Bajaj Finserve (NSE: BAJAJFINSRV) shares are up 5.6% on Friday on the results from Bajaj Finance. So far so good, the promoter form, with a little over 50% of the equity in the operating firm should be up when the subsidiary reports pleasing results. But as ever when considering these large Indian companies matters are a little more complicated than that. There’s the issue of whether those Bajaj Finance results are, in fact, quite all that. Then there’s the share issue and preferential terms. It’s that second which seems to be driving the share price of the higher level firm up more than those of the operating subsidiary. That’s the little oddity which needs the explanation at least.
The basics at Bajaj Finance: “rising for a third straight session after the non-banking financial company (NBFC) released its Q2 business update. The NBFC’s new loans booked during the July–September quarter rose by 26 per cent to 85.3 lakh as compared to 67.6 lakh recorded in the corresponding quarter of the previous fiscal. The counter gave up initial gains and ended at Rs 7,865, down Rs 102.6 or 1.29 per cent on NSE.”
And, well, yes. The grand experience from elsewhere in the world is that the big test for a non-bank finance company is not being able to lend more money. Any fool can do that. The difficulty is in finding people worth lending more money to. Adam Smith wrote on this near 250 years ago after all. The test is when all those new loans get paid back – or don’t, as the case may be. On the other hand this is India, with a corpulent banking system and also near startling levels of economic growth. So, opinions can be mixed on that.
Bajaj Finserve share price from Google Finance.
It’s the other part of the announcements that really seem to be driving Finserve, rather than Finance, higher: “The board of Bajaj Finance has approved raising up to ₹10,000 crore via a QIP (qualified institutional placement) and preferential issue to parent Bajaj Finserv. The NBFC plans to raise up to ₹8,800 crore via a QIP, and the remaining up to ₹1,200 crore via the preferential issue of shares, it informed the exchanges. As a part of the preferential issue, Bajaj Finance will issue up to 15.5 lakh convertible warrants to Bajaj Finserv. Following the issue, the promoter’s share in Bajaj Finance will increase to 52.57 per cent from 52.45 per cent.”
The issue there is warrants. That means that Finserv can share in the outcome of Finance’s growth but without having to pay up fully to do so. 25% down then see how it goes. That is not just a preferential issue it’s preferential treatment – as such then yes, the value rise in Bajaj Finserv should be higher than that in Bajaj Finance. Same upside, lower downside, that is worth money.