By Saevuk Atwal, Rhodie Ferrer, Yanxi Liu (Warwick University), Diti Shah (UCL).
Photo: Markus Spiske (Unsplash)
Summary of IPO
Bajaj Housing Finance (NSE ticker: BAJAJHFL) is a leading provider of financing, based in Pune, to individuals and companies for both the purchase and renovation of residential property as well as for working capital needs - with the loans secured against the underlying property. BAJAJHFL operates as a subsidiary of Bajaj Finserv, which is one of the largest NFBC (nonbank financial companies) in South Asia. With IPO bidding starting on the 9th of September and ending on the 11th, BAJAJHFL had a blockbuster debut, with shares listing at Rs 150, a 114% premium on the original issue price and analysts widely labelling it as the ‘IPO of the year’ in not the just the size of the IPO itself (. Despite the initial rise, a ‘buy’ rating still seems to be the consensus on the street, with shares listing at a valuation of 4.6x book value, which suggests that the shares are undervalued when compared to intrinsic and comparable methods of valuation.
Company and IPO Profile:
Sector(s): Housing Finance
Ticker: BAJAJHFL
Exchange floated: National Stock Exchange of India (NSE)
Amount raised: ₹6560 crore ($781 million)
Offered price and number of shares: ₹66-70/share and 937.1 million shares, including 428.6 million existing shares and 508.5 million new shares.
Equity offered: 11.1%
Valuation and relevant multiples at IPO:
- Market Capitalization: ₹58,297 crore ($7 billion)
- EV: ₹127,362.25 crore ($15.34 billion)
- EV/Revenue: 16.7x
- EV/EBITDA: 57.8x
Coordinators/Advisors
Joint bookrunners: Kotak Mahindra Capital Company Ltd, Bofa Securities India Ltd, Axis Capital Ltd, Goldman Sachs (India) Securities Private Ltd, SBI Capital Markets Ltd, JM Financial Ltd, and IIFL Securities Ltd
Strategic Rationale
The strategic rationale behind Bajaj Housing Finance’s IPO is primarily focused on augmenting its capital base to support future business requirements, particularly for onward lending. As the second largest and fastest growing entity in the housing finance sector, the company is well-positioned to capitalise on increasing demand for housing loans. The steady growth in both top and bottom lines underscores its robust operational performance, which investors may find appealing for long-term portfolio diversification. While the IPO appears fully priced based on FY25 annualised earnings, this reflects the company's established market presence and potential for continued growth. By raising capital through the IPO, Bajaj Housing Finance can strengthen its balance sheet, enabling it to expand its lending capacity and enhance its competitive edge in the market. This strategic move not only supports immediate financial needs but also positions the company for sustainable growth in an evolving housing finance landscape, making it an attractive option for investors seeking moderate, long-term returns.
Market Reaction
Build Up
In the build-up to Bajaj Finance’s IPO, analysts were generally very optimistic and predicted that the stock would list at a premium and see sustained interest. Bajaj Housing Finance (BHFL) targeted a valuation of $6.94 billion in one of India's biggest initial public offerings this year. BHFL set a price band of 66-70 rupees per share for its $781 million IPO. The IPO was oversubscribed, with retail investors bidding for about seven times the shares on offer and the shares set aside for large institutions oversubscribed by 209 times.
India's stock market has hit record highs over 50 times this year and seen about 200 companies raise more than $7 billion through IPOs, including high-profile offerings from EV-maker Ola Electric Mobility and telecom operator Bharti Hexacom. This is indicative of the positive sentiment in the market on the back of a strong Indian economy and a huge gush of liquidity from domestic institutional and individual investors.This year is on track to be the best IPO year in India. Analysts attribute the rush for BHFL’s offering to strong demand for loans for luxury homes as they benefit from India's rising home prices, attractive IPO pricing and confidence in the pedigree of the nearly 100-year-old Bajaj group.
Launch
Upon Bajaj Housing Finance Ltd.’s trading debut, shares more than doubled, surging 136% to 165 Rs versus an offer price of Rs, marking the biggest first-day gain for any IPO over $500 million in size. The strong demand from local retail investors and institutions reflects an uptake in local enthusiasm towards IPOs, besides India’s global role as a pillar for capital raising, with an average of over 30% in first-day gains this year. Although the current interest of domestic investors have partly driven this buoyancy, there remain growing concerns over the gush of liquidity pushing up valuations. As a recent study by a market regulator reflected, most retail investors resort to selling half of their IPO holdings within a week. Increasing demand as a result of rich valuations has sparked new listings planned in India - the Indian businesses of both Hyundai Motor Co. and LG Electronics are expecting to raise $3.5 and $1.5 billion, along with Indian food-delivery platform Swiggy Ltd. seeking over $1 billion.
Potential Risks and Downsides
While the prospects for Bajaj Housing Finance (BHFL) appear promising, there are potential risks that should be considered. The Indian housing finance market is highly competitive, with a mix of public-sector entities, private-sector banks, non-banking financial companies (NBFCs), and specialised housing finance companies (HFCs). BHFL will need to continue differentiating itself through competitive interest rates, innovative loan products, and exceptional customer service while expanding geographically into underserved regions to gain a competitive advantage and increase market share. Additionally, BHFL may be impacted by macroeconomic factors such as rising interest rates. This can push up home loan interest rates and lead to a decline in their net interest income and margins, as well as the value of its fixed-income portfolio, adversely affecting profitability and cash flow. The geographic concentration of their assets under management could also pose a risk; as of June 2024, 85.2% of BHFL’s total AUM is concentrated in five states: Maharashtra, Karnataka, Telangana, Gujarat, and New Delhi. Any adverse developments or economic difficulties in these regions could impact cash flows.
“Bajaj Housing Finance, the housing finance arm of the renowned Bajaj Group, made a spectacular stock market debut, listing at Rs. 150 per share, a staggering 114% premium over its issue price of Rs. 70.” - Shivani Nyati (Head of Wealth, Swastika Investments)