Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to Rs 1000 crore commercial paper programme of Bajaj Auto Credit Ltd (BACL; erstwhile, Bajaj Auto Consumer Finance Ltd) and reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities of the company.

 

BACL is a wholly owned captive finance subsidiary of Bajaj Auto Ltd (BAL; rated ‘CRISIL AAA/Stable/CRISIL A1+’), established exclusively for financing two-wheelers (2W) and three-wheelers (3W) manufactured by BAL and its subsidiaries. This business was earlier housed under Bajaj Finance Ltd (BFL; rated ‘CRISIL AAA/Stable/CRISIL A1+’) as its auto finance division. After receiving its license from the Reserve Bank of India (RBI) on August 29, 2023, BACL commenced operations on January 1, 2024 and has been carrying out the 2W and 3W financing business with all new loan originations being made at BACL in a phased manner. Correspondingly, the existing 2W and 3W portfolios of BFL pertaining to BAL-manufactured vehicles is getting organically redeemed. This transition has been underway for a few quarters now and, is expected to culminate by June 2025. As on September 30, 2024, the BACL’s assets under management (AUM) stood at Rs 4,148 crore, comprising of 55% of 2W loans and 45% of 3W loans while the company’s networth was Rs 1,142 crore and debt was Rs 4,276 crore.

 

The ratings remain centrally driven by the expectation of strong support from, and the company’s strategic importance to, BAL. The ratings further factor in adequate capitalisation of BACL and its experienced management team. These strengths are partially offset by the nascent stage of the company’s operations and its undemonstrated ability to successfully operate as an independent captive financier.

 

Thus far, the company has received Rs 1,250 crore as equity capital from its parent, BAL, and is expected to receive a cumulative quantum of over Rs 2050 crore over fiscals 2025 and 2026 while maintaining a steady state gearing of close to 5 times. Considering the robust growth plans, the company’s ability to successfully adapt the existing financing business of BFL and maintain sound portfolio quality alongside steady growth shall remain monitorable

Analytical Approach

CRISIL Ratings has assessed the standalone credit risk profile of BACL, and thereafter factored in the strong support from BAL.

Key Rating Drivers & Detailed Description

Strengths:

• Expectation of strong support from, and strategic importance to, the parent and the Bajaj ecosystem: Being the captive financing arm of BAL, BACL is expected to be a critical part of the parent’s business growth strategy. The company is expected to finance around 40% of new two and three-wheelers manufactured by BAL, which was earlier financed by BFL’s auto finance division. Historically, this business function has been pivotal in facilitating the parent in maintaining its market share. With this business now being carried out through BACL – this subsidiary is expected to be strategically important to the parent. The business synergy between BAL and BACL is further substantiated by the latter’s restrictive license, which allows it to finance vehicles manufactured only by BAL and its subsidiaries.

 

In terms of strategic and management oversight, there is material overlap between the leaderships of BACL and BAL. This is reflected in BAL’s managing and executive director of the parent being the chairperson of BACL’s board, with one more common director. Additionally, the managing director of BACL is an erstwhile senior management member of BAL.

 

Given the business transition is planned in phases over the following two fiscals, apart from financial support and strategic oversight from the parent, BACL is also expected to benefit from the support of BFL in ensuring a smooth and successful transfer of business originations and allied support functions such as underwriting, monitoring, and reporting. Thus far, this transition has been smooth, supported by available operational infrastructure imbibed from BFL.

 

As on September 30, 2024, BACL had a networth of Rs 1,142 crore that was entirely contributed by BAL and the latter is expected to maintain majority stake in the company over the medium term. Over the two-year span of this business transition ending March 2026, the parent is expected to infuse another ~Rs 2050 crore into the subsidiary which, along with the expected growth, should support the business.

 

• Adequate capitalization: Capital position is adequate for the current and planned scale of operations, supported by the planned equity infusion. Networth stood at Rs 1,142 crore as on September 30, 2024, which comprised of equity capital of Rs 1,250 crore received from BAL. This was partly offset by the negative accretion to networth during the first fiscal of operations. Considering the company has started operations only recently, gearing stood at 3.7 times as on September 30, 2024, and is expected remain around 5 times on a steady state basis alongside an overall steady state capital adequacy ratio of 20%. Over the two-year course of business transition, the company was expected to receive over Rs 3300 crore as incremental capital from the parent, of which Rs 1250 crore of capital has been received. The company plans to infuse additional capital as the business scales up. This, in addition to a gradual increase in internal accretions in the long run, will help sustain capitalisation over the medium term.

 

• Experienced management team: Leadership team has extensive experience in, and understanding of, the vehicle industry and the captive financing business. Many of the senior management members of BACL were previously part of leadership teams at BAL and BFL and have demonstrated track record of running and scaling the vehicle financing business as part of an established and larger ecosystem.

 

The management aim is to develop an exclusive 2W/3W financing arm for vehicles manufactured by BAL and its subsidiaries to offer an increased variety of financing options to its business partners and retail customers through the new non-banking financial company. To meet the targeted deadline of June 2025, the management is focused on putting in place relevant systems, processes, and policies.

 

Weakness:

• Nascent stage of operations; ability to successfully transition into an independent captive financier remains critical: BACL commenced 2W/3W financing business on January 1, 2024. As on September 30, 2024, the company’s assets under management (AUM) stood at Rs 4,148 crore, comprising of 55% of 2W loans and 45% of 3W loans. This portfolio was earlier housed in the auto finance division of BFL and had benefitted from its established track record and market position with sound systems and practices, including a robust collections team. BACL’s gross non-performing assets (GNPA) stood at 0.4% as on September 30, 2024. The company plans to leverage the existing credit appraisal ecosystem of BFL’s auto finance division and grow the loan book prudently over the medium term. The company also set up its own collections team, however, its success in maintaining sound portfolio quality at BACL remains monitorable. Similarly, the ability of the leadership team to successfully transition and scale this business under an independent captive financier and tap into unmet growth potential within the group’s ecosystem will remain critical.

 

The returns generated from the 2W/3W business housed in BFL have remained healthy. In case of BACL, the company reported a total income (net of interest expense) of Rs 175 crore in the first half of fiscal 2025 as against Rs 10 crore for full fiscal 2024, following the similar strategy. BACL has already incurred majority of the operating expenses in setting up operational infrastructure and onboarding relevant teams though its lending operations are yet to gain momentum. Thus, the earnings profile remains modest presently. The company incurred a loss of Rs 59 crore in the first half of fiscal 2025 as against a loss of Rs 24 crore in full fiscal 2024. However, as economies of scale are achieved, profitability is expected to improve.

 

Ability to successfully build the business while maintaining healthy asset quality and profitability will remain critical.

Liquidity: Superior

Cash and bank balance and sanctioned available bank limits stood at 1,242 crore as on September 30, 2024. The company expects cumulative collections of Rs 1,974 crore in the six months between October 2024 to March 2025. This is sufficient to cover the upcoming cumulative debt obligations of Rs 530 crore for the same time period. The asset liability management profile was comfortable as on September 30, 2024, with no material negative cumulative mismatches in any of the segments. As a philosophy, the company plans to maintain one month of outflow obligation at any point in time, on a steady basis.

Outlook: Stable

BACL will continue to benefit from the strong support of its parent, BAL, and maintain adequate capitalisation.

Rating sensitivity factors

Downward factors:

• Significant reduction in support from, or 1 notch downward rating action on BAL leading to a corresponding rating action on BACL
• Prolonged inability to achieve steady state profitability from core lending operations

About the Company

A captive financier of BAL and its wholly owned subsidiary, BACL received a restrictive license on August 29, 2023, to finance Bajaj Auto vehicles, and started operations on January 1, 2024. This entity was started with the objective to finance Bajaj Auto vehicles, a business earlier housed in the auto finance division of BFL.

 

The business transition from BFL to BACL, planned zone/state-wise, has been staggered over a timeline of two years. This 2W/3W financing business was earlier being carried out through BFL and, as part of this transition, has been shifted to BACL with all new originations for the selected zone/state being done under the latter. Correspondingly, the existing 2W/3W portfolio of BFL has been running down organically by virtue of scheduled redemption. The transition has been supported by duplicating the existing systems and infrastructure of BFL under BACL, except the collections team that will be freshly onboarded.

Key Financial Indicators

As On/Nine months ended	Unit	Sep’24	Mar’24	Mar’23
Total assets	Rs crore	5,556	1,268	22
Total income (net of interest expense)	Rs crore	175	10	0
Profit after tax	Rs crore	-59	-24	-8
GNPA	%	0.4	0	NA
Gearing	Times	3.7	3.7	NA
ROA^	%	(3.5)	(3.7)	(72.7)

^On an annualised basis

Any other information: Not Applicable