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Bajaj Finance Ltd is making a strategic move to pare down its stake in subsidiary Bajaj Housing Finance Ltd through an initial public offering (IPO). This decision is aimed at ensuring compliance with Reserve Bank of India (RBI) regulations and fostering self-reliance for Bajaj Housing Finance, reducing its dependence on its parent company for funding.
The IPO will consist of an offer for sale (OFS) by Bajaj Finance amounting to ₹3,000 crore and a fresh issue of shares to raise ₹4,000 crore for Bajaj Housing Finance. Given that Bajaj Housing already has ample capital adequacy, raising more from a fresh issue alone could have pressured its return on assets (RoA) and return on equity (RoE) in the near term. Conversely, a purely OFS-based issue would have seen Bajaj Finance exiting the housing business before achieving significant scale and valuation.
Post-listing, Bajaj Finance is set to benefit by shedding the lower RoA and RoE business of housing finance, allowing Bajaj Housing Finance to become financially self-reliant. In April, Bajaj Finance injected ₹2,000 crore into Bajaj Housing Finance via a rights issue. Projections by Emkay Global Financial Services estimate Bajaj Finance’s FY26 RoA and RoE at 4.8% and 23.2%, respectively, much higher than Bajaj Housing Finance’s 2.1% and 14.6%.
Bajaj Finance’s strong return ratios are attributed to its short-duration loans, including high-interest consumer appliance financing, resulting in a robust net interest margin. Additionally, quicker recycling of capital due to shorter loan cycles boosts return ratios.
Nearly 85% of Bajaj Housing Finance’s borrowers are salaried employees, minimizing the risk of non-performing assets (NPAs) as loans are secured against property value. However, floating interest rate loans pose a risk if interest rates decrease, potentially thinning the interest rate spread. In FY24, the company’s spreads compressed to 2.5% from 2.8% in FY23 due to rising fund costs in line with repo rate increases.
Listing Bajaj Housing Finance is crucial for regulatory compliance. As a non-deposit-taking housing finance company in the RBI’s upper layer of non-banking financial companies, listing is mandatory by September 2025.
Valuation implications show that Bajaj Housing Finance’s market capitalization, estimated between ₹830- ₹844 per share of Bajaj Finance or around ₹50,000 crore, represents about 10% of Bajaj Finance’s ₹5 trillion market capitalization. Even if Bajaj Housing Finance surpasses expectations by 50% post-listing, it would only add about a 5% upside to Bajaj Finance’s valuation.
Investors are cautioned against buying Bajaj Finance shares solely based on Bajaj Housing’s listing. Brokerages like Motilal Oswal Finance Services see limited upside catalysts for Bajaj Finance. “Management’s guidance for FY25 is below its long-term guidance on multiple metrics such as AUM growth, credit costs, RoA, and RoE,” noted Motilal’s analysts in their Q4FY24 review report.
As Bajaj Finance navigates this strategic move, the market will closely watch its impact on the company’s financial health and growth trajectory.
