0:00

A quick announcement: head of the episode.

0:02

I will be co hosting a multi

0:04

day event with David Sandra in September.

0:06

It's going to be a business breakdowns

0:09

and founders collaboration. And if

0:11

there's one thing that you learn from

0:13

studying these businesses, from studying founders just

0:15

existing in the business community, It's.

0:18

That relationships run the

0:20

world. And. This is gonna be an event.

0:22

Tailored. For the investment community. We're.

0:24

Gonna review each application to ensure it's

0:26

the highest quality audience. It's limited in

0:29

size so you do want to make

0:31

sure that if you're interested, you preserve

0:33

your spot. today. In the event

0:35

is structured to foster relationships. it's gonna

0:37

be on a private location. The only

0:40

people on site will be attendees of

0:42

the conference. There will be limited main

0:44

stage talks and instead we're gonna have

0:46

a lot of smaller breakouts, panels, and

0:48

significant time for one on one conversations.

0:50

All of the details can be found

0:52

in the show. Notes were the will

0:54

be a link or he can go

0:56

directly to join colossus.com/events. And.

0:59

I'll leave you with this. I attended David's

1:01

event in March of this year twenty Twenty

1:03

four and just yesterday I was looking at

1:05

my phone considering this upcoming conference and I

1:07

noticed there were four different people that I

1:10

spoke to yesterday. That. I had met

1:12

for the first time a David's conference. And.

1:14

Since then, we've continued to talk. Continue.

1:16

To foster relationships. And. Who

1:19

knows where these relationships might over. When.

1:22

You gather these groups of people in the

1:24

right type of environment. That's. Where relationships

1:26

com a very interesting things are us.

1:28

So. Please make sure to check out

1:31

the link in the show notes

1:33

or again join colossus.com/events. For. More

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3:43

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3:46

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3:48

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3:51

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3:57

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4:07

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4:09

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4:12

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4:18

only and should not be relied upon

4:20

as a basis for investment division. Welcome

4:24

back to Business Breakdown. Today

4:26

we are covering India's

4:28

largest non-banking financial company,

4:31

Bajaj Finance. Today,

4:33

Bajaj has a market cap over

4:35

$50 billion, which can

4:37

largely be attributed to the significant growth

4:40

over the past two decades. To

4:42

break down Bajaj, I'm joined

4:44

by Sarab Murkaji, the founder

4:46

and CIO of Marcellus Investment

4:49

Managers. Now, Sarab previously

4:51

joined us for a breakdown on Titan

4:53

and returned to dive into this

4:55

specialized lender. One of

4:57

the headline numbers that immediately caught my attention from

5:00

Bajaj is that the loan book compounded 40% from

5:02

2009 to 2022. But

5:06

we won't just judge that book value

5:08

by its cover here. We needed to

5:10

dive into what Bajaj is actually capturing

5:13

in the lending economy. And

5:15

Sarab gets us into the unique

5:17

dynamics with India's lending system, how

5:20

Bajaj embedded itself into the

5:22

consumer durables purchasing funnel and

5:24

how this business has performed in various

5:27

cycles. Regardless of how

5:29

you interpret the loan book, it

5:31

is fascinating to see how Bajaj

5:33

has become this extension of manufacturer

5:35

sales forces. And there's a lot

5:37

to learn here, particularly going into a new

5:39

geography outside of the U.S. to see how

5:41

the lending system works. Now,

5:43

please enjoy this breakdown. Bajaj.

5:48

All right, Sarab, thank you for

5:50

coming back for round two of

5:52

Business Breakdowns. I am excited to

5:54

go back to India to cover

5:56

a business there, the fans of

5:58

Business Breakdowns in India. are loud

6:00

and vocal and always excited when

6:02

we cover a name in India.

6:06

Today, we'll be covering Bajaj Finance, a

6:08

company that I knew very little about.

6:10

I'm guessing many in our audience will

6:12

also be unfamiliar with Bajaj or BFL,

6:14

as I'll likely refer to it throughout

6:17

the conversation. So maybe we can just

6:19

start extremely high level, set the scene

6:21

for the company. What do they do?

6:24

What do they sell? Any metrics around it to

6:26

give a sense of the size of this business would

6:28

be a great place to start. Firstly,

6:30

thank you for inviting me back. Last

6:32

year, I did my first business breakdown.

6:34

That was a lot of fun. So

6:36

looking forward to this one, Bajaj Finance,

6:38

BFL as you called it. This is

6:40

India's largest retail lending, NBFC. So NBFC

6:43

stands for Non-Bank Financial Company. Basically, this

6:45

is our shadow lending sector. So BFL

6:47

is India's largest retail lending,

6:49

NBFC. Majority, nearly 60% of

6:52

India's consumer durable loans are made by

6:54

this one company. And as

6:56

we've discussed over the course of this

6:59

session, the competitive advantages really are around

7:01

very low cost of funds, a uniquely

7:03

intense work culture and state of the

7:06

art technology. But before we get there,

7:08

just to contextualize BFL, I'll give you three dimensions

7:10

to think about this. In the

7:12

Indian economy, credit outstanding grows at around

7:14

11%. Over

7:16

the last decade, Bajaj Finance has grown

7:19

its loan book at thrice as fast,

7:21

sustainably thrice as fast as the broader

7:23

lending sector in India. The second

7:25

way to contextualize it is just to think

7:27

about the lending sector in India. Banks

7:30

lend around $2 trillion in India. The

7:32

non-bank sector lends around $250 billion. Bajaj

7:36

Finance's loan book is $40 billion. So

7:38

roughly one in five non-bank loans in

7:40

India, one in five non-bank loans

7:43

in what is the world's fifth largest economy

7:45

is made by this lender. And the final

7:47

way to contextualize Bajaj is just to look

7:49

at the compounding. And over the last 16

7:51

years, this company has compounded

7:53

share prices 1000X. That's

7:56

underpinned by 30% loan book Kaggart,

7:58

50% F So

8:00

50% Pat Kaggart over 16

8:02

years, I think that's roughly 650x

8:05

Pat compounding over 16 years. So

8:08

we're looking at an extraordinary lender which has

8:10

achieved exponential growth and what is one of

8:12

the world's fastest growing economies. And

8:15

to separate what would be a

8:17

bank loan or the customer base

8:19

for traditional bank loan versus someone

8:21

who would use BFL for that

8:23

non-traditional loan or non-bank loan, can

8:25

you just describe the differences in

8:27

terms of the customer bases there

8:29

or who they would be targeting?

8:32

So what Bajaj did very well and

8:34

I think a lot of the credit

8:36

for this goes to my erstwhile neighbor

8:38

who's the CEO of Bajaj Finance Rajiv

8:40

Jain and really the transformational figure for

8:42

Bajaj in the last 16 years. So

8:45

the area that Rajiv and the owner

8:47

group at Bajaj Finance identified was aspirational

8:49

Indians, Indians who want to upgrade their

8:51

lifestyle but for whatever reason can't get a

8:53

loan from a bank or can't get a credit card

8:55

from a bank. And the core

8:57

customer acquisition engine is to give working

8:59

capital loans or consumer durable loans to

9:02

these upper middle class or middle class

9:04

aspirational Indians. Bajaj Finance does this

9:06

through 100,000 consumer durable stores. I

9:10

would say in excess of 10,000 auto showrooms,

9:12

it's an app which has been downloaded by over

9:14

50 million Indians and just to put it in

9:16

simple terms, I reckon there are at least 200,000

9:19

venues in India where you can get

9:22

a Bajaj Finance loan and the lending

9:24

product itself is unique and this is

9:26

really the innovation that made Bajaj Finance

9:28

a giant compounding engine. The

9:30

mainstay product is called a no cost

9:32

EMI. So EMI stands for equal monthly

9:34

installments and this is a consumer trying

9:36

to buy a TV or an air

9:38

conditioner or a fridge and he

9:40

rocks up at the local consumer durable store and

9:42

let's think about a consumer wants to buy a

9:45

fridge. The fridge costs $1200. Bajaj

9:48

says no problem, you don't have to pay upfront

9:50

for the fridge, We will lend you the

9:52

money and guess what, you don't have to pay any

9:54

interest on this. This was a mind blowing innovation. In

9:56

Fact,: even when I heard it from my first client,

9:58

I was like, I don't know. Labour the Now

10:00

see you. I could barely believe it. I

10:02

first heard about this Fell thirty years ago.

10:05

I thought there's a catch. How can you

10:07

make money so quickly? Explain how this than

10:09

one hundred dollar fridge lot where the customer

10:11

doesn't be any interest makes money effectively. The

10:13

manufacture of the fits assume Samsung Gear. Much.

10:15

As will be Samsung not fell hundred the

10:17

judge will be Samsung. Well hundred less Five

10:20

percent. Said. Discuss One One Four

10:22

Zero dollars That five percent is the

10:24

marketing discount that Samsung is basically getting

10:26

of a to buy Such a customer

10:28

will be a small up front six

10:31

feet and even the the customers being

10:33

hundred dollars times twelve and describing the

10:35

trend hundred dollars that fight the sand

10:37

marketing fi that samson the speed Bajaj

10:39

results in a twenty percent plus I'd

10:41

I'd for Bajaj that's a win win

10:44

for everybody. Samsung shifts, it's figures quicker.

10:46

The. Customer gets to by the fridge without any

10:48

payment up front of the low cost financing.

10:51

The. Retailer couldn't be happier. The stuff is

10:53

flying off the shelves and Bajaj acquired a

10:55

middle class upper middle class aspiration consumer with

10:57

a lower risk product on a smart to

10:59

could learn. this is the customer acquisition engine

11:02

nobody else has been able to do. and

11:04

we will do a will landing on the

11:06

scale. And this is really what Bajaj had

11:08

come to be identified with. And

11:11

in that example, can you

11:13

talk about that timeline for

11:15

obvious collection is coming from

11:18

the consumer in monthly installments

11:20

windows that transaction between the

11:23

manufacturer of the refrigerator and

11:25

Bajaj take place. So.

11:27

Right up front of the moment of

11:30

consumer presses the buy button. But I

11:32

this transferring one one four zero dollars

11:34

to Samsung bank account and the sixty

11:36

dollars is effectively a marketing incentive that

11:38

Samsung has effectively given up to be.

11:40

As if you think about it, Samsung

11:42

is and feed right up front by

11:44

God is getting paid over twelve months.

11:47

But because it's a small to could

11:49

learn and the whole process is highly

11:51

automated, there's barely any human intervention. Even

11:53

the loan underwriting decision is highly automated.

11:55

By that is marginal cost of collecting

11:57

out. is actually quite low and if you ask me

11:59

that The big insight that Rajiv Jain, the

12:01

CEO had 15-16 years ago is that aspirational

12:04

Indians will not default on this fridge loan

12:06

because this is a gateway for them to

12:08

other goodies. If you mess up on this

12:10

loan, your credit score gets ruined and as

12:13

it is getting a credit card from a

12:15

bank, Bajaj Finance is giving you a gateway

12:17

to further loans and indeed cross selling and

12:19

upselling to the customer. The typical customer gets

12:22

upsold and crosssold six products. Cost

12:24

of acquiring a customer is low because

12:26

they're coming to the consumer-durable loans but

12:28

even more interestingly, a repeat customer costs

12:31

Bajaj one-tenth of a new customer in

12:33

terms of operating costs and the credit

12:35

cost in terms of credit risk. The

12:37

repeat customer credit risk is one-third that

12:39

of a new customer. So cross selling

12:41

and upselling that engine, again, I don't

12:43

think anybody has built it quite as

12:46

efficient here Bajaj has done. There

12:48

certainly seems to be some benefits

12:50

to scale here and I think

12:52

with a credit-related business that often

12:54

takes time. We've referenced Rajiv's importance

12:57

to this business but maybe we

12:59

can go back. I know this

13:01

started prior to Rajiv. Tell

13:03

us a little bit about the origination story, the

13:05

founding story and some of the key players that

13:07

have played a role in the business as it's grown

13:09

into what it is today. So

13:11

other than Rajiv, there are three other key

13:14

characters in this drama. So the late Rahul

13:16

Bajaj, he was the founder of the group

13:18

Bajaj Auto, the group that Rahul Bajaj really

13:20

drove through the 70s, 80s, 90s,

13:23

was India's largest two-wheeler manufacturing group.

13:26

Rahul Bajaj is really a JP Morgan-esque

13:28

figure in Indian industry. He was a

13:30

member of parliament. He championed India's development

13:32

through the 70s, 80s, 90s and he's

13:34

really a pivotal figure for Bajaj finance.

13:37

The second important person after Rahul Bajaj

13:39

and the family that we need to

13:41

look at is Sanjee Bajaj. Sanjee

13:44

was Rahul's son. Sanjeev now

13:46

is the chairman of Bajaj Finserv.

13:48

Bajaj Finserv is the largest shareholder

13:50

of BFL. Bajaj Finserv owns, I

13:52

think, 51% of BFL

13:54

and Sanjeev really is the owner, the

13:56

man representing the ownership interest rate Rajiv

13:58

Jain reports into. Sanjeev Bajaj. And

14:01

the third figure is very interesting man. His

14:03

name is Nanu Pramnani. Unfortunately, he passed away

14:05

a few years ago. The late Nanu Pramnani

14:07

is a relative of the Bajaj family. He

14:10

was a star in Citibank in the 80s and

14:12

90s. Rumour has it that had he agreed to

14:14

move to New York, he would have

14:17

ended up running Citibank. But he, we

14:19

in India, very fortunate, he didn't go

14:21

to New York. Instead, he moved to

14:23

Pune and he became a mentor to

14:25

Sanjeev Bajaj, the current owner and Rajiv

14:27

Jain, so he's

14:29

the Machiavellian strategist who helped Bajaj come up

14:31

with this business model. So these are the

14:33

key figures. The origin story, Matt, is in

14:36

1986. So just to paint the picture of

14:38

1986, India was in secondary school then. The

14:40

country was dirt poor, but there were two

14:42

things that were doing well in India in

14:44

the mid 80s. Everybody seemed to

14:46

want to buy a two-wheeler. Bajaj was the market

14:49

leader and everybody wanted to borrow

14:51

some money because we didn't have the much

14:53

money in the 80s. We were a really

14:55

poor economy. India was dominated by government-owned banks

14:57

in the 80s. The government-owned banks were, yes,

14:59

lending to the government. And the only other

15:02

people they would lend to is whoever else

15:04

the government wanted to curry favour with, such

15:06

as, say, farmers. Confirmers are a big board

15:08

bank. The government-owned banks were not interested in

15:10

financing two-wheelers and Citibank was one

15:12

of the few foreign lenders. Citibank was one of

15:14

the few foreign lenders operating in India

15:17

in the 1980s. They obviously saw an opportunity.

15:19

So they reached out to Bajaj Auto, Bajaj

15:21

Auto being the parent company. And they said,

15:23

what if we finance some of your two-wheelers?

15:26

The Bajaj Auto guys said, that's a great

15:28

idea. And these guys spread out across Pune.

15:30

Pune is the city, 150 kilometres

15:32

southeast of Mumbai. And the Bajaj Auto

15:34

team spread out in the factories and

15:36

warehouses of Pune, saying Citibank is happy

15:39

to give you an auto loan to

15:41

buy a two-wheeler. Would you like some

15:43

of this? Now, surprisingly, when they went

15:45

to the Tata Motors, officers met. Officers met

15:47

in a place where the officers relaxed in the

15:49

afternoon. The Tata Motors offices were all very clever

15:51

engineers. They did the maths and said, hang on,

15:54

this interest rate is looking a little steep to

15:56

us. We don't think they're interested in

15:58

this. Thankfully, somebody in Bajaj Auto at

16:00

the brainwave to say, forget the

16:02

officers, let's go to the factory.

16:04

Let's go to the workers' canteen

16:06

and Tata Motors' Pune plant. That's

16:08

where the workers took the Bajaj

16:11

Auto scooter financed by Citigroup. In

16:13

fact, the response was so enthusiastic

16:15

that Tata Motors allowed the Bajaj

16:17

Auto team to come for three

16:19

consecutive days to finance these loans.

16:21

I think in three days, they

16:23

sold 2000. They sold 2000 scooters

16:25

on auto finance from Citibank and

16:27

thus the beta testing was done.

16:29

Subsequent year, Bajaj Auto finance was created.

16:32

Unvertically Citibank had done a beta test

16:34

for what has become one of the

16:36

most successful lenders in the bank. That

16:38

was the inception story. 87 is when

16:40

the company begins. Did

16:43

Citibank maintain any economic interest

16:45

or any type of partnership

16:47

with Bajaj into the future?

16:50

Not that I know of. Remember, the

16:52

other Citibank link is Nanupam Nani, the

16:54

late Nanupam Nani, who was a big

16:56

wheel in Citibank and I think their

16:58

Ishan operation ends up joining Bajaj in

17:00

2007 as a mentor. But in between

17:02

the origin in 87 and

17:05

Nanupam joining Bajaj in 2007, as I

17:07

think the vice chairman, in that interim

17:09

20 years, Bajaj Auto Finance took off.

17:12

I think Citibank had its parallel lending

17:14

business. Citibank continued doing consumer durable and

17:16

two-wheeler finance on its own steam, ironically

17:19

until the Lehman Brothers crash in 2008,

17:21

at which point Citibank stopped doing all of

17:23

this stuff in India. That Lehman Brothers crash.

17:25

Bajaj Auto Finance also suffered. I remember I

17:28

just arrived in India at that juncture and

17:30

I remember unperforming assets for Bajaj went from

17:32

2% in 2007 to 12% in 2009. So

17:38

6x jump in NPAs. Liquidity had dried up

17:41

across the world, including in India. Default rose

17:43

and NPAs went 6x and the return on

17:45

equity, which used to be a healthy 25%

17:47

in 2007, fell

17:50

as low as 1% by

17:52

2009. I think ROE was down to 1.

17:54

So this is the pivotal point. So 87 to 2007 is

17:58

uninterrupted growth. Then Lehman

18:00

Brothers disrupts the story, none arrives at

18:02

the request of the patriarch to basically

18:05

mentor the new CEO and the patriarch's

18:07

son. And then this Troika, this Troika

18:09

really constructs the business model that we

18:11

know Bajaj Finances to be. The consumer

18:13

durables business model, the zero cost EMI

18:16

business model. And in that regard, I

18:18

think Lehman Brothers was a blessing in

18:20

disguise. Had Lehman not happened, had Bajaj's

18:22

profitability not got crushed in those two

18:25

years, I don't think the reinvented Bajaj

18:27

Finances would have been born with quite the vigor

18:29

that we see in the firm today. There's

18:31

a few things that I wanted to

18:33

hit on there. One of the things

18:36

that stands out about the key members

18:38

of this story is that they seem

18:40

to have this family relation. And I'm

18:42

curious if that's common in India to

18:44

see so many of the key players

18:47

end up being family related in these

18:49

businesses or if that feels somewhat unique

18:51

to BFL. So

18:53

family-run conglomerates still dominate their industrial

18:56

landscape in India. Broadly speaking, you

18:58

have two family-run conglomerates in India,

19:00

Matt. One is the Tata's or

19:03

the Mahindra's. There is a

19:05

founding family, but there are very few

19:07

active family members left in leadership roles.

19:09

So in the Mahindra Empire, for example,

19:11

none of the founding family members are

19:13

active participants in the business. And actually,

19:16

even in the Tata family, barring one

19:18

or two members, nobody is an active

19:20

part of the colossal empire of the

19:22

Tata's. And the second type of

19:24

Indian conglomerate is like the Bajaj conglomerate,

19:27

where the family members are very active.

19:29

They are making critical capital allocation calls.

19:31

Reliance industry is also very similar. Family

19:33

members are active. So we really have

19:35

both. In India, the origins of this

19:37

go back to the fact that we

19:39

were a very capital poor country. Until

19:41

20 years ago, capital was scarce. And

19:43

therefore, if a business happened to have

19:46

some profits, recycling those profits to build

19:48

out a conglomerate was the best use

19:50

of capital. Raising capital from the broader

19:52

financial system was a cumbersome and high

19:54

cost affair and thus the rise of the Indian

19:56

conglomerate. The cost of capital advantage, I

19:58

think for many US listeners. listeners, coming from

20:00

a 15-year period with very easy access

20:03

to money, it is lost and we've

20:05

seen conglomerates certainly fade in terms of

20:07

the relevance versus where they were many

20:09

years ago. But I think that story

20:11

certainly rings true when we look at

20:13

history. The other thing that

20:15

I was curious about is you mentioned

20:18

they took this, what was intense downturn

20:21

and it turned into a great

20:23

opportunity for them to pivot or

20:25

evolve the business model. Just

20:27

looking back at that period of time,

20:29

it seems like the type of event

20:31

that could have easily brought them down

20:33

in terms of their exposure, did they

20:35

require any type of bailout, rescue funding

20:38

or was it run with some type

20:40

of appropriate leverage levels on the overall

20:42

business which allowed them to escape? There

20:45

was an equity raise. I remember six or

20:47

seven months after Lehman went bust, there was

20:49

an equity raise. There wasn't any

20:51

government bailout. What I think

20:53

saved them from a financial standpoint was

20:55

not only are they an NBFC, they're

20:58

a very rare type of NBFC, they're

21:00

a deposit taking NBFC. That means like

21:03

a bank, they can approach the public

21:05

for time deposits. Now, the Bajaj family

21:07

has a very good reputation, notably they've

21:09

never defaulted. So because the family's reputation

21:12

is so stellar, Bajaj Finance Limited, BFL

21:14

was able to raise debt finance in

21:16

the wholesale market and the retail market

21:18

courtesy the holding company stellar reputation. Without

21:21

that, I think raising debt finance

21:23

post Lehman would have been I think close

21:25

to impossible. I remember 2009, raising

21:27

debt finance in India was tough. So there

21:29

was an equity raise but there was no

21:32

further bailout required. And to this day, the

21:34

fact that Bajaj Finance Limited has a deposit

21:36

taking license and the Bajaj name gives them

21:39

the lowest cost of funds of any NBFC

21:41

in India. They basically get money at 7.5-8%.

21:45

To Americans that might sound like a very

21:47

high rate but just remember the Indian 10-year

21:49

bond deal is 7%. So

21:51

this company is raising money at 100 bps

21:54

over the sovereign and that money is then

21:56

the engine for all the clever lending that

21:58

they do. And I think

22:00

we talked a bit about what their

22:03

customer base looks like today, getting

22:05

into what is ultimately required

22:08

with these businesses, which is

22:10

how they actually go about

22:12

underwriting, a little bit of

22:14

the go-to-market, which you've described. But

22:16

can you talk through that model,

22:19

which seems to have really differentiated

22:21

from competitors and given them this

22:23

advantage relative to anybody else in

22:25

the space? So let

22:27

me begin by focusing on what I think

22:29

is their two comparative advantage. Effectively, Matt, this

22:31

is a tech company in the guise of

22:33

a lender. The reason I say that is,

22:35

so I arrived in India in 2008. At

22:38

that time, I realized that Rajiv Jain owns a

22:40

condo next to where I live in Mumbai. And

22:43

at that time, they were like any other

22:45

lender. BFL then used to rely on credit

22:47

bureau data. Our largest credit bureau is called

22:49

Cibil. This is the Indian equivalent of Equifax.

22:52

So BFL used to rely on credit bureau data. Somewhere

22:55

around 2010-11, they hit

22:57

upon a construct where they would use

22:59

sample sizes of 10,000 customers

23:01

to experiment with different underwriting models. So

23:03

let me give you an example to

23:05

explain how this works. India

23:08

has around 1.2 million doctors. So

23:10

2010-11-12, I won't be able to tell

23:12

you exactly which year, but somewhere in

23:14

that era, Bajaj Finance experimented with roughly

23:16

10,000 doctors. They lent to 10,000 doctors.

23:19

Doctors typically in India need working capital loans

23:22

to grow their practice. And Bajaj

23:24

Finance started stratifying these 10,000 doctors into

23:26

600 buckets. And

23:29

the buckets could be based on things like, has

23:31

the doctor gone to a leading med school such

23:33

as the All India Institute of Medical Sciences? Or

23:35

did he just go to the med school down

23:37

the road where he gave a donation to the

23:40

principal to get a place? Secondly, is the doctor

23:42

an oncologist or is he a general physician? Is

23:45

the doctor's clinic, is it in a very affluent

23:47

part of town like Malabar Hill in Mumbai or

23:49

is it in the back of the yard? So

23:51

if the doctor and oncologist from the top med

23:53

school and has a clinic in the best part

23:55

of town, then Bajaj said let's give him a

23:57

loan at a super low cost. vice

24:00

versa if it's a doctor which looks a little

24:02

ropey. This construct gave them two benefits.

24:04

Over time they played around and experimented and

24:06

nailed down the metrics which drive an ideal

24:09

doctor loan. But what it also did was

24:11

the lower quality doctors, the higher risk

24:13

doctors were weeded out of the portfolio.

24:16

They found that they could get cheaper

24:18

lending elsewhere and the book cleansed itself,

24:20

the book almost self-corrected away from high

24:22

risk doctors. Now these data

24:25

points, I gave you three data

24:27

points, the med school, location and

24:29

the doctor's area of specialization. Today

24:31

Bajaj Finance uses 1000 data

24:34

points on each customer to make the

24:36

lending decision. This is all automated. Rather

24:38

than a million doctors they have 200 million

24:40

Indians in their database. So we just do

24:42

the math on that. 200

24:44

million Indians times 1000 data points.

24:47

Bajaj Finance's database has 200 billion

24:49

data points inside it. This data lake

24:51

is getting churned every day and especially

24:54

when we get to festive season in

24:56

India, our equivalent to Christmas is Diwali,

24:58

the data lake almost explodes. As a

25:00

result Salesforce which is the analytics and

25:03

CRM provider to Bajaj, we hear that

25:05

Salesforce has a separate database entirely for

25:07

Bajaj Finance and from what we understand

25:09

this is the only lender in the

25:12

world that Salesforce treats in this manner.

25:14

This really is the heart of

25:16

the Bajaj Finance comparative advantage. To

25:18

run this data lake they hire

25:20

dozens of graduates from India's top

25:22

engineering colleges which is the Indian

25:24

Institute of Technology, computer scientists, electrical

25:26

engineers, data scientists. It's a vast

25:28

team. I think the headquarters building

25:30

alone there are 1000

25:32

data scientists and electrical engineers working on this

25:35

vast data lake. So this is the first

25:37

comparative advantage. It'll be really really difficult for

25:39

someone else to build it because you got

25:41

200 million Indians thousands of

25:43

data points and years of experience

25:46

of how to mine that data. The

25:48

second aspect was very hard for others

25:50

to replicate as a culture. So

25:52

I Found out about this around seven years

25:54

ago. I First invested in the stock and

25:56

I've gone to meet Rajeev Myers, my neighbour,

25:58

now the CEO. Understand or the

26:00

company was doing and his office executive assistant

26:03

called me to say that the meeting will

26:05

be at seven o'clock So I said seven

26:07

pm. she's in a lot seventy him and

26:09

I was living in a back. but then

26:11

I realized that that's when everybody starts woken

26:14

by God. in fact to start working baggage

26:16

finance at quarter to seven every day. it's

26:18

a sixty five hour work week. Everybody's solar

26:20

to sixty five hour work week. And if

26:23

you can't deal with that please move on

26:25

to the motto is do more on more

26:27

and this aspect to the to driven culture.

26:29

Everybody from. The see your down to

26:31

the youngest graduates will do a Sixty

26:33

five are Wilkie, I suspect. actually they

26:36

do far more. Sixty Five is the

26:38

message that he gets. now. Alongside this

26:40

every month employees are eligible for a

26:42

bonus. The ninety pursue the workforce gets

26:45

a variable incentive every month. These.

26:47

Incentives that again coded. this is a highly

26:49

mattress sites reward system and a bend over

26:51

three months. There's an auto credit of your

26:53

months bonus basis your performers that month and

26:56

I was already agreed with your the beginning

26:58

of the you. Are. You think that

27:00

this ruthless performance oriented culture will result in

27:02

high attrition, but you'd be surprised. Attrition and

27:04

actually fifteen percent. the typical employee works here

27:06

for six years. Part of the reason as

27:09

the on we more than what they would

27:11

had a competing lender. And. Final bit

27:13

of the culture bit and this is a unique

27:15

to India. Firms like Data Her gee that's pump

27:17

probably had this in America would would be have

27:20

done and a unique to India's. Every.

27:22

Year there's a five day longer

27:24

is planning process. From. What we

27:26

understand to go there to a mountain resort.

27:28

the High: can climb mountains and in between.

27:30

Distract the guys about the next five years

27:33

and then look at globally successful companies like

27:35

Microsoft or Netflix or Amazon and they'll see

27:37

what can be learned. How can we started

27:39

ice that five? Your L R P is

27:41

then the spine that gets updated every year.

27:43

I haven't seen any of the Indian Fum

27:46

plan as strategically do that, I'll be them.

27:48

Give you the metrics on with the incentive,

27:50

Be outside. Done. And. The thing is,

27:52

the long range plan gets booted out the most

27:54

union was employed. to the incentive

27:56

construct with kicks in every month and

27:58

the final pieces joke reach. I

28:00

already mentioned that 100,000 consumer

28:03

durable stores, tens of thousands of auto

28:05

showrooms, 52 million

28:07

app downloads already. If

28:09

you are a new consumer durable player,

28:12

LG, Samsung, Sony, you want to make it

28:14

big in India, you have to pick up

28:16

the phone and call BFL because this is

28:18

your plug and play into the Indian customer

28:21

ecosystem. But it's not just scale.

28:23

The typical BFL loan is given in

28:25

90 seconds. So I live in a

28:27

reasonably affluent part of Mumbai. If I

28:29

go to the local consumer durable store,

28:31

there will be BFL's lending desk and

28:33

some of India's largest banks and non-banks.

28:36

Everybody else barring BFL will take a

28:38

couple of hours for that consumer durable

28:40

loan. BFL is 90 seconds. The reason

28:42

for that matter is, they've already credit

28:44

assessed the customer long before the customer

28:47

walked into the store. Now, you

28:49

as a new entrant into the Indian market will

28:51

say, I want reach. I also want most people

28:53

to get the loan. Otherwise, how will my product

28:55

sell? I don't want the customer to have to

28:57

hang around, I don't want a higher rejection rate.

29:00

It's very difficult for anybody else to provide that

29:02

plug and play and thus you create a virtuous

29:04

cycle. All the players who want

29:06

to sell their goods in India come

29:08

to Bajaj Finance. Bajaj Finance finances more

29:10

and more customers, more and more data,

29:12

more analytics, better informed algos, lower credit

29:15

costs and thus the virtuous cycle spins

29:17

away. There are so many

29:19

great details in that differentiation and what

29:21

goes into it. I have to mention

29:23

we are recording this at 8.30 pm

29:26

India time on a Friday. So you've

29:28

taken something from their culture and certainly

29:30

applied it to yourself, which I appreciate.

29:33

One of the earlier points you made was

29:35

on the cleansing of the portfolio. And

29:38

just to get a sense of how

29:40

this works with underwriting, is

29:42

it a binary decision where it is

29:44

a yes or a no? Or does

29:46

it extend beyond that in terms of

29:48

the rate playing a role on the

29:50

back end if there's delinquent payments? How

29:52

much variance is there in the underwriting

29:55

process? It's not a binary

29:57

decision. They are basically risk pricing. What

30:00

are the risk? pricing across three different dimensions as

30:02

you rightly picked up for a given customers to

30:04

go back to the doctor. The star

30:07

oncologist in affluent suburb of Mumbai

30:09

with probably get the Louis treat

30:11

but the Gp in the boondocks

30:13

was still get a rate albeit

30:15

a hard one to. there's differentiation

30:17

across a specific set of customers

30:19

but this to other defenses. The.

30:22

Way But Guys runs the businesses that

30:24

are Forty different lending hats, forty different

30:26

products. Each lending had basically runs a

30:29

mini company. So. He loved his

30:31

net interest in Com has seen Com

30:33

utterly utterly the whole nine yards the

30:35

most successful The divisional see you as

30:37

the more capital she will get from

30:39

the corporate center to operate centre saying

30:41

hey I will give you more money

30:43

if you control me growth at a

30:45

really good auto eat and I'm also

30:47

tracking earnest metrics by the the Secondly,

30:49

Eat C O can discriminate across customers

30:51

and thirdly within a specific products. So

30:53

for example within home Loans to see

30:55

you can see I reckon this is

30:57

not a good time to be getting

30:59

home loans. Below bay thousand dollars ticket

31:01

size. let's ramp up on home loans

31:03

about one hundred thousand dollars to get

31:05

site. to their defense you should within

31:07

a specific segment of customers. The. Defense

31:10

you should across different parts of the

31:12

business and as a defense you should

31:14

across some segments of a specific industries

31:16

such as will lose the ability to

31:18

allocate capital on the fly in a

31:20

giant economy as hyper speed. remember the

31:22

book is growing every two and a

31:24

half years. The because doubling to the

31:27

ability to put all of this on

31:29

an industrial scale is again critical skill

31:31

affectively than making millions of capital allocation

31:33

decisions every year and by allows the

31:35

scabbard lot of these decisions the looking

31:37

out. And. In terms of

31:39

managing that risk, are they able to

31:42

work with the manufacturers at all to

31:44

assume some level of that risk were?

31:46

rather than getting five percent discount to

31:48

the list price him I get six

31:50

percent or four percent. Something along those

31:53

lines. Were it there's an adjustment or

31:55

is it all being managed on their

31:57

own? bucks? So. at the

31:59

store live I'm not so sure whether

32:01

there is a variable discounting policy with

32:03

the manufacturers but what we do know

32:06

is in their online proposition, they've got something

32:08

called the Bajaj Mall. It's an online store.

32:10

You can buy durables, auto, all manner of

32:12

electronics and one of the things we can see

32:14

there is roughly on one on three products

32:16

and one in three products sold on the

32:18

Bajaj Mall. You can get prices lower than

32:20

Amazon or Flipkart and we did some work to

32:22

figure out how this is working out and

32:24

what we figured out by talking to some

32:26

of the auto companies whose products are being

32:28

sold on Bajaj Mall is Bajaj's

32:31

algos tell their lending heads

32:33

for example how many 600cc

32:36

mountain bikes will be sold in the next

32:38

30 days. So they will go to the

32:40

manufacturer of that 600cc mountain bike

32:42

and say, listen we're gonna sell 20,000 of

32:44

these. Can you give

32:46

us a lower price than is available at

32:48

any showroom in the country and

32:50

can you also ensure that the price is

32:53

lower than what you offer anybody else, Flipkart,

32:55

Amazon, whoever and as a result of that,

32:57

as a result of them being able to

32:59

predict, Bajaj is predicting how many people will

33:02

buy high-end phones and cars and bikes. They're

33:04

using the algo to negotiate a bulk discount

33:06

and as a result of it, their online

33:08

mall, Bajaj Mall has premium products available at

33:11

discounted prices. So that's where we've seen the

33:13

discount kick in. I'm not so sure at

33:15

the store level they've got variable discounting going

33:17

on with the manufacturers. Very

33:19

interesting point though and the way that

33:22

they can play around with the scale

33:24

advantages that they have and ultimately seems

33:26

to be an extension of the sales

33:28

force of these manufacturers in many ways

33:31

and in a very, very impressive fashion in terms of

33:33

how they can drive a lot of that. On

33:36

the culture point and the willingness

33:38

for the workers to put in

33:40

this time, you mentioned the monthly

33:42

bonus payments. Is that unique to

33:44

this business? Is that fairly common

33:46

in India to see something? I

33:48

think in the US we see

33:50

quarterly and quite a few sales

33:52

positions but monthly is very unique.

33:55

I think many parts of the Indian

33:57

financial ecosystem will have a monthly bonus

33:59

culture. What's unique is the

34:01

metricization and the fact that human intervention

34:03

is not driving the monthly bonus payment,

34:05

that is Algo's driving the whole thing.

34:07

So the stockbroking sector, for example, in

34:09

our country, many parts of the banking

34:11

ecosystem, the credit card industry, there will

34:13

be monthly bonus payments unquestionably, but most

34:15

cases there is human intervention. I think

34:18

what Bajaj has done, and quite deliberately

34:20

so, is made it very transparent and

34:22

thus made it obvious to people that

34:24

if you're an ambitious young professional who

34:26

wants to rise in the financial services

34:28

world and you want to get rich

34:30

reasonably quickly, this is the employer

34:33

of choice. So I've seen whenever I go

34:35

to their office, the average age

34:37

of employees will be south of 30, hungry

34:40

young people. And when we have traveled

34:42

around India, Matt, when we've gone to

34:44

smaller towns in India, the town head

34:46

will be typically a 28, 29-year-old, three

34:48

or four years out of college, hungry

34:50

young man or woman, pushing himself hard

34:52

to make sure that those incentives click

34:54

in into his monthly pay. On

34:56

the geographical reach and the expansion

34:58

within India, I think one of

35:01

the takeaways from our series Return

35:03

on India and just what you

35:05

described earlier, population is basically 20%

35:07

of the globe. It's

35:10

not homogenous. You have different areas,

35:12

different cultures within those areas, different

35:15

demographics, particularly on the wage side

35:17

of things. As they've expanded, have they

35:19

hit any bumps in the road as they've

35:21

gone into more and more

35:24

of the geography? How has

35:26

that expansion gone and have there been any hiccups

35:28

along the way? So look, I

35:30

think I'm sure there have been geographical hiccups.

35:32

I think for reasons of political sensitivity, they

35:35

probably don't make those public. So for example,

35:37

the eastern side of India is lower income

35:39

and lower growth than the west and the

35:41

south. In fact, the south of India is

35:44

almost twice as rich as the rest of

35:46

the country. And therefore, as you can imagine,

35:48

west and south, Bajaj has had far more

35:51

traction. Some of the poorer eastern states, I

35:53

reckon their footprint is weaker, where I

35:55

think they've been able to, and this is both a forward

35:57

looking point and I think a point about the last three

36:00

four years where I think they've got a

36:02

real tailwind behind them is the rise of

36:04

mobile data in India. So 2016 is

36:06

when GEO launched its incredibly cheap mobile

36:08

data plan. Basically because the mobile data

36:10

in America is 40x what it is

36:12

in India. So we in India get

36:15

incredibly cheap mobile data and Bajaj Finance

36:17

realized that as mobile data gets cheap

36:19

Indians will take to their mobile phones.

36:21

So around three years ago I think

36:23

at the height of the pandemic they

36:25

pushed themselves really hard to launch their app at the

36:28

height of the pandemic and that resulted

36:30

in 50 million plus downloads. Interestingly they

36:32

didn't spend a single dollar on marketing

36:34

that. Without marketing the app 50 million

36:36

downloads and the Bajaj Mall and the

36:38

app into place. The app not only

36:40

has lending it also has the mall.

36:43

I think they also have stock broking

36:45

on top of it. India is adding

36:47

roughly 10 million to 20

36:49

million new stock broking customers in the

36:51

Indian market every year. So you're seeing

36:53

the creation of an online financial services

36:55

giant in the space of three years

36:57

and not only is it stock broking

36:59

not only is it the Bajaj Mall

37:01

not only is it lending but it's

37:03

also a payment app. Their Bajaj pay

37:05

app has been very successful. A decade

37:07

or so ago the government launched a

37:09

variety of initiatives which have resulted in

37:11

something called the unified payment interface. Basically

37:14

half of Indian GDP now works on

37:16

Indians paying each other using their phones

37:19

using UPI but to access UPI you

37:21

got to go through apps. Google for

37:23

example has a very successful app but

37:25

Bajaj pay has also scaled. My reckoning

37:28

is the largest FinTech player has effectively

37:30

become Bajaj finance and they've done so

37:32

really quietly without any burn on marketing

37:34

at all. The 50 million

37:37

app downloads we have Tinder in the

37:39

US for much different reasons but I

37:41

think you could tie all of these

37:43

things to various needs of people that

37:45

gets ingrained in us. One

37:47

last point on the things you described and

37:49

you've touched on it a few times the

37:52

importance of the physical presence in stores and

37:54

pairing that against that app presence which I

37:57

think you pointed to and particularly during the

37:59

pandemic why we was so important. As

38:01

you look into the future, I don't

38:03

know if you have a sense of

38:05

what percentage of business is now done

38:07

through the app or online versus in-store

38:09

or on-site, but any sense of what

38:11

that looks like as a split and

38:13

then just your general sense of where

38:15

you expect those to trend over time.

38:18

Starting with the in-store presence, both with

38:20

the local consumer durables store near my

38:23

house and in general across India, I've

38:25

seen that the in-store Bajaj finance guy

38:27

or girl basically does two things really

38:29

well. Firstly, they will urge you to

38:31

upsize your products. So, if you're buying

38:33

a 32-inch TV, why a 32-inch TV?

38:35

Surely, you look like a person who

38:37

could do with a 42-inch TV and

38:39

again, that's a win-win for the retailer

38:41

and for the OEM. And the

38:43

second thing is, once they have realized that you've

38:45

bought as big a TV as you possibly wanted

38:48

to, they will start the process

38:50

of cross-selling the Bajaj finance products. So, Matt,

38:52

I see you've taken a TV loan. Do

38:54

you know we have an extremely attractive offer

38:57

for car loans? Here is our app. You

38:59

might want to look at the car loan

39:01

offers on that. So, the in-store customer acquisition

39:04

is both driving up the ticket size of

39:06

that loan and then beginning the upsell journey

39:08

for further loans. The amount of share that

39:10

the Bajaj finance desk in a store will

39:13

have will be somewhere around 70-80%.

39:15

I live in an affluent part of Mumbai where

39:17

you think people won't need a loan to buy

39:19

a fridge, but I go to the local durable

39:22

store. They tell me that 90% of

39:24

consumer durables are bought using credit and

39:27

out of that credit piece, 80% is

39:29

Bajaj finance and therefore, you get numerous

39:31

opportunities to upsell and cross-sell to affluent

39:34

people. Coming on to the

39:36

online versus offline piece, online isn't still

39:38

a meaningful part of the book. The

39:40

online piece is still, I think, business

39:42

development where they're building out their key

39:45

assets. If you hark back to the

39:47

2008, 10,

39:49

11 year old, they basically tried and

39:51

played and experimented for four years before

39:53

they had the accelerator. So, 2008, 19,

39:55

I remember I was describing the 10,000

39:58

doctors and now they experimented. reckon

40:00

there's a heck of a lot of

40:02

experimenting going on. The reason I suspect

40:04

that is over the last year the

40:06

amount of automated calls that I get

40:08

from Bajaj Finance and the automated messages

40:11

have stepped up and I keep reading

40:13

these messages in Azure Investor. I'm very

40:15

interested because the messages are formats change,

40:18

the ticket sizes change, the interest rates change.

40:20

So I reckon there's a whole bunch of

40:22

tech work going on on using the app,

40:24

using the payment app and the mall to

40:26

figure out how best to optimize and again

40:29

that's a sign of what I think is

40:31

a very successful company. No decisions made in

40:33

a rush. Experiment with small ticket sizes, small

40:35

amounts of money at stake. Once you're completely

40:38

sure that you've got it nailed, that's when

40:40

the cannon ball, that's when the ramp up

40:42

will come. Makes a lot

40:44

of sense. Transitioning a bit to

40:46

the financial model with banks or

40:49

with lenders, it can always be

40:51

tricky to paint the picture relative

40:53

to traditional operating companies. How do

40:55

you frame the business particularly from

40:57

a financial model standpoint? So

41:00

the flow-through of numbers is reasonably straightforward and

41:02

it's been very stable for the last 15

41:05

years. So roughly let's start with the 40

41:07

billion dollar, that's the loans outstanding, that's the

41:09

asset base and I'm going to express everything

41:11

as a percentage of this 40 billion. So

41:13

net interest margin is 10%. Nobody else in

41:16

India makes a 10% NIMP and you're operating on

41:19

a colossal scale 10% NIMP, then

41:21

2% fee income. Remember the zero cost

41:23

EMI, there's a fee involved, the 2%

41:25

fee income kicks in there. So you're

41:28

making roughly 12% from the

41:30

customer. Knock off 4% for OpEx, 1.5%

41:33

for provisions. Again, nobody of this scale

41:35

in India has as lower provisioning cost.

41:37

So you've knocked off 4% OpEx, 1.5%

41:41

provisions, you're left with 5.5% of PBT. That translates into

41:45

PATT of 4.5%. You

41:47

lever that PATT 5X, you get to

41:49

an ROE of 22%. This 5X

41:51

leverage amongst the big lenders in India,

41:53

this company operates the lowest leverage and

41:55

here generates the highest ROE. So 4.5%

41:58

PATT results in

42:00

22% ROE. If you multiply that

42:02

4.5% Pat with the $40 billion

42:04

loan book, you get to the

42:06

current profitability which is a shade under $2

42:08

billion. That flow through of numbers I gave

42:10

you Matt, 10% NIMM, 2%

42:13

free income, 5.5% Pat. Nobody in

42:15

India operates on this scale with

42:17

those numbers. These are unbelievable numbers.

42:19

Beyond the other aspects we've discussed which

42:21

underpins this company's success, there's a

42:23

few other things. This is a very lean

42:26

operation. There's no marketing cost, there's no big

42:28

spend on advertising. Customer acquisition costs are low.

42:30

Just to give you a sense of how

42:32

lean these people are, I remember around 7

42:35

or 8 years ago they had a consumer

42:37

discretionary finance loan agreement that used to be

42:39

10 pages. They applied their mind to

42:41

it and figured out how to get it down to

42:43

3 pages. That detail across

42:45

millions of loans helps save

42:48

costs. Low acquisition costs, low

42:50

marketing costs, high interest rates,

42:52

high NIMMs and an extremely profitable business

42:54

with a duPont which no other lender

42:56

in India has been able to match.

42:59

One of the things that when you were

43:01

first describing the business, I expected to happen

43:04

was you had these customers

43:07

that maybe didn't qualify for

43:09

traditional credit. But what

43:11

I expected is at some point in

43:13

the future, they would graduate and maybe

43:15

move out of being a BFL customer

43:18

into being a traditional credit card customer.

43:20

What you just described there in terms

43:22

of your neighborhood and the amount of

43:24

loans that are still done through Bajaj,

43:26

it doesn't seem to be the case. Is

43:29

that something just thinking about the

43:32

churn or the maturity of the

43:34

customer base and whether they actually

43:36

transfer out of BFL? Can

43:39

you describe whether it is surprising in the

43:41

sense that they do retain many customers or

43:43

if that is one of the dynamics that

43:45

takes place and they have to basically replace

43:48

those customers in the future? I'm

43:51

sure there is an upgrading of customers

43:53

that is happening, but the funnel is

43:55

also feeding in millions of new customers.

43:58

My reckoning is that somewhere around 5

44:00

to 10% of the book is balance transferring

44:03

out and a larger number is coming in.

44:05

Now, there's a very clever thing that the

44:07

Bajaj management started doing 12-13 years ago to

44:09

manage this. Remember, I mentioned the 40 business

44:12

heads that they have. The

44:14

businesses are broadly segmented into two groups.

44:16

There's scale builders, businesses which are scale

44:18

builders. So for example, housing finance is

44:20

a scale builder. A scale building business

44:22

will have relatively low ROEs. The risk

44:24

is low. It's supposed to be a

44:26

low risk, low ROE business, but it

44:28

allows Bajaj to build colossal scale. And

44:31

then there are profit maximizers, businesses which

44:33

are higher risk but will generate juicy

44:35

ROE and thus keep the ROE high.

44:38

So what Bajaj does is basically combine

44:40

the scale builders and the profit maximizers

44:42

50-50. Now just

44:44

to help explain why this is relevant.

44:46

If you know that in housing finance

44:48

and home loans, there is a natural

44:50

tendency for customers to refinance under lower

44:52

rate loan. But if you know

44:55

that, you keep your home loan rates very

44:57

competitive as it is Bajaj Finance has the

44:59

lowest cost of funds in the BFC sector

45:01

in India. Over and above that,

45:03

you're effectively able to cross subsidize your

45:06

housing finance business, for example, with a

45:08

micro finance lending operation, which is lending

45:10

at 20-23%. So you're minimizing your balance

45:12

transfer out risk by your low cost

45:15

of funds but also by having elsewhere

45:17

in the Bajaj finance empire high ROE

45:19

businesses in niche sectors such as micro

45:22

finance, such as CV finance and so

45:24

on and so forth. And every year

45:26

what we see is they blend the

45:28

two. So from what we are seeing,

45:31

they're planning to bring two-wheeler loans. Two-wheeler

45:33

loans will be 20% ROE, high

45:36

risk loan. But alongside two-wheeler loans, which are high

45:38

risk, they're bringing in new car finance, which will

45:40

be lower ROE. New car finance is a highly

45:42

competitive market, it will probably be a 12% ROE

45:45

business. By constantly blending the high risk

45:47

and the low risk, they're able to

45:49

make sure that the low risk customers

45:51

don't BT out any more than they

45:53

absolutely have to. The natural

45:56

transition from everything in the financial

45:58

model is to the capital out.

46:00

allocation and again with finance businesses, capital

46:02

allocation is different. A lot of that

46:04

capital gets recycled into new loans. How

46:07

do they treat capital allocation, particularly

46:09

with the addition of thinking about

46:12

shareholders, leverage dynamics, anything else that

46:14

comes into play for this business?

46:17

So what we've seen over the last decade

46:19

or so, and it's also taken a little

46:21

bit of time to piece together exactly what

46:23

they do, because as you can imagine, they

46:25

don't want to share all their secrets with

46:27

third parties in the world outside. This LRP

46:29

process that they undergo every year, somewhere in

46:31

autumn, October, I think, they go through the

46:33

long range planning process and they hit

46:35

upon these five year goals that they want to

46:38

attain. Typically from what we can

46:40

see, Matt, they are hitting their five year goals

46:42

every three years. And the five year

46:44

goals tend to be around, fabbling the business over

46:46

five years, but rather than fabbling the business over

46:48

five years, we're ending up seeing that often, they're

46:51

able to double within three years and by the

46:53

time they get to the five year mark, it's

46:55

well over tripled. Now that piece

46:57

of growth, that piece of growth is

46:59

sustainable because even though it's a $40

47:01

billion lending business, credit outstanding in India

47:03

is 2.3 trillion. And therefore it's a

47:06

1.5% market share. What

47:08

these guys seem to be targeting is they

47:10

want to get to 2% market share, I

47:12

think in the next few years. In order

47:14

to do that, every year they are saying

47:16

we will open some businesses which are scale

47:18

builders. So I gave you the example that

47:20

they seem to be going through the process

47:22

of opening a new car finance business. And

47:24

alongside that every year in the LRP, they

47:26

say we'll also open some businesses which are

47:29

profit maximizers, the two wheeler business example. Another

47:31

combination of scale builder and profit maximizer that

47:33

I think they're targeting is corporate loans. Corporate

47:35

loans, because their cost of funds is so

47:38

low, they can enter an area which has

47:40

historically been dominated by banks in our country.

47:42

Banks tend to have lower cost of funds

47:45

and naturally dominate corporate loans, but Bajaj is

47:47

exceptional. So I think they're targeting corporate loans.

47:49

They seem to be aiming for a 10%

47:52

return on equity on corporate loans. But just to

47:54

make sure that that doesn't drag down the overall

47:56

ROE, they're combining corporate loans with

47:58

microfinance at 20%. So this

48:01

LRP process every year in October says,

48:03

here's the Mount Everest that we will

48:05

climb in the next five years. Given

48:07

the aggression in the business, they seem to get

48:09

there in three years and those strategic initiatives are

48:12

around. Combining every year, a

48:14

bunch of new businesses around scale and a

48:16

bunch of new businesses around profit maximization. Headquarters

48:19

runs that process, so very similar to their

48:21

constellation software or a Baksha Hathaway,

48:24

where headquarters is doing capital allocation. At

48:26

the ground level, each of those CEOs

48:28

is running after the metrics that he's

48:30

promised to deliver at the LRP. With

48:32

an initiative like corporate loans, I

48:35

certainly could understand where that's you

48:37

in a different playing field from

48:39

a reputational standpoint, almost from a

48:41

prestigious standpoint. It seems to represent

48:43

something different. But I could also

48:46

play devil's advocate and say, this is going to

48:48

be lower return and it

48:50

moves you away from your major

48:52

advantages in many ways. So

48:54

is this the right focus to have

48:56

into the future? What

48:59

are your thoughts just in terms of

49:01

something along those lines and

49:03

the positives and negatives related to something like

49:05

that? So it's a valid point of

49:07

raise. A decade or so ago

49:09

when they entered home loans, I was

49:11

similarly concerned, a little bit perplexed. My

49:14

point was, what advantage do you have

49:16

relative to the then dominant non-bank home

49:18

loan provider HDFC? But we've

49:20

seen in due course that they've built one

49:22

of the largest home loan books in India.

49:25

In fact, I think that stock now that they will IPO,

49:27

they will demerge their home loan business, it's become so big.

49:30

So we've seen Bajaj Finance do this. Identify

49:33

an area that they are targeting, identify

49:35

a leader, usually from within, give the

49:37

leader a capital budget, not

49:39

expect the leader to generate astonishingly high

49:42

ROEs. Their home loan ROE is significantly

49:44

below the overall ROE of the business

49:46

at 22%. So similarly

49:48

with corporate loans, provided their ROE targets are realistic,

49:50

I'm pretty sure they'll not try to do more

49:52

than 10%, provided their ROE

49:54

targets are realistic, provided the

49:56

Bajaj families clout and reach into the boardrooms

49:59

of the country. and provided

50:01

this firm's ability to underwrite sensibly,

50:03

I think we're a good chance

50:05

of building scale here. Profitability is

50:07

not something that'll come and in

50:09

order to prevent profitability from being

50:11

compromised, they need that microfinance initiative

50:13

to fire. So we doubted for

50:15

a long period of time

50:17

till six years ago basically, I

50:19

was a doubting Thomas and Bajaj

50:21

finance, then how can you pull

50:23

off so many different things in

50:25

parallel but by decentralizing decision-making, by

50:27

pushing authority down the line, by

50:29

giving transparent incentives to hard-working bright

50:31

professionals, they've shown that you can

50:33

build a lending conglomerate that can

50:35

be, if not all things to

50:37

all men, there are lots of

50:40

things to plenty of people. And

50:42

one of the important dynamics seems

50:44

like in India, the private sector

50:47

and the public sector do seem

50:49

to have a tight relationship just

50:51

in terms of the initiatives to

50:53

drive growth and evolution of India

50:55

as a whole. And I

50:57

can certainly see why

50:59

BFL has played such a large

51:01

role in that and what they've

51:03

done with their traditional strategy. Can

51:05

you talk about that relationship that

51:07

they have at the government level?

51:10

And also, you see ever any

51:12

risks as they transition into a

51:14

conglomerate lender, maybe moving into areas

51:16

where they're more competitive with existing

51:18

solutions, just anything along those lines

51:20

as it relates to positives or

51:22

risks with the business? So

51:24

I think let's link this to the corporate

51:26

lending point. We haven't had a proper corporate

51:28

lending cycle in India, Matt, for now nearly

51:30

eight or nine years. The Indian corporate lending

51:32

ecosystem ran into a lot of credit and

51:34

NPA related issues around 2014, 15, 16. And

51:36

it's only over the last two or three

51:41

years that the economy has pulled out

51:43

of that mess. So the government obviously

51:45

is very keen that project finance, corporate lending

51:47

gets going, private sector capex gets growing.

51:49

And in that context, I think the powers that

51:52

be in New Delhi will be delighted to see

51:54

Rajaj Finance also stepping into the corporate lending arena.

51:56

If not anything else, it will spur the banks

51:58

on to do more as the corporate lending

52:01

arena where I think both the most

52:03

tricky interface for Bajaj finance with the

52:05

authorities and their most important regulatory interfaces

52:07

with the Reserve Bank of India. So

52:10

the RBI is our regulator, RBI is

52:12

Bajaj Finances regulator and in RBI's case,

52:15

they are very focused not just on

52:17

credit quality which for the Bajaj finance

52:19

people is not an issue but they

52:21

also focus on consumer interest and this

52:23

is increasingly a I think a fragile

52:25

area for all lenders in India. As

52:27

the economy gets bigger, as a rapidly

52:30

growing lender like Bajaj Finance pushes the

52:32

envelope, there are inevitably areas of friction

52:34

with the regulator. So just to give

52:36

an example, I think around six months

52:38

ago, six months ago, the

52:40

Bank of India said that they had

52:43

found a couple of digital products where

52:45

in Bajaj's key facts statement, there were

52:47

some gaps and the regulator's

52:49

norm in India has to put up an

52:52

announcement on its website saying we have hauled

52:54

up XYZ lender for ABC reason and

52:56

Bajaj Finance received that treatment six months

52:59

ago. It knocked off good 300-400 bips

53:01

of their EPS growth. So their recent

53:03

results, EPS growth was only 21% would

53:05

have been easily 25% had

53:08

the regulator not hauled up Bajaj

53:10

Finance and made them stop lending

53:12

on those digital products. Fortunately for

53:14

Bajaj, they've corrected the gaps that

53:16

the regulator identified and last

53:19

week I think lending has started again for

53:21

those digital products. I think this is where

53:23

the relationship will be delicate. The Reserve Bank

53:25

of India is saying we want lenders to

53:27

treat customers fairly whether it's on digital products

53:30

or on apps and there's a lot of

53:32

gray areas. This economy is growing fast and

53:34

anybody who's found wanting on consumer fairness is

53:36

getting hauled up by the regulator. These are

53:38

smart people at Bajaj. I'm sure they'll not

53:41

just fix the issue that was raised by

53:43

their RBI six months ago but more generally

53:45

figure out how to do tech-related lending, tech-based

53:47

lending without falling on the wrong side of

53:50

the regulator. I think that's the main regulatory

53:52

interface. I would say it worries us as

53:54

an investor with regards to Bajaj Finance. When

53:57

something is moving so fast, it's hard to

53:59

contain it. it and many times it's after

54:01

the fact or it's a constant back and

54:03

forth and checks and balances system. And I

54:06

think just on that what I can see

54:08

the regulator is deliberately focusing on the fast

54:10

growing lenders. The regulator is saying I've

54:12

only got so much bandwidth. If you're a big

54:15

lender and growing fast, I'm going to spend a lot

54:17

of time looking at what you're doing and that's where

54:19

I think the flash points potentially will occur in the

54:21

years to come. Seems like a

54:23

reasonable strategy as well from a regulatory

54:25

standpoint. Focus your time on where

54:27

there is the most impact. I think

54:29

you've outlined the growth pockets well throughout

54:32

the conversation but if you were to

54:34

summarize a five year,

54:36

ten year outlook in terms of

54:38

whether it's growth in certain business lines

54:41

or just general market opportunities, how would

54:43

you summarize those? So let

54:45

me just give you the overall growth number. The

54:48

Indian economy is growing at around 12%. I

54:50

reckon credit outstanding in the country will

54:52

grow at roughly 15% for the next

54:54

decade or so. Remember Bajaj Finances share

54:56

is one and a half percent of

54:58

that credit buy. So I don't see

55:00

why they shouldn't be able to grow

55:02

at close to 25% lower than their

55:04

long term norm of 30% but I

55:06

think 25% is a very respectable number.

55:08

I reckon they'll become 10x their size

55:10

in 10 years. Now where will they

55:13

find that growth? There are still

55:15

several chunky niches in Indian lending

55:17

where Bajaj has no presence as

55:19

yet. For example, gold, loan, finance.

55:21

After China, we are the largest buyers

55:23

of gold in the world. Something like

55:26

I would say 10% of Indian families

55:28

as balance sheet will be gold. Indian

55:30

families probably own the best part of

55:32

a trillion dollars of gold and

55:34

financing based on gold is a big

55:36

industry. Bajaj should get its fair share

55:38

of that. Similarly, tractor finance. 60% of

55:41

the Indian population lives on the farm.

55:44

They need to make agriculture more productive

55:46

to feed more mouths. Tractor finance therefore

55:48

becomes a natural area of growth. So

55:50

in filling in these niches where they

55:52

historically haven't participated plus growing home loans

55:54

and corporate loans and consumer durable loans

55:56

should give them 25% loan growth. Alongside

56:00

that, the digital lending piece kicks in. We discussed,

56:02

you raised the question as to how meaningful is

56:05

digital lending. I don't think it's particularly meaningful so

56:07

far, but those app downloads are soon going to

56:09

push towards the 100 million mark. I'm pretty sure

56:11

they'll go through 100 million app downloads in the

56:14

next couple of years. As that

56:16

happens, I think the digital lending piece takes

56:18

off. That again becomes a spur to their

56:20

growth. And the last piece is that payment

56:22

app and the use of that payment app

56:24

for data mining. Roughly 25 million

56:27

people use the Bajaj Finance Payment App. Now

56:29

just imagine the ton of data that

56:31

Bajaj is getting. Where is this guy

56:33

going? How much is he spending on

56:36

hotels, on e-commerce, on restaurants, clothes? What

56:38

sort of customer is it? How can

56:40

I profile them? That's just a mind

56:42

of data that will get transferred into

56:44

lending. So this company's ability to take

56:46

modern technology, marry it with India's needs

56:48

and generate loan growth without high credit

56:51

costs is the core engine. And I

56:53

think the next 10 years bode well

56:55

for this firm. On the

56:57

other side of the spectrum, you talked about

56:59

the regulatory risks. Are there other risks that

57:02

stand out to you for this business? I

57:05

think the main risk that worries us beyond

57:07

the regulatory risk, the main risk that worries

57:09

us is Rajiv Jain. He's a superman figure

57:11

for Bajaj Finance, but he is 56 years

57:13

old. I think he

57:15

works at 12-hour day quite comfortably at the

57:17

moment. He probably does a 70-hour week. He's

57:19

56 years old. I think three to five years

57:22

hence he will probably move into a non-exec role.

57:24

They have identified the successor. We've met him. He's

57:26

very capable. He's been at Bajaj Finance for a

57:28

long period of time. He speaks a lot like

57:31

Rajiv. I won't give his name away, but the

57:33

successor is in a way a Rajiv clone. But

57:35

I do worry about the successor because Rajiv has

57:37

been an exceptional CEO and he'll be a hard

57:39

act to follow. The other aspect is

57:42

as you get bigger and you start going

57:44

into these niches such as say tractor finance

57:46

and gold finance, there is a risk that

57:48

you go into areas which are politically sensitive.

57:51

So gold finance can be as little as

57:53

300-400 dollars and you're going

57:55

into strata of Indian society where low middle

57:57

class people are involved and we are a

57:59

democracy. and a natural way for

58:01

politicians to cultivate publicity, cultivate favour with

58:04

voters is to say, I now

58:06

announce a loan waiver. How long before

58:08

Bajaj Finance enters politically tricky areas where

58:10

powerful people will be incentivised to announce

58:13

loan waivers, I worry about that. At

58:15

the moment, those risks seem far away

58:17

but for investors like us, the job

58:19

is to worry about risks that others

58:21

can't see. And Rajiv Jain,

58:23

Reserve Bank of India and

58:26

the interplay of Bajaj Finances, burgeoning growth

58:28

with India's lower income strata is something

58:30

that we're keeping a careful eye on.

58:33

This has been an incredible conversation just

58:35

in the sense that we've gotten a lot

58:38

on BFL but also just the economic

58:40

dynamics in India which is always great

58:42

to learn about both the macro and

58:45

the micro. You know we

58:47

close these episodes out talking about the lessons

58:49

that you can take away from this business.

58:51

What would you point to in terms of lessons

58:54

from Bajaj? So let me

58:56

do one financial lesson around money and

58:58

how compounding works and one non-financial lesson.

59:01

The compounding lesson that I learned and

59:03

I literally learned this live watching this

59:05

company compound 1000X over 16

59:07

years is, if you are able to raise

59:09

money at 8 times price, so Bajaj has

59:11

raised money 4 times in the last decade

59:13

at 8 times price to book, particularly

59:16

getting very cheap funding from your shareholders.

59:18

If you then take that money that you're

59:20

getting, you're getting cheap equity from shareholders at

59:22

an incredibly high valuation and you're reinvesting that

59:25

at 22% ROE, you are moving

59:27

that flywheel really fast. That virtuous cycle,

59:29

raise money at very low cost of

59:31

equity, generate very high ROE in that

59:33

and keep spinning that wheel faster and

59:35

faster. I had read about theoretically in

59:38

William Thondike's outsiders, I see it in

59:40

motion in Bajaj finance. That's the real

59:42

secret to the 32% book

59:45

value per share CAGR that this company has given

59:47

in the last decade. On the non-financial

59:49

lesson, I remember meeting Sanjeev Bajaj 6

59:52

years ago, he was sitting in his office and

59:54

I asked him, why don't you do lots

59:56

of other things, other Indian conglomerates, do a

59:59

range of things. They get into real estate, they

1:00:01

get into telecom, they get into IT services, why

1:00:03

don't you do that? So Sanjeev said something which

1:00:05

has stayed with me. He said that look, there's

1:00:07

only so many hours in a day and I

1:00:09

don't want to do dozens of different businesses like

1:00:11

the Tata's or the Mahindra's do. I

1:00:13

want to focus on building scale and

1:00:15

excellence in a couple of areas where

1:00:17

I think I can make a difference.

1:00:19

And he said, I focus on three

1:00:21

things. And three things that Sanjeev Bajaj

1:00:23

focuses on are disruptive innovation, excellence alongside

1:00:25

scale and long-term sustained profitability.

1:00:27

And he said, I'll only enter

1:00:30

those businesses where I can pull

1:00:32

off those three things, disruptive innovation, excellence

1:00:34

alongside scale and long-term

1:00:36

sustainable profitability. And as

1:00:39

my colleagues and I try to build Marcellus,

1:00:41

those three things keep spinning through my head

1:00:43

that don't do anything where you can't hit those

1:00:45

three bullets straight off the bat. And I

1:00:47

know one of the reasons I think the

1:00:49

business has been so successful is while Rajiv has

1:00:51

manned the engine room and navigated Bajaj finance, Sanjeev

1:00:53

has provided the owners, we call it in

1:00:55

India, the promoters clarity of thought that look,

1:00:57

this is what we're going to do. We're in

1:01:00

it for the long haul and we're not going

1:01:02

to spray capital about in 20 different directions.

1:01:04

I think that's a big learning for me. Focus your

1:01:06

time and attention on a few things rather than trying

1:01:08

to do plenty of things. Yes,

1:01:10

I think I was alluding to the focus

1:01:13

point and you put it in great terms

1:01:15

there and great perspective there. Both of those

1:01:17

lessons are excellent. Sarab, thank you so much

1:01:19

for joining us. Appreciate you coming back for

1:01:21

a round two. Thank you, Matt.

1:01:24

And if I don't mind my saying so

1:01:26

at the parting, my employer, Marcellus, has Bajaj

1:01:28

finance in his portfolio. I'm a client of

1:01:30

Marcellus, so are my parents. So by default,

1:01:32

therefore, all of us in the family have

1:01:34

a beneficial interest in Bajaj finance. Thank you

1:01:36

so much for giving me an opportunity to

1:01:38

articulate that beneficial interest. Absolutely.

1:01:40

Appreciate you adding that additional disclaimer

1:01:42

there. Thank you very much. Hope to have

1:01:45

you back again for a round three. Thank

1:01:47

you very much. Looking forward to that. To

1:01:49

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1:01:56

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