Bajaj Housing Finance’s IPO: A game-changer for Bajaj Finance?

The IPO is a combination of an offer for sale (OFS) and fresh issue of shares. The OFS by the holding company amounts to ₹3,000 crore, while the fresh issue will raise ₹4,000 crore for Bajaj Housing Finance.

Now, since Bajaj Housing already has more than required capital adequacy, raising a higher amount from fresh issue would have put pressure on the return ratios i.e. RoA (return on assets) and RoE (return on equity) in the near future. At the same time, a purely OFS issue would have seen the holding company cashing out of the housing business before it could achieve scale and higher valuation.

After listing, Bajaj Finance will benefit by shedding the lower RoA and RoE housing finance business, making Bajaj Housing Finance self-reliant in terms of funding. In April, Bajaj Finance infused ₹2,000 crore into Bajaj Housing Finance via a rights issue. Emkay Global Financial Services projects FY26 RoA and RoE for Bajaj Finance at 4.8% and 23.2%, respectively, significantly higher than the 2.1% and 14.6% projected for Bajaj Housing Finance.

Bajaj Finance’s high return rations are due to its short duration loans, including the financing of consumer appliances, though unsecured, but with high interest rates culminating into robust net interest margin. Moreover, return ratios get a boost from faster recycling of capital as loan cycles are shorter.

Nearly 85% of Bajaj Housing’s borrowers are salaried employees, which further reduces the already low risk of non-performing assets (NPAs) in housing finance as loans are secured against the property value. However, if interest rates head south, there is a risk of the interest rate spread becoming thinner as Bajaj Housing offers loans on a floating rate basis, even as about 40% of the company’s borrowings are on fixed interest rate. The company’s spreads compressed to 2.5% in FY24 from 2.8% in FY23 as cost of funds rose in tandem with the repo rate increase.

Regulatory compliance and valuation implications

Another crucial aspect of the listing is regulatory compliance. Bajaj Housing Finance is classified as a non-deposit taking housing finance company in the upper layer of the RBI’s list of non-banking financial companies. Listing for such companies is mandatory by September 2025.

As far as the impact on the valuation of Bajaj Finance is concerned, it is already being valued on a sum-of-the-parts basis.

ICICI Securities and Emkay Shares value the stake in Bajaj Housing at ₹830- ₹844 per share of Bajaj Finance or at a market capitalization of about ₹50,000 crore. Considering Bajaj Finance’s market capitalization of ₹5 trillion, Bajaj Housing Finance’s valuation represents around 10% of the total. Now, even if Bajaj Housing Finance were to exceed expectations by 50% upon listing, it would translate into just about a 5% upside to Bajaj Finance’s valuation.

Against this backdrop, investors should avoid buying Bajaj Finance’s shares solely guided by Bajaj Housing’s listing. In fact, brokerages like Motilal Oswal Finance Services are not enthused about Bajaj Finance’s prospects and see limited upside catalysts for the stock. “Management’s guidance for FY25 is below its long-term guidance on multiple metrics such as AUM growth, credit costs, RoA, and RoE,” said Motilal’s analysts in their Q4FY24 review report.