.0
120 750
15 9.3
7.9 9.0
90 10
9 8 8 9 9 500
10
6 784 779 6.0
60 5 5 704
5
250 573
5 3.0
30
36 33 38 51 53 97 131 121 102 130 147
0 0 0 0.0
1QFY24
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, Company Data / Note: assumed 60% of auto
Source: PhillipCapital India Research, Company Data finance is 2W finance

Conclusion: Diversifying auto finance product mix for enhancing profitability

During the pandemic, BAF’s auto finance segment faced concentration risk, which the
management is trying to diversify by financing other OEMs. With risk-diversification
taking root, we believe 2W/3W customers will help maintain a healthy pipeline for NTC
customers, diversify BAF’s product mix, help make inroads into rural markets, and
remain high-yielding in a profitable way. We expect auto financing to be a significant
profit driver for the company, at 32% CAGR over FY23-26. Auto finance is likely to grow
to c.5% of its overall book in FY26 to touch c.Rs 296bn, and should make up for c.5% of
its incremental book growth in this period.

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 BAJAJ FINANCE COMPANY UPDATE

Growth drivers: Commercial lending, mortgages

• Commercial lending (including Loans against Securities and IPO financing): has
helped BAF make inroads into the market for working-capital loans, particularly
for mid-range corporates. This will drive opportunity driven growth its way.
• Mortgages: In-house loan sourcing, cross-selling opportunities to existing
customers who have c.Rs 5tn of mortgages as per the management, and popular
ticket-size loans of Rs 4.5-5.0mn will act as key growth drivers for Bajaj Housing
Finance Ltd (BHFL) in the near-to-medium term. We expect its commercial
lending/mortgages book to see c.12%32% CAGR over FY23-26 with commercial
lending/mortgages at c.8%/32% of overall book in FY26 to touch c.Rs
431bn/1.77tn and c.4%/32% of incremental book growth in the same period.

Commercial lending offers opportunistic credit plays

BAF’s commercial lending AUM grew 3x to c.Rs 343bn during FY18-1QFY24.
Commercial lending (c.13% of consolidated AUM) offers high-volume, profitable and
opportunistic credit plays to mitigate risk concentration on the balance sheet. The
portfolio is fairly granular, giving the company the flexibility to go slow on certain
segments, depending on risk parameters. Its commercial lending consists of the
following products:
1. Loan against securities
2. Loans to financial institution group (FIG)
3. Working- and growth-capital loans to auto-components manufacturers
4. Loans to the light engineering industry
5. Loans to the specialty chemicals and pharma industry and other mid-market
companies.

BAF ensures that commercial lending is an opportunistic, profitable business

(average c.11% IRR) that avoids concentration risks:
• Selective credit entry/exit decisions: BAF decided to wind down its warehouse-
receipt-financing business from April 2019, attributing this to stress in the agrarian
sector and lack of a sustainable profit model. It fully exited from warehouse receipt
financing business in FY20. In vendor financing, BAF focuses only on certain
industries.
• Loans to auto-component manufacturers have only c.30% share from BJAUT
vendors. In auto ancillaries, it caters only to tier-1 vendors. c.30% of this business
is from BJAUT’s vendors. Its main competitors are HDFCB, KMBB, AXSB and SBIN.
We calculate the return on equity (RoE) in this segment at 9-10%. This is a stable
business with pristine asset quality. BAF lends to 120 out of the 250 auto vendors
in India.
• LAS: BAF slowed down its loan against securities (LAS) AUM due to volatile stock
market condition in 2HFY20. In securities lending, its clientele includes high-net
worth individuals (HNIs), brokers, promoters and regular individuals. The overall
LAS lending industry size is Rs 300bn. Major players include BAF, IIFL Finance, JM
Finance, Edelweiss Broking, Aditya Birla Capital, Motilal Oswal, and Kotak Prime.
• In the corporate-finance segment, BAF gives loans with a ticket size of Rs 500-
750mn to companies with Rs 10bn+ annual turnover. This is a low margin business
(2.5-3% NIM). However, with low opex and expense ratio of 30-40bps, RoAs are
decent at 1.5-1.7%.
• Regulations weigh on IPO financing: Industry estimates peg the cumulative
lending amount to be c.Rs 500bn for a mid-sized issue with good demand. Since
April 2022, the market regulator has put a ceiling of Rs 10mn per borrower for IPO
financing and has advised NBFCs to fix more conservative limits. This limits BAF’s
opportunistic credit play and hence we have not taken this into our estimates.

Commercial lending (including LAS and IPO financing) has helped BAF make inroads
into the working-capital loan markets of mid-range corporates. We expect it to see 12%

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 BAJAJ FINANCE COMPANY UPDATE

CAGR in BAF’s book over FY23-26, grow to c.8% of overall book in FY26 to touch Rs
430bn, and to 4% of incremental book growth in the same period.

Commercial lending has grown c.3x since FY18 Healthy IRRs across products
Commercial lending AUM (Rs bn) % AUM (RHS, %) IRRs (%)
19 12 10.8 10.8 10.8
400 20 10.3
350 18
10
14 16
300 13 13 13 13
12 12 14 8
11
250 10 10 12
9
200 8 8 10 6
150 8
6 4
100
4
109
120
112
143
274
309
343
50 2 2
52
24
20
18
33

79
9

0 0
FY16

1QFY24
FY11
FY12
FY13
FY14
FY15

FY17
FY18
FY19
FY20
FY21
FY22
FY23

0
LAS Vendor FIG Corporate
financing finance
Source: PhillipCapital India Research, Company Data
Source: PhillipCapital India Research, Company Data

Commercial lending and LAS were an equal mix in 1QFY24 We analysed c.46% of BAF’s commercial lending portfolio, of
which c.37% is below BBB+ rating
LAS (Rs bn) Commercial lendiing (Rs bn) AA+ AA AA- A+ A A- < BBB+

400
350
300
250 181 31.4
36.5
115 158
200
150
100 57 83 10.1
64 159 151 162
50 6.3
64 48 61 9.1
5.0
0
FY19 FY20 FY21 FY22 FY23 1QFY24 1.6

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Average ticket size has not increased materially for NBFCs in Lenders have focused on micro, small, and medium
the last one year enterprises in commercial loans
FY 21 (Rs mn) FY 22 (Rs mn) Micro Small Medium Mid Corporate Large Corporate
40
100%
35 90%
30 80%
70% 56
25 72 71 71 67
60% 74
20 50%
15 40% 6
30% 6 11
10 8 6
20% 12 7 12 15
5 11 10 11
10% 5
17 33 19 33 8 9 8 8 11
7 7 12
0 0% 3 3 3 4 5
PSBs PVBs NBFCs FY17 FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, Company Data, CRIF High Mark Source: PhillipCapital India Research, Company Data, CRIF High Mark / Note: Data
for disbursement value

Page | 74 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

BHFL: To be among top-4 mortgage players in the medium term

BHFL – background information

• BAF launched its mortgage business in FY09 with LAP products. In subsequent
years, it entered into home loans for self-employed and salaried customers, LRD,
and CF.
• It hived off Bajaj Housing Finance (BHFL) into a separate entity in FY18.
• With BHFL, it received access to a lower cost of funds, a dedicated team to focus
on the large Rs 26tn market (which is likely to expand at 12% p.a.), and the
opportunity to lever the business by 7-8x.
• Atul Jain, who had set up a successful rural lending business, heads BHFL.

BHFL's strategies for growth in the housing loan market

• It continues to widen geographical presence to further strengthen its market share
in this business.
• In FY16, it changed its HL (housing loan) origination strategy from a DSA basis to
in-house originations, which lowered the cost of customer acquisition, increased
retention, and improved credit quality.
• In-house loan sourcing, cross-sell opportunity to existing customers (who have
c.Rs 5tn of mortgages as per the management) and popular ticket-size loans of Rs
4.5-5.0mn will act as key growth drivers for BHFL in the near-to-medium term
• To increase its housing loan penetration, BHFL continues to do these three things:
(1) deepen its presence at existing developers’ projects, (2) increase distribution
reach, and (3) leverage developer-finance relationship for higher retail home loan
contribution.
• Going forward, BHFL intends to expand its housing loans business to the self-
employed segment and also to affordable housing (launched in FY22) – with a
calibrated risk strategy to cover the full spectrum of the housing loan market.
• BHFL’s developer-finance portfolio will continue to expand its geographical
footprint, deepen relationships with existing developers, and on-board newer
developers that meet its underwriting standards and allow building a granular
portfolio.
• In commercial real estate, BHFL now offers financing for commercial construction
and lease rental discounting for build-to-suit warehousing and industrial
properties.

BHFL’s financials: To focus on building a low-risk balance sheet

• Management expects BHFL to deliver 14-15% ROE in the near term. With scale,
operating leverage will also play out in this business (though a few years away),
thereby meaningfully contributing to return ratios.
• We expect BHFL to focus on building a low-risk balance sheet with RoA/RoE of
1.8%/13% with a core focus on salaried HL over the next 3-5 years.
• We expect the CF book to be range bound at 8-10% of BHFL’s total book.
• The ticket size focus is likely to remain on Rs 3-10mn with strong CIBIL scores of
750+.
• When it attains a certain size, BHFL’s continuous focus on process efficiencies will
start showing in operating leverage.
• With optimal borrowing mix of bank lines, money market instruments, NHB
refinance and assignment (15-20% of borrowings), we expect steady NIMs of 3.7-
4.0% in FY23-26.
• With a guidance of GNPA of 0.6-0.8%, we expect credit costs to remain benign in
the near term, leading to above-mentioned return ratios.
• As of 1QFY24, mortgages contribute 31% of BAF’s consolidated AUM. We expect
mortgages to have a 32% CAGR in the book over FY23-26. Mortgages are likely to
grow to 32% of the overall book in FY26 to c.Rs 1.77tn and 32% of incremental
book growth during the same period.

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 BAJAJ FINANCE COMPANY UPDATE

BHFL likely to grow to c.4.5% of mortgage market share by …driven by higher ticket sizes in LRD and CF
FY26…
BAF mortgage portfolio (Rs bn) BAF market share (RHS, %) HL LAP LRD CF Rural and others

1,500 4.4 5.0 100 2 6

4 8 8 7 7
10 5 5 6 9 9
1,250 4.0 80 9 13
12
16 16 18
12
1,000 12 12
3.0 60 9 9
2.3 2.4 1,773
2.2
750
1.8
2.0 40
500 68 66 62 62 59 58
617 1.0 20
250 462 496
339
0 0.0 0
FY19 FY20 FY21 FY22 FY26 FY19 FY20 FY21 FY22 FY23 1QFY24

Source: PhillipCapital India Research, Company Data, CRIF High Mark / Note: Source: PhillipCapital India Research, Company Data
Includes BHFL portfolio

BHFL aims to be among the top-4 mortgage originators in India in the medium term
In its five years of operations, BHFL already ranks among the top-7 mortgage
originators and top-3 HFCs in India. It aims to be among the top-4 mortgage originators
in India in the medium term. The management wants to create a low-risk sustainable
balance sheet, keeping gross NPA (%) between 0.6-0.8%, with a larger focus on salaried
housing loans. BHFL is focused on BAF’s 66mn customer base, for data enrichment, to
create right propositions – with a focus on cross-selling. The parent infused capital
worth Rs 25bn in FY23, taking its total capital infusion to Rs 75bn. With strong
parentage and a low-risk model, it has been given AAA rating by CRISIL and India
ratings.

Snapshot of product suite BHFL operates in a sweet spot of Rs 4.5-5mn HL ticket size
HL LAP LRD CF
Avg. ticket size (Rs mn) 5.0 7.2 840 330
<Rs 3.5mn Rs 3.5mn-Rs 7.5mn Rs >7.5mn
LTV (%) 70 50 55 NA 100
Locations 52 29 12 13 21 20 20 20 21 24
80
Source: PhillipCapital India Research, Company Data / Data as of FY23
25 25 27 29 30
60 32

40
55 55 53 52 49
20 44

0
FY17 FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark / Data for originations value

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 BAJAJ FINANCE COMPANY UPDATE

HL originations have increased in FY22… …with BHFL clocking a quarterly mortgage disbursement
run-rate of c.Rs 75-80bn over the last 3-4 quarters
Originations Value (Rs tn) Originations Volume (RHS, mn)
8 3.0 Monthly disbursement (Rs bn)
7 2.4
2.2 2.2 2.5 40
2.1 2.0
6 35
2.0

34.6
5 1.7 30

30.9

30.1
25

28.8
28.7
26.5
4 1.5

24.8
20

23.4
21.5
20.4
20.0
20.0
3

19.0
1.0 15

17.5
16.0

15.0
2 10
0.5 5
1
4.2 5.5 5.7 5.6 5.7 7.4 0
0 0.0

Q3FY21
Q4FY21
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21

Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
FY17 FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark

Source: PhillipCapital India Research, CRIF High Mark / Note: Monthly
disbursement only for last month of the quarter

Home loans: Focused on building low-risk portfolio

• BHFL offers home loans for ready-to-move-in homes as well as those under
construction to mass affluent salaried customers across 59 locations in India with
an average ticket size (ATS) of Rs 5.0mn.
• It follows a micro-market-presence strategy, using a mix of direct and indirect
channels. BHFL started offering its customers external benchmark (repo)-linked
housing loans; so, c.30% of acquisition comes at repo-rate-linked housing loans,
leading to faster loan re-pricing.
• The company focuses on the mass-affluent-and-above range of customers, where
average age is 35-40 years and average salary is Rs 1-2mn.
• All sanction letters are digital. BHFL does only Aadhar-based on-boarding.
• It has moved to e-agreements from August 2022. It sends pre-filled agreements to
all customers, which are signed digitally by the company. There’s no ceiling on
ticket size. In urban areas, c.97% of on-boarding is salaried customers, so ticket
size does not exceed Rs 20mn. This offers a natural hedge. In rural HLs, BHFL will
on-board self-employed non-professionals (SENPs), but the ticket size is lower.
• BHFL handles 2-3 >Rs 50mn cases per month. It treats any ticket size above Rs
30mn with preference (except Mumbai metropolitan region) as these customers
would usually be buying marquee property. Besides, these customers are super-
prime, so they would receive quotes from most HFCs and banks, so BHFL has to
land them with a faster quotation and better service.

Net balance transfer impact is negligible of BHFL book

BHFL has an inward balance transfer (BT) of Rs 4bn per month, which has a top-up
component – where THE LTV difference is the difference between permissible LTV and
current LTV on run-down HL. However, its balance transfer outward – to SBIN and
HDFC – is also at similar levels of Rs 4bn per month.

BHFL’s HL acquisition is largely done via developer counters and in-house sales
At present, BHFL acquires most of its housing loans through developer, DSAs, and via
its in-house sales force. The company keeps calibrating HDFC’s best practices and
adapts the same strategy – of selecting a developer of choice and size to make housing-
loan offerings to end-users.

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 BAJAJ FINANCE COMPANY UPDATE

Hedge for interest-rate risk is maintained by keeping …leading to 50% of BHFL’s book being housing loans
salaried sourcing 90%+…
Salaried (%) Professionals (%) Self-employed (%) 500 HL portfolio (Rs bn)

450 429
100 5 4 5 4 410
6
5 5 5 5 5 400
80 350
300 276
250
60 221
250
89 90 91 90 91 200
40
150

20 100
50
0 0
FY20 FY21 FY22 FY23 Q1FY24 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Increase in interest rates over the last c.1.5years has fuelled competitive intensity
In primary sales, in terms of demand, there was no significant downturn due to an
increase in rates. However, in secondary sales, the rate increases led to slight demand
compression. As BHFL predominantly gives home loans to salaried people rather than
self-employed people, competitive intensity impacted BHFL’s originations. However,
management has alluded to maintaining margins despite competition. It books fresh
HL at 9%+ after rate hikes. BHFL’s LTV norms are similar to that of HDFC.

c.50% of HL customers have a previous relationship with BAF

BHFL screens salaried customers based on previous credit relationships – which is a
new practice for the company. Around 45-50% of home loan customers have previous
relationships with BAF, so BHFL can generate data-analytics-based offers for these
customers, leading to better risk management. c.11% of BHFL’s home loan sourcing
comes from Bajaj Finserv’s digital channels. HLs have a maturity period of 4-5 years
based on ‘behaviouralized maturity’ and the B2C channel offers BHFL higher
profitability, driven by the ability to cross-sell.

Micro-market focus helps increase market presence in B2B home-loan sourcing

In B2B home-loan sourcing, BHFL adopts a micro-market-based approach and focuses
on customers who have had HLs for 7-8 years (behaviouralized maturity). It caters to
majorly elite, A+ and A-category developers. To improve scale, relationships, and risk
management, it is focused on ‘own-cash-flow-funded’ projects. It is building a large
array of partners to increase its scale and only selected and risk-approved projects are
allowed for sourcing. As of now, BHFL’s home loans via developers remain a hard sell,
as customers tend to ask for HDFC home loans; it will take 3-4 years for BHFL to create
a brand name in this segment. However, the company remains focused on this market
opportunity in B2B, as it is less risky and offers a highly stable portfolio with centralized
underwriting.

DSA-sourcing offers stable portfolio in HLs, unlike in LAP

Direct Selling Agents (DSAs) don’t flip customers (encourage them to switch) in HLs
(home loans), but they do it in LAP (loan against property) because LAP loans need top-
ups each year, giving DSAs the incentive (in terms of commissions). The flipping of LAP
customers does not happen because of rates hardening.

55-70% FOIR gets decided on net income

The prudence of customers is the first filter for BHFL, which is decided by their salary.
Fixed-obligation to income ratio (FOIR) is calculated on net income and ranges between
55-70%. Higher the salary, higher the FOIR, which is a proxy for credit modelling, and
will be 5-6% different from others in the HL market.

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 BAJAJ FINANCE COMPANY UPDATE

c.80% of on-boarded HL customers have 750+ CIBIL score… …and these largely get driven from B2B sourcing
Customers with 750+ CIBIL (%) B2B (%) B2C (%)

90 100
85 84 84 85
83 83
85 81 81 81
79 78 78 78 78 80
48
80 77 78 54
73 69 68
60
75

70 40
65 52
20 46
60 27 31 32
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
0
FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

HL is clocking c.Rs 35-40bn quarterly disbursement run- …with an increasing focus on open sourcing
rate…
HL monthly disbursement (Rs bn) Open market customer sourcing (%)
75 HL monthly disbursement (RHS, % of total) Existing customer base sourcing (%)
20 72 80 100
67 67 66
61 70
57 57 55 33 37 38 38
15 54 54 60 80 41 42 42 41 44 46 48
51 51 54 54
48 48 59 59
45
39 50
60
10 40
17.5

15.6
14.8

40
14.3

13.8

30
13.7
13.4
13.4

12.9

12.6
12.3
12.0

11.7

67 63 62 62
11.0

59 58 58 59 56 54 52
10.0
9.9

5 20 49 46 46
20 41 41
10
0 0 0
Q3FY22

Q3FY23
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22

Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24

Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23

Q4FY23
Q1FY24
Source: PhillipCapital India Research, Company Data / Note: Monthly Source: PhillipCapital India Research, Company Data
disbursement only for last month of the quarter

Pay-outs for HLs are decided as per origination source… …while maintaining FOIRs and avg. customer salary
FOIR (%)
Payouts (bps)
LTV at origination (%)
Avg. customer salary (RHS, Rs mn)
100 90 Avg. ticket size (RHS, Rs mn)
80 6.0
80 4.9 5.0 5.0
4.5 5.0
4.2
60
60 50 4.0
45
40
40 3.0
40 71 70 70 70 70
59 59 59 59 59 2.0
20 20
1.0
1.2 1.2 1.3 1.3 1.3
0 0 0.0
Connectors Developers Mid-sized DSAs Large DSAs FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 79 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Increasing focus on loan against property (LAP)

BHFL offers LAP to SMEs, self-employed individuals and professionals against mortgage
of their residential and commercial properties. Its LAP business operates in 29 locations
across India with an average ticket size (ATS) of Rs 7.2mn. It is presently 11-12% of
BHFL’s balance sheet and is likely to increase to 14-15% in the near term. BHFL’s LTV
(loan to value ratio) is maximum for SORP (self-occupied residential property) at 60-
70%, while for commercial properties, it is c.65%. For lower credit profile customers, it
limits its LTV to c.55%.

Benign LTV at origination ensures margin of safety… …with increasing contribution from salaried customers
LTV at origination (%) Self-employed Non-Professionals(%)

60 55 55 Self-employed Professionals(%)
Salaried (%)
50 45 44 44
100
40
80
30 62 59 56 59 57
60
20
40 14 14
12 13 13
10 20
26 28 30 28 29
0 0
FY20 FY21 FY22 FY23 Q1FY24 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Majority of collateral is self-occupied residential property… …despite increasing proportion of open-sourced customers
Self-occupied residential property (%) Commercial property (%) Open market customer sourcing (%)

100 LAP Existing customert base sourcing (%)

27 29 29 100
31 31
80 20
29
80 41
53 56
60
60
40
73 71 71 69 69 40 80
71
59
20 20 47 44

0 0
FY20 FY21 FY22 FY23 Q1FY24 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

NBFCs’ LAP portfolio grew sharply in FY21, but they are now more conservative
As per CRISIL, the total LAP portfolio of NBFCs is estimated to have been at Rs 2.6tn in
FY23. In FY21, it saw higher growth than non-LAP (secured non-LAP and unsecured) as
NBFCs preferred mortgage-based lending over cash-flow-based lending in the short
run, given the potential risks in other segments. NBFCs are unlikely to be as aggressive
as they were in the past (12% CAGR between FY17-20) when they were driven by lower
interest rates and desire for higher penetration. However, after FY19, NBFCs lost share
in LAP, as they focused on containing asset-quality deterioration.

Banks registered strong growth in LAP due to their aggressive strategies, higher market
penetration, lower cost of funds, and adequate liquidity support. CRISIL expects LAP
segment to grow 9-11% in FY24, driven by improving economic conditions and
normalisation of business activities.

Page | 80 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Per CRISIL NBFCs’ LAP book… …should inch up to Rs 3.1tn in FY24

LAP outstanding for NBFCs (Rs tn) Share of NBFCs in LAP (%) NBFC (YoY %, RHS)

3.5 60 25
3.1 21
3 2.7 2.6 50
2.4 2.5 20
2.4 16
2.5
2.1 40
2 12 15
30 10
1.5 10
7
20
1 4
3 5
0.5 10
52 51 49 48 45 45 44
0 0 0
FY18 FY19 FY20 FY21 FY22 FY23 FY24E FY18 FY19 FY20 FY21 FY22 FY23 FY24E

Source: PhillipCapital India Research, CRISIL Source: PhillipCapital India Research, CRISIL

Rural mortgage loans offer geographic diversification

BHFL offers home loans and loans against property to salaried and self-employed
customers across 109 small towns in India. It aims to expand its geographic presence
in tier-3 locations. Rural mortgages business operates at an ATS of c.Rs 1.7mn and helps
BHFL widen its geographic reach and reduce portfolio concentration risk.

Expanding reach via hub-and-spoke model… …but keeping LTV in check

Hub locations Spoke locations HL LTV (%) LAP LTV (%)

250 70 63 63 62 61
58
193 193 60
200
50 43 44 43
140 42 40
150 40

100 30
78
109 109 109
73 20
50
50 50 10

0 0
FY20 FY21 FY22 FY23 Q1FY24 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Increasing proportion of HLs… …is contributing to growth in AUMs

HL (%) LAP (%) AUM (Rs bn) Avg. ticket size (Rs mn, RHS)

100 30 1.8 1.8 2.0

1.7 1.7
36 34 25 1.5
80 42
52 52 1.5
20
60
15 1.0
40
64 66 10
58
48 48 0.5
20 5
16 20 23 26 27.43
0 0 0.0
FY20 FY21 FY22 FY23 Q1FY24 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 81 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

LRD (lease rental discounting) and CF (construction finance) remain growth vectors
India's major cities like Bangalore,
BHFL focuses on relationships with top developers, HNIs for LRD
Delhi-NCR, and Hyderabad will see
BHFL focuses on high net worth individuals (HNIs) and developers for their lease rental
strong demand for office space and
discounting needs with loan amounts of up to c.Rs 6bn, which entails financing against BFSI, e-commerce, and life sciences, and
lease-rental cash flows of commercial properties occupied by prominent lessees under flexible space operators will drive
a long-term lease contract. The LRD segment will grow, as it is cash-flow backed and sustained leasing activity
has an escrow attachment. BHFL has managed to build relationships with all top
developers in the last four years, which will lead to growth.

Establishment of global capability centres will boost corporate leasing

India is likely to remain an attractive cost-effective destination, leading to strong office
space demand in Bangalore, Delhi-NCR, and Hyderabad. Sustained leasing activity is
expected in Chennai, Mumbai Metropolitan Region (MMR), Pune, and Kolkata driven
by BFSI, e-commerce, life sciences, and flexible space operators. Select tier-2 markets
would continue to attract attention from corporates that prefer to locate closer to their
talent pools. Sustained technology spending by corporates and increasing digitization
of business operations would also drive corporate leasing activity in FY24-25. 500+
global capability centres (GCCs) are likely to be set up in India across sectors by FY26,
which will sum up to 2,000+ GCCs by FY26. During the same period, the GCC market
size is likely to increase to Rs 5.6tn from Rs 2.9tn. A steady supply of c.52mn sq. ft.
should be delivered during CY23, and should increase in FY24-25 by c.3% each.
Bangalore, Delhi-NCR, and Hyderabad should dominate completions, followed by
Chennai, MMR, Pune, and Kolkata. With demand outstripping supply, vacancy rates
are likely to be range-bound in CY23, leading to a strong LRD market in FY23-26.

Absorption has outstripped demand in FY19-22… …leading to low vacancy rates and strong LRD off-take
Supply (mn. sq. ft.) Gross absorption (mn. sq. ft.) AUM (Rs bn) Avg. ticket size (Rs mn, RHS)

70 65 100 840 900

57 800
60 54
50 51 700
75
50
42 41 510 600
40 35 400 500
50
320 400
30
225 300
20 25 200
10 100
29 48 68 113 135
0 0 0
FY19 FY20 FY21 FY22 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, CBRE

Provides construction finance (CF) to stable small and mid-sized developers

BHFL offers cash-flow financing to small- and mid-sized developers with strong track
records of timely delivery of projects and loan repayments. Here, the average loan
value is Rs 300mn. It is present in 13 locations across the country in this segment
(excluding Delhi-NCR). Developer relationships enable BHFL to acquire retail customers
for home loans and it offers inventory finance to developers against their unsold
completed construction inventory. It secures repayments for these loans through
escrow arrangements. Earlier, BHFL did not go beyond Rs 1bn, but now it has – on 2-3
projects. All its CF loans are at a project-level. There are no group exposures and there
are it does not give loans to holding companies.

BHFL selects developers based on specific criteria – should have built minimum 0.8-
1.0mn sq. ft. in the preceding 7-10 years, should not have 4+ live projects, should have
low leverage, and significant market share in a micro-market. BHFL has centralized
underwriting, and disburses loans only after RERA and building approvals.

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 BAJAJ FINANCE COMPANY UPDATE

Disbursements are deferred on the basis of construction stages and sales milestones.
Interest servicing is mandatory on a monthly basis with no moratorium.

BHFL is focused on building a granular CF book and focuses on house prices being less
than Rs 10mn in cities other than MMR and less than Rs 15mn in MMR. It does not
finance land acquisitions. The focus is to convert CF exposure to retail low-risk home
loan and LRD exposures.

Developer relationships have risen… …leading to uptick in average ticket size and AUM
Active developers AUM (Rs bn) Avg. ticket size (Rs mn, RHS)
330
600 70 350
504 300
60 275 300
500 250 250
50 250
400
307 40 200
269
300
222
184 30 150
200
20 100
100 10 50
18 21 31 60 65
0 0 0
FY20 FY21 FY22 FY23 Q1FY24 FY20 FY21 FY22 FY23 Q1FY24

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Lower limits to c.85% of developers… …acts as a natural hedge to keep CF book granular
Rs 200-500mn limit developers >Rs 500mn limit developers NBFC credit to developers (Rs bn)
Banks credit to developers (Rs bn)

3,500
15
3,000
1,350 1,010 810
2,500 1,251
958
2,000 560
1,500
2,298 2,360
1,000 1,776 1,856 1,858 2,023
85 500
0
FY16 FY17 FY18 FY19 FY20 FY21

Source: PhillipCapital India Research, Company Data, RBI Source: PhillipCapital India Research, RBI

Focused on judicious developer-financing model for strong portfolio performance

Going forward, BHFL plans to deepen relationships with existing developers, expand
reach to new developers with a granular exposure strategy, increase its developer-
financing offerings to new geographies, and create presence with large developers.

In the commercial real-estate portfolio, BHFL continues to expand its product suite by
adding new product variants such as commercial construction finance, lease rental
discounting for build to suit warehousing, and lease rental discounting for industrial
properties. Separate underwriting structures for
salaried and self-employed loans,
special underwriting for commercial
Prudent risk management to ensure balance between risk and return loans, and a separate debt-
HL and LAP loans have separate dedicated underwriting structures for salaried and self- management structure for retail loans
employed loans. For salaried loans, it follows a hub model, while it underwrites self- leads to efficient loan processing and
employed loans across all locations – to address business and collateral-related resolution of legal cases
nuances. It conducts telephone personal discussion (Tele-PD) for all salaried loans
while a physical PD with the underwriter is mandatory for all self-employed loans. It

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 BAJAJ FINANCE COMPANY UPDATE

performs legal and technical evaluation of collateral through its in-house collateral
team and empanelled vendors, as per regulatory norms. It has checkpoints / hind-
sighting processes over the life-cycle of a loan.

For LRD and CF loans, BHFL has a dedicated underwriting structure of subject-matter
experts with relevant domain experience. It uses industry best-practices and tools for
preparing a credit approval memo (CAM) for each commercial transaction. It has
centralized disbursal of all commercial transactions for better control.

The company has a dedicated debt-management structure for all retail loans – urban
and rural, which it performs through an in-house team (no external agencies), which is
backed by a strong legal structure focused on SARFAESI wherever needed. With this
dedicated team in place, it efficiently resolves legal cases at different stages.

LRD and CF businesses have… …strong risk-management practices

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Lowering borrowing costs will lead to margin expansion in the near-term

BHFL focuses on the low-risk segments across its portfolio; therefore, individual
BHFL’s priority is low-risk segments.
housing loans constitutes c.62%, and even within this, c.95% of AUM consists of loans
Majority of its portfolio consists of
given to salaried and self-employed professionals. LAP, LRD, and CF book are equally individual housing loans. Since cost of
granular and have natural hedges due to limits in ticket sizes and prudent risk- funds has decreased, its growth in
management, which helps in keeping their gross NPA and net NPA low. affluent micro-markets has increased

BHFL’s cost of funds has begun to structurally decrease over the last 5-6 quarters vs.
BAF’s because for a mortgage company the interest rate curve is lower than for an
NBFC. This benefit is coming through, now that BHFL has completed five full years of
operations. Rates are lower for BHFL in the bond and bank term loan markets, so, the
company is passing on benefit in order to acquire customers in select affluent micro-
markets. The sweet-spot for BHFL in home loans (size) remains Rs 5.0-7.5mn, but the
company wants to finance high-ticket loans in certain affluent pockets as well, which
will ensure that it can create a space for itself in an intensely competitive market.

BHFL’s ticket-size focus will stay on the Rs 3-10mn bracket, with strong CIBIL scores of
750+. When it moves to a larger scale, operating leverage benefits will kick in, as it is
focused on process efficiencies. With optimal borrowing mix of bank lines, money
market instruments, NHB refinance, and assignments (15-20% of borrowings) we
expect steady NIMs of 3.7-4.0% in FY23-26.

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 BAJAJ FINANCE COMPANY UPDATE

We expect RoA/RoE of 1.8%/13% in the medium term for BHFL BHFL’s aim is to become a top mortgage
BHFL aims to be among the top-4 mortgage originators in India in the medium term. It originator with a low-risk balance sheet
wants to create a low-risk sustainable balance sheet, delivering gross NPA (%) between that focuses on salaried home loans. It
0.6-0.8% with large focus on salaried HLs. It is focused on BAF’s 66mn customer base has received significant capital infusion,
for customer data enrichment to create the right propositions for cross-selling. There holds AAA ratings, and is targeting
was a capital infusion of Rs 25bn in FY23, taking the total capital infusion by its parent strong return ratios
to Rs 75bn. With strong parentage and a low risk model, it has been given AAA rating
by CRISIL and India ratings.

Operating leverage will be dependent on scale of CF, LAP, and its LRD exposure. Its core
focus will be on salaried home loans over the next 3-5 years. The CF book will be range-
bound at 8-10% of its total book. In three years, BHFL is likely to have a balance sheet
of more than Rs 1tn. Its opex growth in the next 3-4 years will be slightly higher than
its balance-sheet growth. With a guidance of GNPA of 0.6-0.8%, we expect credit cost
to remain benign in the near term; this along with its focus on building a low-risk
balance sheet will lead to RoA/RoE of 1.8%/13%.

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Building blocks for the medium term

The company has an ambition to be a leading payments and financial services company
in the medium term. The management has plans to launch: (1) New car finance, (2)
tractor finance, (3) micro finance, (4) LAP in SME finance, and (5) flexi loans on QR via
EDC. The management intent is to build all businesses organically. We believe there
remains enough space for BAF to enter the new business segments given its large
geographic reach, tested cross-selling franchise, and strong data analytics.
Additionally, it has diversified the risk on its balance sheet, created more product
offerings for its customers, and increased new customer-acquisition throughput.

Long-range strategy (LRS) ensures strong growth for the next five years
BAF holds an annual meeting for discussing its ‘long-range strategy’ (LRS) during 3Q. In
its FY23 LRS, the company came up with an annual ‘five-year rolling strategy’ and
updated the investors about it. Here are some of the key takeaways from this:
• Doing things differently now: Under LRS, the company’s ambition is to be a
leading payments and financial services company in the medium term. However,
to achieve this, it is adopting a new approach of engaging more via its web, app
and QR codes, which will start scaling up in near-term. For the last 13 years, BAF
used to acquire customers and cross-sell across all assets and liabilities to urban
consumers, small businesses, commercial lending customers and rural consumers
in India, across all consumer platforms.
• Taking a 10-year view long-term view on building any business helps anchor the The company has a philosophy to build
business strongly: The company has a philosophy to build any business with a ten- any business with a ten-year view and
year view and deliver RoEs of c.19-21% through the cycle, which it has done for deliver through-the-cycle RoEs of c.19-
21%. The management’s intent is to
the last 12-13 years, excluding covid years.
build all businesses organically
• The management intent is to build all businesses organically.
• Expects total systemic credit to grow to c.Rs 240tn in FY23-28 at a 12.5% CAGR.
• Entering new categories: BAF is not present in 28% of retail categories (auto, CVs
and agri) and plans to enter these markets with various product offerings such as
car, tractor, and microfinance loans.
• Megatrends: Discussed 15 megatrends, of which it believes ‘India stack’ and the
‘account aggregator framework’ will become game-changing moments for
financial services.
• Presently, c.500mn Indians are on social platforms – sees this as a potential e-
commerce opportunity.
• Believes that rewards and pre-owned products are thematically new tools at a
design level for leading companies in the retail business. Rewards have been
traditionally used as a tool for deeper consumer engagement for credit-card
customers. However, with its new web and app strategy, BAF will need rewards to
keep customers engaged and for repeat transactions. Pre-owned products were
once shunned for ownership, but with consumers coming of age, refurbished
products are increasingly becoming a preference. For e.g., owning an iPhone is a
status symbol in India, but everyone can’t afford a new iPhone. So, consumers will
buy refurbished iPhones for their aspiration. This nascent market requires a
financing solution where BAF can expand.
• In technology, augmented reality (AR) and vernacular voice are new vectors to
engage consumers in tier2+ cities as BAF gets deeper into India.

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BAF during its FY23 LRS… …ideated a five-year rolling plan

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

BAF aims to be an omnipresent financial service co… …by FY28

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

BAF: Already in top-8 profitable financial services cos… … and we believe it can be in the top-5 by FY28

HDFCB+
HDFC, 20.0
Rest of BFSI,
36.5
SBIN, 12.5

ICICIBC,
9.2
BAF, 2.5
BOB, 2.9
AXSB, 5.1 REC + PFC,
KMBB, 3.4 7.9
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Ace Equity / Data as of FY22

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 BAJAJ FINANCE COMPANY UPDATE

BAF plans to launch new products over the next one year

Source: PhillipCapital India Research, Company Data

Focused approach on new car loans will manifest market share gains for BAF
BAF already offers used-car finance and expects this book to touch c.Rs 80bn by the
BAF's has a strong foundation in used-
end of FY24, up substantially from c.Rs 28bn in FY23. As used-car financing starts to car finance, and it has the partnerships
turn profitable BAF has now ventured into new-car financing, which takes longer to and resources in place to succeed in the
turn profitable. BAF will launch its new car-loans business in 2QFY24. The management new-car market
already signed a financing contract with Maruti in 1Q; Maruti is the largest car OEM by
market share in India.

We believe there is enough space for BAF in the new-car-loan market given its large
geographic reach, tested cross-selling franchise, strong data analytics, and tie-up with
leading OEMs.

The new auto loans portfolio has grown c.18% in FY19-22… …keeping value market share largely similar in FY21-22
Portfolio Outstanding (Rs tn) Active Loans (RHS, mn) PSBs PVBs NBFCs Others

5 15.0 100 2 2
11.9 12.2
11.1 11.5 25
4 12.0 27
80

3 9.0 60
37 37
2 6.0 40

1 3.0 20 34 36
4.0 4.3 4.4 4.7
0 0.0 0
FY19 FY20 FY21 FY22 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark Source: PhillipCapital India Research, CRIF High Mark

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 BAJAJ FINANCE COMPANY UPDATE

New auto loans disbursement growth has been… …largely due to average ticket sizes rising c.31% in FY17-22
Originations Value (Rs tn) AverageTicket Size (Rs) YoY (RHS,%)
Originations Volume (RHS, mn) 700,000 17 20
2 5.0 600,000 13
15
3.5 3.5 3.6 4.0 500,000
1.5 10
3.0 3.1 5
2.8 400,000
3.0 5
1 1.9 2.0 300,000 0 -6
1.9 1.8
1.5 1.7 2.0 0
200,000

587,858
507,935

535,176

535,596

501,238

665,039
0.5
1.0 100,000 -5

0 0.0 0 -10
FY17 FY18 FY19 FY20 FY21 FY22 FY17 FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRIF High Mark Source: PhillipCapital India Research, CRIF High Mark

Re-entering LAP within SME business to take on competition

LAP is a secured with mostly self-occupied residential property as collateral. It is
typically an MSME product, as it is 100-250bps more expensive and time consuming
due to the need for taxation documentation.

Before BHFL split into a separate company, BAF used to offer LAP within its SME
business. As BAF intends to be a leading player in the MSME space, we believe that just
giving LAP loans via BHFL would not be sufficient, as that business is more B2B. As BAF
is in the process of increasing its SME business, the management decided that both
BHFL and BAF would have to offer LAP as a core SME product, given that most NBFCs
and small finance banks do this. As BAF offers business loans in 2,000+ cities in India,
re-entering the LAP business will give it a strong growth vector.

We believe tier-2+ cities’ LAP markets are priced differently from tier 1. Tier-2+ cities
have less migratory population. Hence, income and address verification are easier on
given government documents at tier-2+ cities than in tier-1 cities. Given that tier-2+
cities’ borrowers have lower access to credit vs. tier-1 city borrowers, their repayment
behaviour is better. Hence, we get better risk-adjusted pricing for tier-2+ cities than
tier-1 cities.

BAF is among the only two players in India that has sustainably been in SME financing
for the last 15 years – hence it understands the nuances of SME underwriting across
cycles. BAF has templatised several industries’ underwriting, which is quite unique in
SME underwriting – which is usually time consuming; it takes time to estimate cash
flows effectively.

As per bureau data, BAF on-boards c.22% of the total business loans booked in India, As BAF intends to be a leading player in
which are mostly to small businesses or professionals. However, the MSME sector’s the MSME space, we believe that just
market size in terms of loans is Rs 23.5tn, of which business loans is just c.4%. Hence, doing LAP in BHFL will not be sufficient,
to become a sizeable player in SME loans, it is pertinent to re-enter LAP loans which as that business is more B2B
have higher ticket size than business loans.

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 BAJAJ FINANCE COMPANY UPDATE

Secured MSME loan market size has grown c. 2x in FY18-22… …with increasing focus on Rs 0.5-10mn ticket sizes
Market size (Rs tn) Rs <0.5 mn Rs 0.5 mn - 3 mn Rs 3 mn - 5 mn
7.5 6.9
Rs 5 mn - 10 mn Rs >10 mn
100%
5.8 6.0
51 50 46 45 42
80%
5.0 4.6
3.8
60%
13 31
13
13 13
2.5 40%
10 10
9 10 10

20% 26 27
23 24 29

0.0 0% 3 4 5 5 5
FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22

Source: PhillipCapital India Research, CRISIL Source: PhillipCapital India Research, CRISIL

Microfinance and tractor finance – new product offerings

• MFI is a significant opportunity: With data analytics, management has discovered BAF wants to create a separate
that out of a set of loans that BAF offers on a monthly basis in personal loans cross- microfinance business which will have
sell (PLCS), c.4% qualify as MFI loans. After looking at the repayment performance, its own CEO/profit head and will be
management has concluded that there is merit in pursuing this business. In the driven like an MFI organisation within
BAF structure initially for first 3-5 years.
past, whenever BAF has launched a business, it has become materially significant
to the balance sheet and P&L in 4-5-years.
• Separate microfinance business: BAF wants to create a separate microfinance
business which will have its own CEO/business head and will be driven like an MFI
organisation, initially within the BAF structure for 3-5 years, with a 5-7-year view
to build out the business in a staggered manner.
• Rural market expertise: BAF understands the rural market having built the rural
business from scratch and having conducted plenty of businesses within the rural
framework. Given how deep BAF has gone into India – with c.2,350 rural branches
– microfinance (MFI) is a business that BAF plans to launch in 4QFY24 and tractor
finance in 1QFY25.
• Tractors: The management has found there are c.600,000 BAF customers with
active tractor loans. Growth of the tractor industry will come from low levels of
tractor penetration in India, the government’s strong focus making available
finance for agricultural mechanization, rural development, and high irrigation
potential. Increased usage in non-agricultural domains such as haulage in
construction and infrastructure projects will also increase tractor demand.
• Market share and expansion: We expect BAF to have c.1% market share by FY26
in the MFI industry, though it will take longer to be a meaningful player in tractor
finance space. Incremental MFI and tractor finance will lead to the following –
build a high-yielding book in the medium term, diversifies the book, and adds to
the new customer acquisition pool. BAF’s MFI plan is to start with two states –
Uttar Pradesh (UP) and Tamil Nadu (TN) over four years, and then spread out to
ten states in India. BAF operates out of c.3,750 locations with a total population of
c.1.1bn which covers c.98.5% of the credit bureau footprint in India. This means
there are c.300mn people left, which BAF plans to cover by FY24 by expanding to
c.4,200 branches – which will cover 99.5% of India’s credit bureau footprint.
• Impact on PSL: Presently, priority sector lending (PSL) portfolio is c.15% of BAF’s
book. As and how it builds MFI and tractor finance the PSL book shall increase and
likely to be compliant with banks’ PSL criteria of 18% of book towards agriculture
and 12% towards weaker sections.

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BAF to have c.1% market share in MFI by FY26 end NBFCs have had c.55% market share in tractor financing –
which was a Rs 1.2tn market in FY23
MFI GLP (Rs bn) NBFC tractor finance loan book growth (%)

7,000 16 15
5,878
6,000 14
4,898 12
5,000 10
4,164
10
4,000 3,376
2,865 8
3,000 6
6
2,000 3
4
1,000 2
0 0
FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E

Source: PhillipCapital India Research, CRIF High Mark Source: PhillipCapital India Research, CRISIL

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 BAJAJ FINANCE COMPANY UPDATE

Preferential debt pricing to manifest stable spreads

For BAF, stable credit rating, positive asset-liability mismatch (ALM) in the less than
one-year bucket and a favourable borrowing mix have helped cut borrowing cost by
c.160bps over FY20-23. This in turn has kept spreads stable at 9.0-9.5% in the same
period. The rural-financing foray also augurs well for margins as yields are 100-150bps
higher than those in urban branches. We expect spreads to remain at c.8.7% levels
during FY24-26, backed by benign debt-market pricing of BAF’s papers and the
company’s ability to increase its deposits profile. The HDFC-HDFCB merger is likely to
provide disproportionate tailwinds to BAF’s liabilities in terms of pricing.

BAF has been saved from event risks due to stringent ALM monitoring

Stringent ALM policy helped BAF sail through the IL&FS crisis
After the IL&FS crisis of September 2018, most NBFCs maintained a high level of liquid
assets to ensure meeting a minimum of two months of maturities. BAF’s conservative FY19-20 were difficult for NBFCs and
policy of ensuring minimal mismatches in any of the time buckets in its structural HFCs due to tight systemic liquidity.
liquidity statement reasonably insulated it from the industry-wide liquidity crunch. The
company monitors asset-liability management (ALM) on an ongoing basis to mitigate BAF’s was reasonably insulated from
liquidity risk. It also manages any interest-rate risks that could arise due to mismatches the industry-wide liquidity crunch by its
conservative policy of ensuring minimal
of assets and liabilities maturities by regularly monitoring maturity profiles.
mismatches in any of its time buckets in
its structural-liquidity statement.
One of the few NBFCs that has been able to keep NCD issuances going
A testament to BAF’s stringent ALM monitoring – we see no noticeable change in its
ALM up to the one-year bucket. In the aftermath of the crisis, most NBFCs altered their
long-term borrowing profile, moving away from market borrowings such as non-
convertible debentures (NCDs, witnessing a liquidity crunch) to bank borrowings.
However, BAF kept on its normal course of NCD issuances – issuing 8 NCDs in CY20 of
2-3-years tenor with an average coupon of c.5.9%, which was c.120bps higher than the
CY20 average two-year GSec yield, indicating the strength of the franchise. It was also
successful in garnering higher volumes of bank term loans at competitive rates and
could thereby maintain a healthy ALM position throughout the crisis period.

Has enough cash balance for ALM

BAF’s cash balance aggregated Rs 43bn (1.6% of assets) as of FY23. We believe this is
adequate for ALM, with no major negative cumulative mismatches across all time
buckets. BAF has incrementally replaced its debt mix with fixed-rate instruments,
taking advantage of the falling rate environment and its stable credit rating profile over
FY20-23. Cost of borrowings has declined c.160bps over FY20-23. With an incremental
focus on financing high-yield, high-churn digital and lifestyle products, the back-book
repricing has been faster than liability repricing – which has manifested in stable-to-
improving spreads over FY20-23, ranging from 9.0-9.5%.

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 BAJAJ FINANCE COMPANY UPDATE

Well matched in less than one-year bucket through FY15-23 Optimum borrowing mix due to prudent treasury operations
(excl. FY21)
Total Assets (%) Total Liabilities (%) Banks Deposits NCDs Sub. debt CPs Others

70 66 100 1 1 2 0
5 4 9 6 10 7 8 8 8
90 13 4 3 2
7 6 4 4 6 5 6
60 3 4 3 2
49 80
46 46 48 47 48 33
50 43 44 70 25 38
42 42 36 38 34
39 40 45 36 42
40 35 60 1
32 33 34 4
32 30 50 6
30 40 13 20
8 12 27
30 25
20 58 54 24
48
20 35 37
10 30 30 23
10 21 18
0 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Despite maintaining lowest liquidity buffer among peers… …BAF gets preferential pricing of debt
NCDs avg. interest rate
Cash (Rs bn) % of assets (RHS) CPs avg. interest rate
Bank loans avg. interest rate
200 10.0 10
8.9 8.6 8.6
7.8 8.2
8.0 8.7
150 8 8.5
7.9 7.8 7.0 7.0 7.1
6.0 7.6 7.6 7.0
7.4 7.4
100 7.0 6.1
6
6.5
2.9 4.0
2.6 2.6
50 1.6 4
2.0 4.5
4.1
158.2 28.3 29.6 10.7 43.0
0 0.0 2
SHFL MMFS CIFC SUF BAF FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data / Data as of FY23 Source: PhillipCapital India Research, Company Data

We estimate c.Rs 200bn of bonds retiring in FY24-25… …whose incremental interest cost will Rs c.Rs 1.5bn
Bonds retiring (Rs bn) Incremental interest cost (RHS, Rs bn) Replacement interest cost (Rs bn) % of interest cost (RHS)

125 1.5 10 5.0

1.2
100 1.2 8 4.0
105.4
3.4
75 87.8 0.9 6 3.0 3.0

50 0.4 0.6 4 2.0

25 0.3 2 1.0
6.2 7.4
0 0.0 0 0.0
FY24 FY25 FY24 FY25

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

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Deposits franchise has sharp focus, with strong tailwinds

• Deposits used to account for 1% of the company’s borrowings in FY14 and
gradually increased to 12% of borrowings by FY18. The IL&FS crisis in September Retail deposits are sourced across
2018 had put a strain on cash flows of NBFCs, which prompted BAF to increase the 1,000+ location through 12 channels
pace of its deposits franchise. As of FY23, deposits formed 27% of BAF’s (both D2C & B2B) and increasing
borrowings. distribution reach will help scale
• BAF wants to diversify its liabilities and make them a sticky and granular source of volumes.
fund raising. For achieving this, deposits are a vital factor. The company wants to
strategically reduce its dependence on banking lines and debt markets for growing
its balance sheet.
• The company focuses on retail and corporate deposits as a part of its growth
strategy, and it is simultaneously increasing its focus on digital origination of retail
deposits. With the launch of the Bajaj Finserv app in FY23, its focus is now on
scaling up deposits through digital platforms. It will do this with the five new
‘customer journeys’ that it will gradually release on its app from February 2023.
Notably, 45% of the deposits it sourced in FY23 were paperless. BAF’s attractive
schemes and seamless processes should enable it to garner a decent share of
incremental deposits.
• The company is accelerating deposits with retail deposit originations at c.Rs 17.5bn
on a monthly basis, locking in the rate for c.33 months maturity at 7.1%.
• It sources retail deposits across 1,000+ location through 12 channels (both D2C
and B2B) and its increasing distribution reach will help scale up volumes.
• The management believes that the HDFC-HDFC Bank merger will lead to attrition
of deposits towards other NBFCs as HDFC’s deposits are priced higher by 50-70bps
than banks, and banks can’t give differential pricing to fixed-deposit holders. 45% of the deposits sourced during FY23
Within NBFCs, BAF could benefit disproportionately because of three factors – (1) were paperless. Retail deposits now
HDFC’s deposits are mostly driven by brokers, (2) investors like higher rates than contribute to 63% of total deposits
bank FD rates, and (3) BAF deposits are a trusted franchise.
• With the withdrawal of long-term capital gains tax on mutual funds (MFs), with
effect from April 2023, fixed deposits (FDs) would become an attractive alternative
for investors as tax-adjusted FDs will offer higher rates than debt MFs.
• Along with increasing retail deposits, it is also increasing its focus on strengthening
cross-selling and third-party products distribution to raise its fee income.

BAF has increasing proportion of granular deposits … … like its NBFC peers
Deposits (Rs bn) % of borrowings (RHS) BAF SHFL SUF MMFS

500 27 30 30
25
450 24
455 25 25 27
400 20 25
350 24
20 20 23
300 20
314 19
250 13 15 15
12
263 15 151416 1515 15
200 8 13 1313
221 10 10 12 121211
150 6 1011
100 4 5 8 7
132 5
50 1
2 10 22 41 78
0 0 0
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Page | 94 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Deposits’ effective annualised pricing is competitive at both …and 36-months tenors vs. peers
12-months…
Dec-22 Jul-23 Dec-22 Jul-23
10
8

7.45 7.60 8.72

7.40 7.40
7.05 7.15 7.00 7.5
7.75 8.05 8.25
6 6.75 7.50 7.35 7.50
7.30

5
4

2 2.5

0 0
BAF MMFS SUF SHFL BAF SUF SHFL MMFS

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

c.63% of deposits are retail… …with an average ticket size of c.Rs 300,000
Retail (%) Corporate (%) Amount (Rs bn) Average tickets size (RHS, Rs)
375,000
100 6 400,000
333,333
27 350,000
31 37 5
39
75 300,000
4
208,333 250,000

50 3 200,000

73 150,000
69 2
61 63
25 100,000
1
50,000
5.0 5.0 1.5
0 0 0
FY20 FY21 FY22 FY23 ICICIDirect ET Money IND Money

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

BAF has had low spreads over GSec and TBill yields since January 2016
BAF has been able to issue commercial papers (CPs) more successfully since the IL&FS
crisis vs. other NBFC peers and at an attractive pricing. The spreads over 3-month
tenures of T-bill yields are at c.60bps. This helps the company lend at better rates than
it does in consumer-durables financing and allows it to offer benign rates to existing
customers returning for personal loans and home loans.

Page | 95 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Since Jan-16 BAF has raised c.50% of its NCDs in 2-3-years …with an average spread of c.120bps over two-year GSec
tenors… yield
Amount (Rs bn) Average yield (RHS, %) 2-year GSec yield 5-year GSec yield

600 10.0 10-year GSec yield

8.1 7.9 300
500 7.7
250
7.5
200
400
150
300 5.0 100
50
478
200 0
2.5 -50
245 217 -100
100
-150

Jan/16

Jan/17

Jan/18

Jan/19

Jan/20

Jan/21

Jan/22

Jan/23
Jul/16

Jul/17

Jul/18

Jul/19

Jul/20

Jul/21

Jul/22

Jul/23
0 0.0
2-3-Years 5-Years 10-Years

Source: PhillipCapital India Research, Company Data, Bloomberg Source: PhillipCapital India Research, Company Data, Bloomberg / Data shows
spread

Since Jan-16 BAF has raised c.50% of its CPs in <90 days …with an average spread of c.60bps over three-month T-Bill
tenor… rate
<90 Days 90-270 Days >270 Days 3m T-Bill rate

100 250
8
18 200
75 150
46
43 100

50 50
0

25 -50
47
39
-100
Jun-16
Nov-16

Dec-18

Jun-21
Nov-21
Jul-18

Oct-19
Apr-17
Sep-17
Feb-18

Apr-22
Sep-22
Feb-23
Mar-20
May-19

Aug-20
Jan-16

Jan-21
0
CPs Issued Value

Source: PhillipCapital India Research, Company Data, FBIL Source: PhillipCapital India Research, Company Data, FBIL / Data shows spread

Expect stable spreads over FY24-26 at c.8.7% levels

We expect BAF to benefit disproportionately with HDFC merging with HDFCB as a c.Rs
800bn of NCD supply market opens up. Similarly, bank term loans, CPs, and deposits
will also benefit – with favourable rates over the next three years with the HDFC-HDFCB
merger.

Page | 96 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

We expect cost of borrowings at c.7.3% over FY24-26… …leading to c.8.7% spreads during the same period
Cost of borrowings (%) Spreads (%)

12 10 9.7
9.5
9.6 9.7 9.2 9.3
10 8.7 9.5
7.9 7.9 8.2 9.0
8.9
8 7.2 7.2 7.4 7.4 9 8.7 8.7 8.8 8.8
6.6 6.6 8.6 8.6
8.4
6 8.5 8.3

4 8

2 7.5

0 7
FY15

FY24E

FY25E

FY26E
FY14

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 97 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Granular fee income to offset c.50% of opex

BAF’s fee income has 4 major components – (1) service charges, (2) value-added
services fees, (3) foreclosure income, and (4) distribution income. It has grown c.12x
during FY16-23 to Rs 43.4bn, of which distribution income is the largest at Rs 19.2bn.
Fee income is evenly distributed across 17-18-line items and has equal split between
distribution and loan-related fees. We expect fee income CAGR at 35% during FY23-26
to touch Rs 1.06tn, which will largely offset c.50% of operating expense through the
same period. This implies that a large portion of NII will directly flow into operating
profit, leading to operating leverage during the same period.

Cross-selling franchise to drive fee income

BAF has a successful cross-selling franchise that increases customer engagement,
drives high-velocity, small-ticket lending, and generates granular fee income. Over
FY16-23, the company has seen a five-fold rise in cross-sell customer pool to c.41mn,
aiding c.12x fee income growth over this period.

Despite a rising cross-selling franchise, BAF hasn’t lowered …which has led to a sustainable cross-selling ratio
approval rates…
Cross-sell customers (m) Cross-sell customers % of customer franchise
Approval rates on credit segment (RHS, %) Cross-sell ratio (%)
72.5 75.5 75.6
50 69.3 71.9 69.7 67.8
71.6 80.0 80 68.4
61.3 62.0 70.0 70 61.7
40 56.8 56.0 55.1
44.3

60.0 60 47.7 49.7

40.4 40.6 44.1
30 50.0 50
40.6
32.8

40.0 40
26.9

20 30.0 30
24.1
20.7

20.0 20
10
15.4

52.8
11.0

48.5

54.6

58.8

59.9

56.6

55.4

56.9

58.7

60.7
6.3

8.5

10.0 10
0 0.0 0
1QFY24

1QFY24
FY16
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY15

FY17

FY18

FY19

FY20

FY21

FY22

FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Fee-income-to-PBT ratio to increase

Opex needed to sell to existing customers is negligible and credit loss is one-third that
of new customers. Thus, management expects fee-income-to-PBT ratio to increase to
38-40% in the near term from 35% at present. This non-linear growth will largely cover
operating costs, allowing a large proportion of NIIs to flow into operating profit.

Fee income is evenly distributed Existing customer contribution is c.2/3rd of loan volume
growth
Existing customer contribution to new loans (%)
80
67 68
70 63 65
62 59 61
59
60 54 54
Loan related 50
fees
45% 40
Distribution
fees 30
55% 20
10
0
1QFY24
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 98 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Loan losses on existing customers is lower… …leading to higher pool of non-delinquent customers
Loan loss ratio vs. new customer Non delinquent customers (%)
80
0.35 0.33 67 67 67 67
66 67 66
70 63
57 59
0.30 60
0.25 50

0.20 40
0.15 30
0.15
20
0.10
10
0.05 0

1QFY24
FY17
FY15

FY16

FY18

FY19

FY20

FY21

FY22

FY23
0.00
< 18 months on board > 18 months on board
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Factors that will drive an increase in granular fee income

As the new app and web interface picks up scale, products and services will transition
from push to pull. This means they will have low-value, and higher velocity fee-
generation capability that will be ‘stimulated’ by banners, notification infrastructure,
and digital marketing infrastructure. With higher engagement to meet the latent needs
of consumers, granular fee income will increase.

Core fee income growth exceeded NII growth… …leading to higher profit pool accrual from fees
NII growth (%) Core fee income growth (%) Fee income to PBT (%)

42.2
120 108 45
100 38.4
36.0

35.6

35.6
35.4
40
33.3
32.9

80
60 35
29.9

55 54
28.4

60 44 43
27.2
42
26.4

35 35 35 30
40 25
42 40 39
20 37 35 25
28 31 31 30
-5 26 22
0 20
3
-20
15
FY24E

FY25E

FY26E
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY22
FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 99 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

This has led to sustained growth in AUM per cross-sell …and doubling of profit per cross-sell customer during FY15-
customer… 23
AUM per cross-sell franchise (Rs) YoY (RHS, %) PAT per cross-sell franchise (Rs) YoY (RHS, %)
9.1
70,000 10.0 3,000 40.0
30.4 32.3
60,000 5.9 8.0
2,500 30.0
5.0 4.6 19.1
6.0
50,000 13.1 20.0
4.0 2,000 10.9
1.2 4.8
40,000 0.5 2.0 10.0
1,500 -2.9
30,000 -2.2 0.0 0.0
-6.9 -24.8
-2.0 1,000
20,000 -10.0
-4.0
51,856

52,095

54,724

53,521

55,985

61,059

60,199

60,931
56,858

500

1,437

1,506

1,670

1,621

1,931

2,184

2,143

2,834
10,000 -20.0

1,643
-6.0
0 -8.0 0 -30.0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Co-branded credit cards – large source of fee income

Regulations do not permit BAF to offer credit cards as it is an NBFC, so it offers co-
branded cards with RBL Bank and DBS Bank to its existing customers. Of these, RBL
Bank is an older relationship at 4+ years while DBS is relatively new at over a year.
However, the relationships run deep and BAF is building partnerships for the long-
term.

The RBL-BAF book is mature now and the breakeven of their card takes 15-18 months.
RBL Bank is a deeper partnership, where pay-out is not necessarily only on origination,
but also how the card performs in terms of spends, activity, performance, etc. We
estimate this portfolio makes 4.0-4.5% steady-state RoA with c.Rs 6.5bn in annual
distribution income coming from RBL Bank, of which Rs 3.5bn is from sourcing, Rs 1.2bn
from spends and the rest Rs 1.7bn from the performance of cards. Performance of
cards will be based on reducing the collection costs per card from NIM.

The company has a run-rate of c.120,000 new-card acquisitions per month with RBL
Bank and c.30,000 with DBS Bank. RBL-BAF credit cards are offered across 600+
locations in India and the number of cards-in-force as of 1QFY24 were c.3.7mn. The co-
branded credit card with DBS Bank is offered across 80+ locations in India. The number
of cards-in-force (CIF) were at c.0.2mn as of FY23.

BAF’s own credit card business should reduce dependence on partnerships RBL Bank plans to de-risk itself from BAF
The management has confirmed that BAF has applied for a credit-card license and is credit card originations over the next
waiting for regulatory approval. RBL Bank plans to de-risk itself from BAF credit card 12-18 months
originations over the next 12-18 months (based on our discussions with RBL’s
management) as these form c.75% of RBL’s monthly credit card originations. Our
calculations suggest that if BAF were to receive a regulatory nod for a credit card
license, then, its own credit card business, RBL Bank’s co-brand credit cards, and DBS
Bank’s co-brand credit cards could lead to 500,000 originations per month over the
next 4-5 years. The three credit cards businesses could contribute to c.Rs 23-25bn after
scaling up, which could become a significant profit pool in the medium term.

Page | 100 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

BAF occupies 55%+ share in spends and receivables… …driven by higher share in sourcing and outstanding cards
RBL bank sourcing (%) BAF sourcing (%) RBL bank (%) BAF (%)

100 100

75 55 75
60
67
80
50 50

25 45 25
40
33
20
0 0
Spends Receivables CIF (%) Sourcing

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

We estimate BAF generates Rs 6.5bn of distribution income …as BAF contributes more towards revolvers
from RBL bank credit card relationship…
Sourcing (%) Spends (%) Performance (%) RBL bank BAF

20,000 18,000

26 15,000

10,000 9,000

55

18 5,000

0
Average spend per card (Rs)

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Partnerships provide granularity to distribution income

BAF offers a variety of products to its customers in partnership with various financial
service providers – which includes life insurance, health insurance, extended warranty,
comprehensive asset care, and financial fitness reports. BAF is registered with the
Insurance Regulatory and Development Authority of India (IRDAI) as a corporate agent
for distribution of life, health, and general insurance products across nine insurance
partners. IRDAI has recently amended the corporate agency guidelines to enable
corporate agents to work with more insurers and thereby offer greater product
solutions and options to customers. BAF distributes comprehensive asset care product
to its consumer durables finance customers, providing extended warranties, theft
cover, breakage cover, replacement cover, etc. These partnerships and products have
enabled the company to provide value-added services to its customers and make its
fee-based income more granular.

EMI cards – tool for repeat customer purchase

• BAF started offering existing member identification (EMI) cards ranging from Rs Active EMI card volumes grew c.13x
5,000 to Rs 80,000 for a variety of purchases to vetted customers in FY11. The during FY15-1QFY24
company finances its existing EMI card customers for their purchases through e-
commerce platforms.
• Active EMI card volumes grew c.13x during FY15-1QFY24.

Page | 101 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

• In FY18, the company extended its loan offerings in the healthcare segment to
both elective and non-elective procedures, following this up with the recent
launch of a healthcare EMI card.
• BAF’s Retail EMI (REMI) cards are the original buy-now-pay-later (BNPL) products.
The retail spends financing business offers easy instalment options to customers
for small-ticket purchases such as fashion, eyewear, cycles, tyres, car accessories,
vehicle servicing, power back-up, and small appliances. The company now focuses
on higher ticket spends, which are economically more viable.
• It has EMI options for coaching classes, for dentistry, for smaller appliances, for
low-speed bikes in the smaller cities etc.
• It has a tyre and ancillary product ecosystems with tie-ups from Bridgestone and
Michelin.
• The loan tenures are short, normally 4-6 months, so BAF will keep growing
categories to have deeper customer engagement. However, since FY21, ticket size
has increased to Rs 14,000 to 15,000 – as loss-rates can be catered with high ticket
sizes. Hence, this makes good economic sense.

EMI cards grew c.13x during FY15-1QFY24… …led by multiple use cases
EMI cards (mn) YoY (RHS, %)

50 90 87 100
82
40
62 75
30
45
40 50
20 26 27
23 8
18 25
10
22.0
12.9

18.7

30.0

42.0

41.6
23.8
3.1
1.0

1.9

5.6

6.9

0 0
1QFY24
FY15

FY20
FY13

FY14

FY16

FY17

FY18

FY19

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Retail spends is re-tracing its growth path… …after a change in strategy

Retail spends purchases (mn) % of loans EMI - Retail spends store
2.5 9.0
25000 Retail spends per store (RHS) 120
7.7
7.1 8.0
2 94
7.0 88 100
20000
6.0
1.5 4.7 80
5.0 15000 59
4.0 60
1 2.7 2.8 10000 37
3.0 35
2.0 40
24
0.5 2.0
5000
12,100

19,100

22,200

14,300

18,800

22,200

20
5,600

1.0
0.7 1.8 2.0 0.3 0.7 0.8
0 0.0 0 0
FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 102 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Lifestyle finance loans have been making… …a steady comeback post-covid

Lifestyle finance stores
Lifestyle finance loans (mn) % of loans
Lifestyle finance loans per store (RHS)
0.7 2.3 2.5 15,000 75
2.2 62
2.1 2.0 2.0 61
0.6 1.9 12,500 57
2.0 53 60
1.7 48
0.5
10,000 42
1.5 45
0.4
7,500 29
0.3 1.0 30
5,000
0.2
0.5 15

11,000

13,200
2,500

3,900

6,000

7,700

9,500

9,800
0.1
0.2 0.3 0.5 0.5 0.3 0.5 0.6
0 0.0 0 0
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Consumer durable (CD) loans now form c.50% of total …with per-store productivity reducing due to geographic
loans… inclusion of low-productivity stores
CD financing contracts (mn) Consumer durable + digital product stores
16 % of total loans (RHS, %) 100 CD loans per store (RHS)
YoY (RHS, %) 120,000 354 400
14 80
89 350
100,000 296
12 77
60 250 300
65 80,000
10 221 250
54 53 51 40 191
49
8 60,000 200
20 141 142
6 120 150
40,000
0 100

103,950
4
17,800

25,400

39,600

57,400

70,200

74,200

89,900
20,000
-20 50
2
5.3 9.0 9.9 12.7 13.4 8.9 12.7 0 0
0 -40 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

We estimate c.40% of EMI cards are active… …and c.7-8% are used on e-commerce platforms
EMI card txn (mn) Active EMI cards (RHS, %) EMI card txn on e-commerce platforms (mn)
20 75 Persistency ratio (RHS, %)
61 62 % of EMI card txn (RHS)
3 25.0
16 52 60
18.8 19.5 19.1
2.5 18.3 17.5 20.0
44
12 36 37 38 45 2
15.0
27 1.5 10.4 10.2 10.6
8 30 7.6
6.7 6.9 10.0
1 6.3
4.5
4 15 5.0
0.5 1.5
1.5 2.5 6.8 11.5 13.6 8.7 13.1 16.0 0.2 0.7 2.1 2.6 1.7 2.5 2.8
0 0 0 0.0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Page | 103 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Technology is the backbone of growth for the cross-selling franchise

Technology driven approach:

• BAF currently has one consumer app platform (Bajaj Finserv App), one web
platform (www.bajajfinserv.in) and three marketplaces hosted on
www.bajajmall.in.
• It has invested deeply in domain talent and technologies in last two years and
onboarded 618 employees to build these platforms.
• BAF is actively integrating technology into its business transformation, utilizing
both established and emerging technologies to enhance various aspects of its
operations. Its focus on technology is aimed at introducing new products,
expediting customer acquisition, enhancing customer experiences, and
streamlining back-office processes. BAF churns its franchise effectively and
deepens engagements with existing customers with the help of domain-specialist
teams within each business vertical and data analytics. Overall, BAF's technology-
driven approach focuses on improving customer experiences, optimizing
operations, and fostering innovation across various facets of its business.

c.83% of the company’s IT workload runs on cloud:

• With a scalable cloud-based Enterprise Data Warehouse (EDW) in place, BAF has
now moved its entire raw data to a data lake, which enables exploratory data
analysis on raw data as against curated data/variables in EDW – and is being used
to run large workloads.
• Currently, it runs 200 workloads on the data lake.
• New addition to the existing data platform stack is data streaming infrastructure,
which enables real-time data ingestion, data processing, and data propagation for
various business use cases.
• It has built its data lake and data warehouse on Microsoft Azure. Microsoft holds
quarterly engagements with BAF’s data-estate head; c.1,200 on-roll data analysts
run queries and slice-and-dice data.
• The data analytics teams are verticalized as per businesses to run campaigns.

BAF is a large customer of Microsoft Azure in India: There are a total of 700+ application
programming interface (APIs) of which 400 APIs are for various in-house and external
apps. These APIs are hosted on Microsoft Azure.

Finn One: BAF uses an end-to-end loan-lifecycle-management software solution from

Nucleus Software. This software drives high-velocity loans such as consumer durables
and auto loans.

Pennant Technologies: BAF uses this software for unsecured lending and home loans.

Salesforce: All business portfolios have migrated to Salesforce. In fact, BAF is an anchor
customer of Salesforce in India and has a quarterly call with its Chief Information
Officer. BAF provides the largest compute for Salesforce servers.

Collections infrastructure has its own app: It has a separate collections platform, with
c.45,000 collection agencies performing c.70% of field collections.

Road ahead: BAF plans to invest in relevant technology companies and co-create
products to further strengthen its technology roadmap.

Page | 104 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

BAF has had Rs 20bn of technology investments since FY11 It outsources mid- and back-office functions for efficiencies
IT expenses (Rs mn) % of Opex (RHS) Outsourcing expenses (Rs mn) % of Opex (RHS)
9.4
6,000 7.5 4,000 8.9 10.0
3,500 7.8 9.0
5,000 5.8 5.6 7.6
6.0 8.0
3,000 6.6 6.5
5.8 5.8 7.0
4,000 4.2 4.3 2,500
3.9 3.7 4.5 5.0 6.0
3.6
2,000 4.3 5.0
3,000 3.1
2.7 3.3
2.4 2.3 2.5 2.6 3.0 1,500 4.0
2,000 2.5 2.6
3.0
1,000
1.5 2.0

1,086
1,091
1,108
1,477
2,112
2,099
2,428
1,307
2,004
3,393
1,389
1,645
2,109
2,279
4,381
5,678
1,000 500

302
524
760
1.0
109
151
209
295
379
580
928

0 0.0 0 0.0

FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY19
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18

FY20
FY21
FY22

Source: PhillipCapital India Research, Company Data FY23 Source: PhillipCapital India Research, Company Data

Technology tools and investments… …will help give BAF customers better engagement

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 105 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Profitability to see uptick in FY24-26

Street underestimating BAF’s cross-sell franchise, fee income potential
BAF’s geographic expansion into 3,800+ cities pan-India, which is likely to increase to We expect non-linear fee income
c.4,200 cities, covers 99.5% of the credit-bureau footprint, and enables risk-mitigation growth vs. AUM growth, which will
for seasonality. With 25+ credit-product offerings, the company maintains largely offset operating expense and
diversification of risk on the balance sheet and on-boards customers across allow a large part of NII (c.28% CAGR
demographics. We believe the street is underestimating BAF’s cross-selling franchise FY23-26) to flow into operating profit
and thereby fee-income potential. We expect non-linear fee income growth vs. AUM (c.28% CAGR).
growth, which will largely offset operating expense and allow a large part of NII (c.28%
CAGR FY23-26) to flow into operating profit (c.28% CAGR). A granular collections
infrastructure, aligned as per businesses, makes asset quality and credit costs
predictable. With credit cost of c.135bps in FY24-26, we forecast 28% earnings CAGR.
Given the non-linearity of fee income, ROE will improve to 24%+ levels by FY26 at
current levels (i.e. 5.5-6.0x) of leverage.

Expect 31% loan CAGR over FY23-26

We model for a 31% loan CAGR over FY23-26E, leading to an AUM of Rs 5.6tn in FY26,
largely driven by consumer financing (including personal loans) and mortgages. Though
mobile sales have been moving online for the last 5 years or so, BAF’s addressable
market for mobiles, consumer durables, and furniture (c.Rs 7.5tn) is still 72% in brick-
and-mortar and traditional-format stores in tier-2+ cities. We believe BAF’s apps and
revamped web interface will drive incremental customer acquisition (c.2mn p.a.)
through better engagement. Favourable demographics and technology-led client
mining will lead to an addition of 9-10mn customers each year.

Consumer financing/mortgage to reach 32% each of total book by FY26

BAF originates c.15% of new to credit customers (NTC) each year, which is c.75% of
NTC consumer durable customers in the credit bureau records. We thus forecast
consumer financing (including personal loans) to grow to c.32% of its overall book in
FY26 at c.Rs 1.8tn and 36% of incremental book growth during FY23-26. In-house loan
sourcing, cross-sell opportunity to existing customers (who have c.Rs 5tn of mortgages
as per management), and popular ticket-size loans of Rs 4.5-5.0mn will act as key
growth drivers for BHFL in the near-to-medium term, which will lead mortgages
growing to 32% of overall book in FY26 to c.Rs 1.77tn and 32% of incremental book
growth during the same period.

We expect 31% loan book CAGR over FY23-26… ...with strong growth in both unsecured and secured books
AUM YoY (R) FY26E AUM (Rs bn) FY23-26E CAGR (RHS)

6,000 41 45 2,000 50
38
36 36 37 40 35
35 1,500 32 32 40
5,000 33 33 28
35 30
29 28
4,000 27 30 1,000
25 12 20
1,792

1,773

25 500
296

592

713

431

3,000 10
20 0 0
4
Mortgages
Consumer Finance

Rural Finance

Commercial
SME finance
Auto Finance

2,000 15
leanding

10
1,159

1,472

1,975

2,474

3,293

4,375

5,597

1,000
1,529
324

442

602

824

5
0 0
FY15

FY24E

FY25E

FY26E
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Page | 106 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

We expect mortgages and consumer finance to be c.64% of …with both businesses incrementally driving the loan book
book by FY26… growth
Consumer Finance Auto Finance Consumer Finance Auto Finance
Rural Finance SME finance Rural Finance SME finance
Commercial leanding Mortgages Commercial leanding Mortgages

32 32 32 36

8 5 5
4 12 11
13 11

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Sharp focus on debt/risk management to keep asset quality benign

• BAF ran collections as a separate unit from 2007. Until 2018, it had 3,000
employees with 26,000 feet on street (FOS).
• The company typically appoints one person in every branch within 3-5 months of
operations. Out of total workforce of c.43,000
• Any branch that has opened more than 6 months ago, will have one collection people, debt management deploys
person. Similar businesses remain under similar collections setups until they reach between 13,000-14,000. These
employees manage c.47,000 collections
a certain size.
agencies.
• Collections is a very fine balance between cost and delinquency, and has to be
managed on a daily basis.
• A business has to achieve a minimum scale of operation to have its own collection
structure.
• PL collection will always be separate from the CD vertical.
• Out of total workforce of c.43,000 people, its debt-management section has
13,000-14,000. These employees manage c.47,000 collections agencies, but the
on-roll employees don’t collect directly.
• Agency infrastructure is spread across 3,800 cities and towns.
• The largest component of debt management deployment would be consumer
finance (B2B) business, followed by consumer finance (B2C) business. Commercial
lending does not have any debt management.
• Debt management is a highly evolved capacity-planning model, which is constantly
changed depending on the environment.

BAF’s debt-management journey

The debt management journey begins well before the customer’s instalment falls due.
BAF sends advance intimation to all its customers five to six days before the instalment The company ensures that most fraud
falls due, to enable customers to maintain adequate funds in their bank account. The checks are performed well before any
disbursal of loan through an inbuilt
journey is expanded further to counselling of customers towards creating a good
advanced fraud controls analytics in its
repayment behaviour by clearing subsequent EMIs directly from given bank account. loan origination system.
BAF has invested in service call centres to counsel customers after the payment of
overdue EMI. It uses multiple modes such as employees, call centres, digital channels,
field agencies and legal channels for debt management.

BAF actively focuses on a debt-management strategy to ensure that its delinquent debt
portfolio is kept at minimal levels. It has a dedicated structure where the focus is to
follow a strict protocol for missed payments. It offers a choice to customers to make
overdue payment through digital channels, branch walk-ins, at retailer points, and
provides door-step debt-management services too. In an endeavour to follow a non-

Page | 107 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

intrusive debt management practice, BAF collects an electronic clearing mandate from
its customers.

The company ensures that most fraud checks are performed well before any disbursal
of loan through an inbuilt advanced fraud controls analytics in its loan origination
system. It periodically updates its fraud-check rules, based on emerging learnings and
supports a dedicated back-office unit and a 438-member field structure spread across
268 locations.

Graded communication in vernacular language across Dedicated debt-management structure aligned to business
multiple channels verticals

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Recovery cost as % of opex is coming off from covid highs Average recovery cost was 71bps in FY10-23
Recovery cost (Rs mn) % of opex (RHS) Recovery cost % of AUM (bps)
21.7

Average of FY10-23 = 71bps

21.0

20,000 25.0
150 139
17.5

16.9

16.7

20.0
15.4
15.0

15,000
14.6
14.3

125
14.0
13.3

13.0
12.6

12.4

15.0 100
77 75 81
10,000 68 68 70 63 65 68
75 56 53 60 56
10.0
50
5,000
11,508
15,904
16,868

5.0
1,196
1,679
2,044
2,475
3,180
4,914
6,469
9,594

25
561
583
891

0 0.0 0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Page | 108 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Monthly recovery cost per bounced customer is reducing… …leading to uptick in PPoP per new loan excluding recovery
cost…
Monthly Recovery cost per bounced customer (Rs) PPoP per new loan less recovery cost (Rs)

600 YoY (RHS, %)

537
70
475 7,000 75
500
6,000
400 337 50
302 5,000
292 284
262 268 25
300 229 4,000
12 25
3,000 9
200 5 -19
-1
2,000 0
-13

5,153
3,041

3,307

3,285

2,864

2,994

3,756

6,396

5,757
100
1,000
0 0 -25
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data / FY21 is high as new loans
sourced declined

…which has led to strong pick-up in… …bad debt recoveries

Bad debt recoveries (Rs mn) Bad debt recoveries per bounced customer (Rs)
% Gross NPA (RHS, 1-year lag)

3,748
37.1 4,500

3,619
12,000 40.0
34.2 4,000
35.0
10,000 3,500
30.0
8,000 3,000
25.0
2,500
6,000 20.0 2,000
15.0 1,500
4,000 8.4
7.7

550

484
6.8 7.0 7.0
447

10.0 1,000
382
376

336

5.6
299

4.7
11,087

2,000
8,933
1,636
1,507

5.0 500
190

230

302

685

899

0 0.0 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Dedicated credit risk units for each business Digital collections are c.50% of total collections now
Physical collections (%)
Digital collections channel (incl. branch walk-ins, %)

100

80
49 55
65
60

40
51 45
20 35

0
FY21 FY22 FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 109 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

PLCS loan growth and leverage worries

The management has talked about the level of leverage in the system, driven by the
growth in personal loans. As such, BAF is taking pre-emptive steps – in order to
maintain strong risk-adjusted customer on-boarding, any customer who is delinquent
for more than 30 days will never move into its cross-selling franchise.

The systemic personal loan (PL) pie has expanded from Rs 350bn disbursement in
3QFY20 to Rs 650bn in 3QFY23 as per credit bureau data. BAF tracks market share by
disbursal in each market, as it is present in 3,828 cities in India. The management hinted
that even in the 1,000th city, there is increased competitive activity across ticket sizes
– whether it is Rs 20,000 to Rs 80,000 plus. It is concerned with this 89% growth on a
three-year basis in PL, when nominal GDP grew only 26%.

BAF offers personal loan cross-sell (PLCS) offering only to 60% of consumer-finance
(B2B) customers, of which 40% are actually disbursed. The underwriting models are The systemic personal loan (PL) pie has
organised at c.30-35% of B2B customers being made a B2C loan offering. BAF loosens expanded from Rs 350bn disbursement
and tightens these credit filters based on the incoming data from early-warning in 3QFY20 to Rs 650bn in 3QFY23 as per
systems, either by location, or by segment of personal loan. BAF’s urban B2C unit has credit bureau data
18-19 different segments and rural B2C has 8-9 segments. These segments are largely
split geographically. Some markets like Delhi NCR will be designated developed and
some markets like Uttar Pradesh will be designated emerging.

We believe that with credit filters being squeezed for lower decile PLCS customers, we
are unlikely to see material impact on BAF’s credit cost in FY24. With its granular
collections infrastructure, the company will collect from delinquent customers within
90dpd, leading to only marginal slippage to the NPA bucket.

0+dpd of various segments have come off structurally with use of data analytics
CD loans Digital Products Consumer B2C loans SME loans LAP HL Rural lending

3.5

2.5

1.5

0.5

0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 1QFY24

Source: PhillipCapital India Research, Company Data

Page | 110 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Gross slippage ratio on a lag basis is coming off from covid …a trend which is visible in write-offs as % of AUM on a lag
highs… basis as well
Gross slippage ratio (% 1-year lag) Write-off as % of AUM (% 1-year lag)
Gross slippage ratio (% 2-year lag) Write-off as % of AUM (% 2-year lag)

7.50 7.50

6.87
6.00 6.00

6.44
5.46

5.44
4.50 4.50

4.79
4.42
3.85
3.00

3.71
3.00

3.27
3.10

2.73
1.50

2.21
2.52

0.37
2.76
3.07
5.81
4.05
0.89
1.67
0.64
0.34
0.46
0.21
0.29
0.60
0.81
0.88
1.20
1.57
2.13
1.17
1.60
1.94
3.77
3.14
1.71
2.34

1.50
2.11
1.13

2.40
1.53
1.72

1.55

1.84

3.88

5.41

5.23

-
-

FY10
FY08
FY09

FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

We expect asset quality to remain benign in FY23-26 We expect credit cost to be below last 15-year average of
2.3%, despite being conservative
GNPA (%) PCR (RHS, %)
89.4

Credit cost (%) FY08-23 average = 2.3

20.0 100.0
82.6

77.2
76.2

8.1
74.0
72.8

9
70.6

17.5
69.6

65.0
63.8

8
60.5

60.0
60.0
59.8

59.3
58.2

15.0 75.0
6.3
55.0

7
12.5
6
10.0 50.0

4.1
32.1

3.9

5
28.6

3.6

3.1
7.5

2.8
4
5.0 25.0 3
1.6
1.6

1.6
1.5

1.5
1.4
1.4
1.4

1.3
1.3
1.3
1.3
17.6

2.5 2
1.4
8.9

7.9
3.0
1.2
1.1
1.2
1.6
1.2
1.7

1.5
1.6
1.7
1.5
0.9
1.1
1.5
1.8

0.0 0.0 1
FY18
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17

FY19
FY20
FY21
FY22
FY23
FY24E
FY25E
FY26E

FY24E
FY25E
FY26E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Tapering credit costs and range-bound cost-to-income ratio will drive earnings
BAF caters to c.75mn customers, which we expect will grow to 100mn over 2-3 years.
Leveraging this large customer base, the company deploys in-depth data analytics,
bureau scrubs, and database provider alliances to cross-sell personal loans, EMI cards
and co-branded credit cards. The company’s cross-sell franchise earns high fee income
at negligible operating cost, with limited credit loss (c.0.33% that of new customers).

We think the street is underestimating BAF’s cross-sell franchise and thereby fee
income potential. We expect non-linear fee income growth (35% CAGR) vs. AUM
growth (31% CAGR), which will largely offset operating expense and allow a large part
of NII (c.28% CAGR FY23-26) to flow into operating profit (c.28% CAGR).

Page | 111 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Cross-sell opportunities augment better risk-adjusted profitability

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 1QFY24

100

79 78 79 78 78
80 76 76 75 76 76 76
73 73
70 69 68 69
68 66 65 65 66 68 66 66 67 67
64
62 61
59 59 59
60 56 56 56 54 57
54 54

40

20

0
Credit segment (%) Overall cross sell cust. (%) Non deliquent cust. (%) Cross sell cust. (%)

Source: PhillipCapital India Research, Company Data

Employee expense has increased the most as % of opex over FY15-23

Employees Cost (%) Recovery Cost (%) IT expenses (%)
Travelling and communication cost (%) Depreciation (%) Outsourcing/back office cost (%)
Advertisement cost (%) Bank charges + customer experience (%) Others (%)

100
11 11 11 10 9 9
3 3 3
29 4 4 4 5 5
32 31 3 3 5 6
80 4 5
7 7 6 3 2 3
2 3
5 4 2 3
2 4 4 6
2 3 5 4 6
2
2 3 6
5 5 4 4
60 5 3 4
2 4 22 21 17
6 15 17
8 6 4 15
3 3
12
40 14 13

46 47 47 50
44 45
20 36
32 33

0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data

Page | 112 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Cost-to-income ratio to be range-bound in FY23-26… …leading to similar growth rates for operating profit and
AUM
C/I Ratio (%) Expense Ratio (RHS, %) Operating profit growth (%) AUM growth (%)
4.8 4.7
50 4.5 4.4 5.0 75
4.2 4.2 4.2
4.0 3.9 4.0 58
40 4.0 60
3.2 46
44 45
30 3.0 45 37
31 33 33
29 29
20 43 41 2.0 30 41
40 37 37 36 36 34
35 33 35 35 36 33
31
27 25 28
10 1.0 15 6 20 22

0 0.0 0 4
FY24E

FY25E

FY26E

FY18

FY24E

FY25E

FY26E
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY16

FY17

FY19

FY20

FY21

FY22

FY23
Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Efficient technology and strategic expansion

c.70% of BAF’s technology runs on cloud infrastructure, POS staff are temporary, the
mid- and back-office are outsourced to BPOs, and a dedicated financial planning
analysis (FPA) wing works to rein in costs.

New branch openings may not create much of drag on opex growth in FY24-26.The
company is likely to install 2.25mn quick-response (QR) in FY24, with per unit cost being
Rs 150. We can expect Rs 1.5bn of cost for payments via QR code deployment and
Electronic Data Capture (EDC) machines to be deployed through FY24. We expect
another Rs 1.5bn of opex towards new businesses.

Advertisement cost increased c.10x in FY15-23 PBT less advertisement cost per new loan rising
Advertisement cost (Rs mn) % of opex (RHS) Adv. Cost per new to BAF customer (Rs)
PBT less Adv. Cost per new loan (RHS, Rs)
4,000 6.0

5,130
5.1 400 6,000
3,500
4.4 5.0
2,403

350 5,000
3,779
2,591

3,000 4.0 3.9

3,484

3.5 4.0
2,500 300 4,000
2,764

2,722
2,615

2,552

305

2.5 2.6
2,000 2.3 3.0
250 3,000
2.0
1,500
2.0
238

200 2,000
274

221

274

1,000
196
1,669

1,832

2,219

1,042

1,764

3,530

1.0 150 1,000

174

500
352

753

679

157

166

0 0.0 100 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PhillipCapital India Research, Company Data Source: PhillipCapital India Research, Company Data

Page | 113 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

28% CAGR in PAT in FY23-26 With non-linear fee income, RoE to improve in FY23-26
PAT (Rs bn) YoY (RHS, %) RoE (%) RoA (RHS, %)

26.8
25.9
300 80 30 6.0
64

23.5

23.2
22.5
60

22.3
59 70

20.9

20.2
20.0
250 60 25
42 44

17.4
36 36 50
200 32 20 4.5
28 40

4.7
12.7

4.6

4.6
21

4.4
30 15
150
20

3.8

3.7
3.6
10 10 3.0

3.4
100

3.4
3.2
0
-16
-10 5

2.6
50
115

139

189

242
13

18

25

40

53

44

70

-20
0 -30 0 1.5

FY24E
FY20

FY22

FY25E

FY26E
FY16

FY17

FY18

FY19

FY21

FY23
FY24E

FY25E

FY26E
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PhillipCapital India Research, Company Data

Source: PhillipCapital India Research, Company Data

Page | 114 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Management Profile
Experienced management with strong domain expertise…
Name Profile
• Member of the company's executive team.
• Industry veteran with 3+ decades of experience in consumer lending, of which 15 years have been with Bajaj
Finance.
Rajeev Jain, Managing Director • Was associated with GE, American Express and the American International Group (AIG).
• Management graduate from T a Pai Management Institute, Manipal with a bachelor's degree from American
College, Madurai.

• Joined in 2017 to lead its consumer finance portfolio business. Brings more than 28 years of diverse management
experience across sales, product risk, collection, and business intelligence.
• He heads all the retail business lines, including Urban Consumer Durable Loans, Personal Loan, Co-Branded Credit
Cards, SME, all Rural Loans, Fixed Deposits, Insurance, and Payment’s business.
• Also managed other portfolios such as Operations, Service and Marketing.
Anup Saha, Deputy CEO • Was with ICICI Bank as their Senior General Manager and Group Product Head of their Retail Home Loan, Vehicle
Loans, Developer Funding, and Retail and Rural Collections. He worked with ICICI Bank for 14 years across different
roles. Anup has also served on the Board of ICICI Bank HFC and TU CIBIL and spearheaded ICICI Bank's Sales CRM
and Big Data transformation projects.
• Also worked with GE Capital International Services (GECIS), SBI Cards, Blow Past and BHEL.
• Alumnus of IIT Kharagpur and IIM Lucknow.

• Brings on board 3 decades of rich industry experiences and technical know.

• Oversees the functional responsibilities of Technology, Operations, Marketing, and Legal.
• Responsible for driving sustainable growth for all the strategic initiatives.
• Journey in the Bajaj Finserv group of companies started way back in 2009. He was the Chief Operating Officer at
Bajaj Finance Limited until 2018 and led a large portfolio of critical functions, including Technology, Analytics,
Rakesh Bhatt, Deputy CEO Credit Operations, Customer Experience and Quality. He was the CEO of Bajaj Finserv Direct Limited for 4 years and
spearheaded the launch of a diversified Digital Marketplace business (Bajaj Markets) in Financial Services and e-
commerce.
• Has held leadership positions in reputed companies such as AIG Consumer Finance, GE Money, Reliance Industries
and 3i Infotech.
• M.Sc. in Computer Applications.

Source: PhillipCapital India Research

…Experienced management with strong domain expertise

Name Profile
• Rich work history spanning over three decades.
• Was appointed MD of Bajaj Housing Finance in 2022 after serving as the CEO of the company for four years.
Atul Jain, MD, BHFL • Over the last decade, he led key portfolios in Bajaj Finance Limited. During his time at BFL, Atul held numerous
Senior Management roles, including those of the Chief Collections Officer and Enterprise Risk Officer.
• MBA in Finance.
• Responsible for providing strategic direction, managing and growing the Loan Against Securities (LAS) & Corporate
Finance business in Bajaj Finance Ltd.
• Joined Bajaj Finance in January 2010 as National Head – Credit & Risk, Loans against Securities.
Manish Jain, CEO, BFSL
• Instrumental in developing the complete credit underwriting & risk management philosophy for the Loan against
Securities business at the time of launch and in creating a roadmap in line with the organizational strategic intent.
• In April 2013, he took over the responsibility of heading the Product function for Business Loans.

• Joined BAF in 2008 and has been an integral part of the company’s growth and evolution journey from a mono-line
auto finance company to a diversified financial services business.
• Joined BAF in the management accounting unit and since then has served various roles in the company that include
Sandeep Jain, Chief Financial Officer
FP&A, Strategic Planning, Executive Assistant to CEO, Investor Engagement and Head of Management accounting
unit.
• Rank holder Chartered Accountant from ICAI with a Bachelor’s degree in Commerce.

• Oversees the company's governance and strategy for entire risk management portfolio, including risk analytics,
underwriting practices and maintaining relationships with regulatory bodies and other supervisor bodies.
• Career spanning over 25 years.
Fakhari Sarjan, Chief Risk Officer
• Brings a holistic experience covering collections, credit policy, operations, risk, credit cards, analytics and fraud
control.
• Management graduate of IIM Lucknow.

Page | 115 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

• Responsible for the debt management services vertical.

• Was earlier responsible for growing SME business verticals such as Business Loans, Loans against Property,
Professional Business, Self-employed Home Loans, Developer Finance, and Relationship Management Business.
Deepak Bagati, President -
• Has extensive work experience in the services industry, spread across printing solutions, reprographics, rating firms,
Debt Management Services
supply chain management and lending.
• Also worked with HDFC Bank, ONICRA, Mahindra & Mahindra and Modi Xerox.
• Engineering graduate with a degree in Industrial Electronics.
Source: PhillipCapital India Research, Company Data

…Experienced management with strong domain expertise

Name Profile

Deepak Reddy, President - Rural businesses, fixed He has 27+ years’ experience including leading businesses, sales and distribution, product
deposits & investments, insurance services and management and human resources. He is a management graduate of T A Pai management
distribution institute and has worked with American Express, Standard Chartered Bank and Onida.

Source: PhillipCapital India Research, Company Data

Page | 116 | PHILLIPCAPITAL INDIA RESEARCH

 BAJAJ FINANCE COMPANY UPDATE

Financials
Profit and loss Balance Sheet
Y/E Mar, Rs bn FY23 FY24E FY25E FY26E Y/E Mar, Rs bn FY23 FY24E FY25E FY26E
Net interest income 230 281 369 478 Equity 1 1 1 1
Other income 58.6 79.0 106.7 144.0 Reserves 543 654 805 999
Net Income 288 360 476 622 Net worth 544 655 806 1,000
Operating expenses 101 132 171 231 Borrowings 2,167 2,842 3,764 4,865
Pre-provision profit 187 228 304 391 Current liabilities & others - - - -
Provisions 32 41 49 64 Total liabilities 2,752 3,539 4,613 5,908
Profit before tax 155 188 256 327 Net block 24 24 24 24
Tax 40.2 48.8 66.4 85.1 Investments 228 230 232 234
Tax rate (%) 25.9 26.0 26.0 26.0 Loans 2,423 3,194 4,244 5,485
Adjusted Profit after tax 115 139 189 242 Current assets & others - - - -
Total assets 2,752 3,539 4,613 5,908

Dupont (as % of Assets) Key Ratios

Y/E Mar FY23 FY24E FY25E FY26E FY23 FY24E FY25E FY26E
Interest Income 14.6 14.7 15.0 15.2 NIM (%) 10.6 10.0 9.9 9.8
Interest Expense 5.2 5.7 6.0 6.1 NIM (%) - on AUM 10.3 9.7 9.6 9.6
Net Interest Income 9.4 8.9 9.1 9.1 Cost/ Income (%) 35.1 36.6 36.0 37.1
Other income total 2.4 2.5 2.6 2.7 Credit cost (%) 1.5 1.4 1.3 1.3
Net Income total 11.8 11.4 11.7 11.8 RoA(%) 4.8 4.5 4.7 4.7
Operating expenses total 4.2 4.2 4.2 4.4 RoE (%) 23.5 23.2 25.9 26.8
Preprovision profit 7.7 7.3 7.5 7.4 Tier I (%) 23.2 22.4 21.3 20.9
Provisions 1.3 1.3 1.2 1.2 CAR (%) 25.0 23.7 22.3 21.6
Profit before tax and ex items 6.4 6.0 6.3 6.2 Leverage (x) 5.1 5.4 5.7 5.9
Profit before tax 6.4 6.0 6.3 6.2 No of shares (mn) 605.9 605.9 605.9 605.9
Tax total 1.6 1.6 1.6 1.6 Gross NPA (%) 0.9 1.1 1.5 1.8
Profit after tax 4.7 4.4 4.6 4.6 Net NPA (%) 0.3 0.5 0.6 0.7
Provision coverage (%) 63.8 60.0 60.0 65.0
Growth (%)
FY23 FY24E FY25E FY26E Valuation Ratios
Net interest income 31.2 22.2 31.3 29.7 FY23 FY24E FY25E FY26E
Net Income total 31.8 24.8 32.1 30.9 FDEPS (Rs) 189.9 229.3 312.1 399.7
Preprovision profit 30.8 22.0 33.3 28.5 PER (x) 39.1 32.4 23.8 18.6
Profit before tax 63.4 20.9 36.1 28.1 Book value (Rs) 897.3 1,080.8 1,330.5 1,650.2
Profit after tax 63.7 20.8 36.1 28.1 P/BV (Rs) 8.3 6.9 5.6 4.5
Loan 26.6 31.8 32.9 29.3 Adjusted book value (Rs) 897.3 1,080.8 1,330.5 1,650.2
Disbursement - - - - P/ABV (Rs) 8.3 6.9 5.6 4.5
AUM 25.3 33.1 32.9 27.9 P/ PPP 24.1 19.7 14.8 11.5
Dividend yield (%) 0.4 0.6 0.8 1.1
Source: Company, PhillipCapital India Research

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 BAJAJ FINANCE COMPANY UPDATE

Stock Price, Price Target and Rating History

9000

8000
B (T 8700)
B (T 8700) B (T 9500)
B (T 8700) B (T 9500)
7000

B (T 8700)
6000 B (T 8500) B (T 8500)

5000

4000

3000

2000

1000

0
S-20 O-20 D-20 J-21 M-21 A-21 J-21 J-21 S-21 O-21 D-21 J-22 F-22 A-22 M-22 J-22 A-22 O-22 N-22 D-22 F-23 M-23 M-23 J-23 A-23

Source: PhillipCapital India Research

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 BAJAJ FINANCE COMPANY UPDATE

Rating Methodology
We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.
We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock.
The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks

Rating Criteria Definition
BUY >= +10% Target price is equal to or more than 10% of current market price
NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%
SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks

Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers

PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group.
This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at
times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd.
References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for
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any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or
her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements
and past performance is not necessarily an indication of future performance.
This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report.
Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness
of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future
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Additional Disclosures of Interest:
Unless specifically mentioned in Point No. 9 below:
1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in this
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company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report.
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any other products or services from the company(ies) covered in this report, in the past twelve months.
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7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report.
8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report.
9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

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 BAJAJ FINANCE COMPANY UPDATE

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for No
investment banking transaction by PCIL
2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% No
of the company(ies) covered in the Research report
3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No
4 PCIL or its affiliates have managed or co(managed in the previous twelve months a private or public offering of securities for the No
company(ies) covered in the Research report
5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking No
or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last
twelve months

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment
banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek
compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the
securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any
of the securities covered in the report.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or
particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors.
Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and
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value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political
factors. Past performance is not necessarily indicative of future performance or results.
Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be
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Kindly note that past performance is not necessarily a guide to future performance.
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IMPORTANT DISCLOSURES FOR U.S. PERSONS

This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report.
PhillipCapital (India) Pvt Ltd. is authorized to engage in securities activities in India. PHILLIPCAP is not a registered broker(dealer in the United States and,
therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided
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Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information
provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer
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The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority
(“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on
communications with a subject company, public appearances and trading securities held by a research analyst account.

Ownership and Material Conflicts of Interest

Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of
the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests,
or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is
not aware of any material conflict of interest as of the date of this publication

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 BAJAJ FINANCE COMPANY UPDATE

Compensation and Investment Banking Activities

Rosenblatt Securities Inc. or any affiliate has not managed or co(managed a public offering of securities for the subject company in the past 12 months, nor
received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or
intends to seek compensation for investment banking services from the subject company in the next 3 months.

Additional Disclosures
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Digitally signed by SHUBHRANSHU MISHRA

SHUBHRANS DN: c=IN, o=PHILLIPCAPITAL INDIA PRIVATE

LIMITED, ou=EMPLOYEE, postalCode=400013,
st=Maharashtra,

HU MISHRA
serialNumber=6DF07345A0735C07EE34B1965F
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B, cn=SHUBHRANSHU MISHRA
Date: 2023.09.13 10:39:24 +05'30'

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