Bajaj Holdings: Indian Holding Company at Steep Discount to NAV

Deepinder Bhatia of presented his in-depth investment thesis on Bajaj Holdings (India: BJHI) at Asian Investing Summit 2020.

Thesis summary:

Bajaj Holdings is an Indian holding company, 46% owned by the Bajaj Group, with a market capitalization of $2.6 billion. BJHI’s major listed holdings are: (a) Bajaj Auto (31.5% owned by BJHI), founded in 1926, and (b) Bajaj Finserv (39.3%).

Bajaj Auto is the second-largest global motorcycle manufacturer and the global leader in three-wheelers, with ~42% volume (by value) exported to Egypt, Nigeria, Sri Lanka, and other countries.

Bajaj Finserv is a diversified financial services company encompassing lending and insurance businesses via (a) 55%-owned Bajaj Finance, which offers consumer loans (~2% market share, 37% five-year loan CAGR, 31% growth in customers in 2018); and (b) 74% of Bajaj Allianz Life Insurance and 74% of Bajaj Allianz General, both unlisted.

Bajaj Holdings provides exposure to the underpenetrated and highly profitable Indian consumer financial services space as well as increasing penetration of two-wheelers across India and other emerging markets. BJHI shares recently traded at a deep discount to NAV (66%, as compared to an average of 58% over the past five years) and a low P/E multiple (5.2x) based on normalized look-through earnings.

The weakening economic environment in India will severely test financial services companies. Bajaj Finance, the consumer lending subsidiary of Bajaj Finserv — and the business most at risk at the moment — has a capital adequacy ratio of around 26%. Even a ten-fold increase in non-performing assets (up from Bajaj’s industry-best normalized 0.7% to ~7.0% of assets), if it occurs, will be an adverse “earnings event” and not result in impairment to shareholders’ equity or reserves. Deepinder expects liquid, well-capitalized, and conservatively managed players such as Bajaj Finserv, Bajaj Finance, and Bajaj Auto to emerge as long-term winners.

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About the instructor:

Deepinder Bhatia is the Founding Partner and Portfolio Manager of Bayard Asset Management LLC based in Princeton, NJ. Launched in April 2011, BAM manages a concentrated, long-biased, value oriented, global equity fund. At purchase the majority of Bayard’s holdings have limited sell side coverage, net cash balance sheets, trade at less than 10 P/E, less than book value and more than 5% dividend yield. From 2004 to 2010, Deepinder was an Investment Manager and Partner at Ironbound Capital, a global equity long-short hedge fund with peak assets of about US$1 billion. Deepinder joined the buy-side in 1994 as an Investment Analyst specializing in Asian equities at Merrill Lynch Investment Managers (now BlackRock). At MLIM he was part of the Pacific Group which managed around US$5 billion in Asian equities via mutual funds, separate accounts and hedge funds.His education includes an MSc in Economics from the London School of Economics (1994), MBA from The Wharton School of the University of Pennsylvania (1992) and a Bachelor in Commerce from Bombay University (1987). He has qualified as a CFA Charterholder from the CFA Institute (2000), and as a Chartered Accountant from The Institute of Chartered Accountants of India (1988). Deepinder volunteers on various non-profit investment committees in Princeton town, is a member of the Board of Trustees of the Princeton Day School and is a Founder Charter-Member of The Indus Entrepreneurs (TiE Philadelphia). Deepinder and his family have lived in Princeton, New Jersey since 1994.