BAJAJ FINANCE - New shareholders rewarding existing shareholders
Demystifying the effect of fundraising on shareholders' wealth.
Every time Bajaj Finance announces fresh issue of equity shares the market cheers the fundraise plans. But isn't it counterintuitive, when other banks and NBFCs announce a fundraise, there is always dilution highlighted by the analyst and investor community.
Let's deep dive to know why fresh capital infusion is positive for existing investors of companies like Bajaj Finance.
Earlier Fundraise
In 2019, Bajaj Finance raised Rs. 8500 crore through QIP by issuing 2.18 crore shares. Total equity of the company was Rs. 19,200 crore. The fundraise amounted to a whopping 44% of the outstanding equity. Markets were betting positively on the growth prospects but didn’t panic on dilution. In fact, book value per share increased post this QIP!
Let's understand why exactly this happened -
High price to book multiple of approximately 9x
Quantum of fundraise.
Bajaj Finance is a quality NBFC primarily engaged in consumer finance. In the last 10 years, the company has consistently grown topline and bottomline at 25%+ rate while maintaining best in class asset quality. Due to this impressive track record, it has traded at a median Price to Book multiple of 9x. Higher Price to Book ratio enables the company to raise fresh equity at high valuations while keeping dilution low for existing investors.
Recent Fundraise Announcement
Recently, Bajaj Finance announced that its Board of Directors will meet to decide upon fund raise. After the announcement the stock rallied.
We will now calculate how much book value per share will increase if the fresh issue is of Rs. 12,000 crore (assumption). Current book value of the company is Rs. 899.30 per share. Assuming the QIP will happen at Rs. 7700, Bajaj Finance is trading at P/B of 8.5. To raise Rs. 12,000 crore at price of Rs. 7,700 per share it will have to issue 1.56 crore shares. Total shares post QIP will be 60.71 crore and Total Equity will be Rs. 66,371 (54,371 crore before QIP). Thus, book value per share will be 1093.25 per share. A gain of 21.57%.
What if fundraise what at depressed valuations
Assuming if it had traded at book value of less than 1x, say 0.8x, its share price would have been Rs. 719 and it would have to issue 16.67 crore shares. New Book value per share would then be Rs. 860 per share and loss of 4.31%.
Past fundraise of BAJAJ FINANCE & Gain of Book Value
As discussed earlier the two things which matter most are -
High price to book multiple of approximately 9x
Quantum of fundraise.
Let's refer below chart to understand how much book value per share Bajaj Finance stands to gain / lose when the above two variables change:
Conclusion:
As we can see in the chart, the higher the quantum of fundraise at steeper P/B Multiple, higher is the book value accretion for existing investors. Favoring companies based on low price to book multiple may not be the optimum strategy as above mentioned variables work in opposite direction. Market values banks and NBFCs on price to book multiple, hence when book value per share rises market cap will rise considering they will be valued at same price to book multiple. For companies growing at rate faster than Return on Equity high quantum of capital raise at higher P/B multiple is possible. But the same shouldn’t be done by slow growing companies, as it takes time to consume capital and deliver healthy RoE. Generally, dilution is considered negative for equity shareholders but for NBFCs trading at higher price to book multiple this is a blessing in disguise.
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