HDB Financial Services’ (HDB) ₹12,500-crore IPO consists of a fresh issue of ₹2,500 crore, with the rest being an offer-for-sale by HDFC Bank. Post issue HDFC Bank’s stake will decline to 74 per cent (94 per cent now).
Business
HDB is a diversified, non-deposit taking NBFC, with a loan book of ₹1.07 lakh crore. The loan book consists of a) Enterprise lending (39 per cent of loan book) – which includes loans against property, business loans and also salaried personal loans, b) Asset finance (38 per cent) – commercial vehicle, construction equipment, tractor loans and c) consumer finance (23 per cent) – consumer durable loans, auto loans, micro loans and personal loans.
About 73 per cent of the loan book is secured and the portfolio is granular, with an average ticket size of ₹1.65 lakh. The largest 20 borrowers account for just 0.3 per cent of the overall book. HDB has a strong presence in markets beyond the metros, with 70 per cent of the branches located in towns that are classified tier-4 or beyond.
Relationship with HDFC Bank
HDB enjoys the pedigree of HDFC Bank, and it manifests in the highest possible credit rating. This helps the NBFC raise funds at attractive rates. This apart, HDB and its parent are two independent entities, as transactions between the two are on arm’s length basis - meaning, HDFC Bank lends to HDB at rates that are comparable to market rates. Loans from HDFC Bank account for 7.6 per cent of the total borrowings. There is no sharing of leads and no direct assignment of loans underwritten between the two.
HDB also carries out BPO services – back-office support, collection and sales support services to HDFC Bank. Revenue from such services contribute to 7.5 per cent of the overall revenue.
Subscribe or not?
HDB belongs to the fast-growing NBFC space, which is pegged to grow at a CAGR of 15-17 per cent (NBFC credit) between FY25 and FY28 as per a Crisil report. HDB’s loan book grew at a CAGR of 24 per cent between FY22 and FY25. Its RoA (return on assets) profile based on FY25 financials is as follows – Yield of 14 per cent and cost of funds of 7.9 per cent, resulting in a NIM of 7.6 per cent, credit cost of 2.1 per cent and ultimately an RoA of 2.2 per cent after operating expenses. RoE for FY25 stood at 14.7 per cent.
Unlike FY24, when profit grew 26 per cent over FY23, HDB saw profit decline 11.6 per cent in FY25. Per the management, credit cost normalised in FY25 from the lower 1.3 per cent seen in FY24. As delinquencies inched up in the unsecured business loans segment, resulting in GNPA ratio rising from 1.9 per cent to 2.3 per cent, the NBFC had to cushion the balance sheet with more provisions.
The IPO values HDB at a trailing price-to-book value (P/B) multiple of 3.4x (at upper band on post issue basis; 3.7x pre issue). On comparison with peers, Bajaj Finance has a similar credit cost of 2.2 per cent, but has a significantly higher RoA of 4.6 per cent. It is also to be noted that Bajaj manages such RoA and a GNPA ratio of under 1 per cent with a higher share of unsecured loans in its portfolio than HDB. Thus, it commands a premium valuation of 6x.
Though not directly comparable, even HDFC Bank’s RoA is close to HDB’s at 1.9 per cent, with a credit cost of about 0.5 per cent and trades cheaper vs HDB at P/B of 2.9 times. HDB can grow faster than HDFC Bank, given its size and the market it caters to. Cost of funds is also expected to decline over the coming years, as the benefit of repo cuts flows through gradually. However, at current valuation and considering its profitability, these prospects appear fully priced at the IPO price. Further, HDFC Bank might have to pare stake in HDB to under 20 per cent, if RBI’s current draft directions on overlapping businesses are made effective in their current form. This will be a major overhang on HDB’s stock price.
Hence, investors can wait and watch for now.