Bajaj Housing Finance is the most valued HFC; what should be fair valuations?

Shares of Bajaj Housing Finance have seen a secular rally since their listing. The stock, which was issued at Rs 70 after a Rs 6,560 crore IPO, was listed at a robust premium of 114 per cent to Rs 150 apiece, but soared another 26 per cent to 188.45 on Wednesday, zooming 170 per cent over the issue price.

Interestingly, the total market capitalization of Bajaj Housing Finance Ltd has topped Rs 1.57 lakh crore mark, which is more than total market capitalization of the next nine peers. The strong rally in the latest debutant in the housing finance space has not only stamped it as numero uno, but also made it bigger than other peers cumulatively in the top-10 list.

The total market capitalization of other 9 housing finance players stood at Rs 1.56 lakh crore as of their close on Tuesday, September 17. The list included names like LIC Housing Finance, PNB Housing Finance, Aadhar Housing Finance, Aptus Value Housing,Aavas Financiers, Sammaan Capital, Can Fin Homes, Home First Finance Company and India Shelter Finance Corporation.

According to the market participants, the current valuations are not justified for Bajaj Housing Finance as they signal euphoria for the stock, particularly after the historic IPO. The stock, after a stellar run up saw some profit booking on Wednesday, falling 9.15 per cent from day’s high at Rs 188.45 to Rs 171.16 during the session.

Some of the market experts are positive on the stock citing its strong parentage, sound fundamentals and proven track record of the company. They believe that investors, both individual and institutional, are lapping up the stock amid the ‘fear of missing out’ or FOMO for the IPO.

Prasthant Tapse, Senior VP Research at Mehta Equities said Bajaj Housing Finance has a strong parentage of Bajaj Group, which has been a wealth creator for investors in the long term. Also, the housing sector is also attractive for the next 3-4 years. The major demand is coming from funds and HNIs, which had missed the bus due to non-allotment in the IPO.

“Bajaj Housing Finance will trade at a premium valuation in terms of price-to-book value multiple around 4-5x while its peers will command a multiple of 3-4x. Besides a strong parentage, the cost of funds and NPAs of Bajaj Housing Finance are least among the peers, making it a favoured bet over the peers. One should consider buying the stock around Rs 160 levels.”

Recently, Phillip Capital initiated coverage on Bajaj Housing Finance, saying that it is in a league of its own, with its focus on the ‘desirable’ sweet spot for many home loan aspirants – a ticket size of Rs 50 lakh. This way, it addresses 65 per cent of home-loan originations in India. It is increasingly focusing on lease rental discounting (LRD), a high-yield segment.

“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 Rs 2 lakh crore. Near-term, credit costs will remain benign; this, along with its focus on building a low-risk balance sheet. With scale, BHFL has scope to improve its expense ratios, implying an improvement in return ratios,” it added with a ‘buy’ tag and target price of Rs 210.

On the other hand, some experts believe that the current valuations are not justified with the fundamentals of the company and there shall be some correction in the stock, one the froth settles down. However, the stock is a long-term bet even for them.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said that there is a strong euphoria on the stock post listing which is not justified with current financial and fundamentals of the company. “There shall be some sense of sanity regarding the valuations and we may some correction in the stock,” he said.

Independent market analysts Ambareesh Baliga said that the current market is chasing momentum and not valuations. Had it been looking at valuations, we must have seen some correction. The same thing is happening with Bajaj Housing Finance, where investors are chasing the momentum only as fundamental do not match the current prices.

“The fair valuation of Bajaj Housing Finance, with respect to its latest financials, shall be around Rs 100-110,” he added. “However, the stock is a strong bet for long-term and investor may consider holding it for a long-term perspective given its previous track record.”