India Ratings Assigns Bajaj Finance’s NCD and Subordinated Debt ‘IND AAA’/Stable
Ind-Ra-Mumbai-12 October 2015: India Ratings and Research (Ind-Ra) has assigned Bajaj Finance Limited (BFL) a Long-Term Issuer Rating of ‘IND AAA’ rating with Stable Outlook. The agency has also assigned BFL’s INR20bn long-term non-convertible debenture and INR5bn unsecured subordinated debt an ‘IND AAA’ rating with Stable Outlook.
KEY RATING DRIVERS
BFL’s ratings are driven by Ind-Ra’s expectation of support from its ultimate parent, Bajaj Holdings & Investment Limited (BHIL). BHIL holds 39.2% equity in Bajaj Finserv Limited (BFS - which holds 57.5% equity in BFL) and 31.5% equity in Bajaj Auto Limited (BAL). This is based on BFL’s role as a captive financier for BAL. BFL is the dominant financier for BAL, financing a steady 30% of the total sales of two-wheelers in the domestic market. BFL’s auto finance segment is closely integrated with the parent group for planning and execution of its business strategies. In the past, this included an exclusive loss-sharing arrangement to compensate BFL for a higher-than-budgeted credit cost.
The ratings also derive comfort from BAL’s robust business profile, which is the primary source of dividend for BHIL. The group has very strong liquidity in cash and liquid investments to provide funding support to BFL in a contingency and is committed to inject capital in BFL whenever required. This, along with the short-term liquidity that can be generated, accounted for over 50% of BFL’s total debt at end-March 2015 and is an extraordinary buffer for BFL’s creditors. While the group’s liquidity to BFL’s debt ratio will dilute as BFL continues to raise debt for growth, Ind-Ra believes group support will remain sufficient for BFL’s ‘IND AAA’ rating. Other BHIL businesses (auto and insurance JVs) are unlikely to require external cash support for their growth over the short-to-medium term.
BFL dominates market in its key loan segments. Its consumer durable loan book (around 14% of total loans; yields average 25%) has a strong market position. It has a 90% share of financed sales in over 7,000 consumer retail stores it operates in. Consumer durable loans is an anchor segment for the company as it provides cross sell opportunities for other segments. BFL has a healthy funding mix with 56% proportion in money market borrowings raised at competitive rates. The bank funding (around 40% share in funding) is largely at base rate levels. The company revamped its public deposits programme since FY14 (4% of funding) which, we believe, would further stabilise its funding profile as its proportion increases.
BFL targets the loan book to grow at a CAGR of 25% over FY15-FY19 to reach INR800bn which we believe is achievable based on BFL’s strong market positioning in consumer loans and established network of branches and dealer locations. Also, BFL’s reach in various funding avenues will support the liability growth. BFL’s capital buffers (end-June 2015; capital adequacy ratio: 20.7%; Tier I ratio: 17.4%) and healthy internal accrual ratio (FY15: 21%) support its medium-term growth plans. If needed, BFL would be comfortable in raising fresh capital from the parent and other shareholders, believes Ind-Ra. In June 2015, BFL raised INR14bn through qualified institutional placement and INR1.02bn from BFS with an option to convert warrants and infuse an additional INR3bn by December 2016. The existing capital base as well as unutilised bank lines of INR39.5bn provides liquidity comfort to BFL’s operations.
BFL’s robust pre-provision profitability to assets (FY15: 6.2%) has remained above 6% over the last four years. The strong pre-provision profitability is supported by a low cost of funds (around 9.7%) and strong loan yields (around 19%). The net interest margin (FY15: 10.2%; FY14: 10.8%) is vulnerable to competition in BFL’s primary urban markets, but is likely to remain healthy led by the company’s stable funding profile and sustained focus on high-yielding consumer loans as well as increasing rural loans.
While the 180dpd gross non-performing assets were 1.5% at end-March 2015 (FY14: 1.2%), the company provides for stressed loans on 90dpd basis (provisioning cost as % of assets; FY15: 1.3%, FY14: 1%). The company has stopped disbursements in the construction equipment (currently: 1% of loans; FY13: 4%) and the infrastructure segments (1%; 3%) which witnessed stress in the last couple of years. While the retail and business loan (including LAP) portfolios may see delinquencies in the medium term, the healthy pre-provision profitability is sufficient to absorb credit shocks even in a stress case situation.
Ind-Ra expects BFL’s ratings to remain at the highest end of the national scale with a Stable Outlook. Rating change, if any, will depend on a reduction in BFL’s importance as a key financier to the group’s automotive sales or a decline in the ownership and support from BHIL, which is unlikely over the near-to-medium term. Significant deterioration in BFL’s asset quality or its own liquidity worsening could be negative for BFL’s ratings.
BFL is a deposit taking non-banking finance company and is the finance lending arm of the Rahul Bajaj Group. It is a diversified finance company with exposure in various finance segments such as auto loans, consumer durables loans, personal loans, home loans, loan against property, unsecured loans to small and medium enterprises, loan against shares, vendor finance. The company has a pan-India reach through its near 330 branches (SME and consumer durables), over 7,000 consumer durables stores and more than 3,000 two-wheeler dealer locations.
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Applicable criteria, ‘Financial Institutions Rating Criteria' and ‘Rating of Bank Legacy Hybrids and Sub-debt Criteria’, both dated 12 September 2012, are available on www.indiaratings.co.in