Stock Review: Bajaj Auto Finance

 

THE stock of Bajaj Auto Finance, the non-banking finance company of the Bajaj Group, rose to its 52-week high at 632.9 on Monday in a sluggish broader market.

   Over the past one year, the stock has vaulted from a low of 191, which it recorded in the middle of August 2009. A gain of 181% during this period means that the stock has outperformed the Sensex, which returned 17% during the same period. The company is likely to reward investors given the rapid growth in its bottom line.

   Bajaj Auto Finance, started its operations by financing two-wheelers and three wheelers. Over time, the company has expanded its operations to finance consumer durables also. In the June 2010 quarter, the firm forayed into construction equipment finance and retail loans against securities.

   The company reported a robust performance in the June 2010 quarter. Net profit rose three-fold to 46.8 crore on a year-on-year basis. The robust growth can be attributed to a high growth in disbursements coupled with the impact of low base a year ago. Disbursements rose 96% during the quarter. At 54%, this growth was significant even on a sequential basis, reflecting a strong traction in credit off take. Given its recent diversification, Bajaj Auto Finance is expected to maintain the tempo.

   Though disbursements have grown at a high rate, asset quality remains a concern. Net non-performing assets (NPAs), or bad loans, formed 1.8% of net advances. This is relatively high considering that top NBFCs operate at an average net NPAs ratio of less than 1%.

   To its credit, Bajaj Auto Finance's asset quality has substantially improved compared to its year ago levels of 4.5%.

   The company's stock is currently trading at a price-to-earnings (P/E) multiple of 18. This is lower compared to its historical valuations. The company is growing its earnings at a very high rate without unduly sacrificing the quality of its assets. This may support its stock performance going ahead.