Bajaj Housing finance: 50% Correction - Buy/Sell/Hold?

Summary

Bajaj Housing Finance's IPO in 2024 generated massive hype, debuting at a 114% premium. However, over 16-17 months, the stock price fell by 50%, leaving many shareholders confused about its future. While the company remains fundamentally strong, the initial overvaluation and subsequent market conditions led to the correction. The stock's current valuation is more reasonable, offering an attractive entry point for long-term investors, but the growth expectations need to be moderated. A phased accumulation strategy is recommended for investors, with steady returns expected in the future.

Takeaways

• 😀 The IPO of Bajaj Housing Finance was one of the hottest in 2024, with a 67x subscription and a 114% premium on the first day.
• 😀 Bajaj Housing Finance’s stock reached a high of ₹188 after listing but has since fallen by nearly 50% over the next 16–17 months.
• 😀 At the time of listing, Bajaj Housing Finance was perceived as part of the strong Bajaj Finance brand, promising a similar wealth-creating opportunity.
• 😀 The IPO's narrative was boosted by themes like affordable housing, rising urbanization, and government incentives, positioning it as a solid long-term investment.
• 😀 Post-IPO, the stock surged, but its price-to-book ratio skyrocketed to over 6, making it unsustainable in the long run, leading to a gradual decline in stock price.
• 😀 The supply issue arose because Bajaj Finance owned a large share (around 86%) post-IPO, and continued selling shares added pressure on stock price.
• 😀 Broader macroeconomic conditions, such as high interest rates and tight liquidity, contributed to the stock’s underperformance in comparison to other financial stocks.
• 😀 Despite the stock's sharp decline, the business fundamentals of Bajaj Housing Finance remain solid, with a focus on conservative lending and low-risk customers.
• 😀 The IPO optimism resulted in overvaluation, as the market priced Bajaj Housing Finance as if it were a high-growth, high-margin business, like Bajaj Finance.
• 😀 After a 50% correction, Bajaj Housing Finance’s valuation is now more reasonable, but the stock is still priced higher than its IPO price, making it a candidate for gradual accumulation rather than an aggressive buy.

Q & A

What was the listing day like for Bajaj Housing Finance?

Bajaj Housing Finance had a highly successful listing on September 16, 2024. The IPO was priced at ₹70, with the stock listing at ₹150, which was a 114% premium. The stock hit a high of ₹188 in the following days, driven by initial market optimism.

What factors contributed to the initial success of the Bajaj Housing Finance IPO?

The IPO's success was due to multiple factors: Bajaj Housing Finance was seen as part of the reputable Bajaj Finance Group, the housing finance sector was trending positively with themes like affordable housing and government incentives, and the company had strong fundamentals with a focus on low-risk, salaried customers.

What caused the stock price of Bajaj Housing Finance to fall post-listing?

The stock price fell due to a combination of factors, including an initial overvaluation, where the price-to-book ratio soared above 6 post-listing. The broader market sentiment also changed, with tightening liquidity and rising interest rates, which negatively affected the performance of financial stocks.

How did the market sentiment change after Bajaj Housing Finance's IPO?

After the IPO, the market sentiment shifted as the stock became overpriced, and investors began questioning whether the high growth expectations were realistic. Liquidity tightened, and profit-booking by investors increased, which led to the price correction.

What role did the promoter's holding play in the stock's performance?

The high promoter holding (86%) created a supply issue, as Bajaj Finance was required to reduce its stake to meet SEBI's public shareholding norms. This led to continuous selling pressure on the stock, further contributing to the price decline.

Was Bajaj Housing Finance facing fundamental problems?

No, Bajaj Housing Finance was not facing fundamental issues. The company's business model remained strong, focusing on low-risk home loans and maintaining good asset quality. The main problem was that the stock had been priced too optimistically at the time of listing.

How did Bajaj Housing Finance manage risk in its loan book?

The company focused primarily on prime loans to salaried customers with a low-risk profile. For example, 75% of its home loan customers had a credit score of over 750, and 87% of the customers were salaried, which helped mitigate risk.

What is the current valuation of Bajaj Housing Finance after the 50% correction?

After the 50% correction, the valuation of Bajaj Housing Finance is more reasonable, trading at a price-to-book ratio closer to 3-4, which reflects a fair premium for a quality housing finance company. However, it is still above the IPO price-to-book of 3.2.

What strategy should investors follow when considering Bajaj Housing Finance stock?

Investors should adopt a strategy of gradual accumulation rather than lump-sum investing. Since more shares will come into the market due to the promoter stake reduction, the stock could remain range-bound for some time. A steady approach will reduce risk.

How does Bajaj Housing Finance compare to its parent company, Bajaj Finance?

Bajaj Housing Finance is a more conservative business compared to Bajaj Finance. While Bajaj Finance is a high-growth company with a high return on equity (ROE), Bajaj Housing Finance is a lower-risk, steady compounding business with a more moderate ROE of 13.5%.