Upcoming IPO of HDB Financial Services: HDFC Bank Can Finally See Value Unlocking

Investors have accepted equity investments as a sure-shot way to earn higher returns than other assets. For this, investors often hold blue-chip stocks at the core of their portfolios.

And that makes sense after. After all, blue-chip companies are leaders in their industries.

These stocks are renowned for their wide moats, reliable dividends, and stable earnings, making them a choice for long-term investors seeking resilience.

Despite exposure to market fluctuations, these stocks exhibit a remarkable ability to recover swiftly, establishing them as low-risk investments.

HDFC Bank, a stalwart in the financial sector, stands tall as a blue-chip stock, embodying stability and reliability in the Indian stock market.

With a formidable track record, sound financial fundamentals, and a widespread reputation for prudent management, HDFC Bank has earned its status as a preferred choice for investors seeking long-term growth and stability.

Gaining attention today, the spotlight is once again on HDFC Bank as this blue-chip giant, ventures into the IPO frenzy in India.

That's right... HDFC Bank has set the ball rolling for the much-anticipated initial public offering of its subsidiary HDB Financial Services.

HDB's IPO will be the first issue by the combined entity of HDFC and HDFC Bank.

Before the merger, HDFC Asset Management Company and HDFC Life, belonging to the erstwhile HDFC Ltd, were the last subsidiaries to be listed.

About HDB Financial Services

Established in 2007, HDB Financial Services (HDBFS) is a prominent Non-Banking Financial Company (NBFC) that addresses the evolving needs of a forward-looking India, catering to both individual and business clients.

In addition, it offers services for marketing and promoting diverse financial products. HDB Financial Services operates as a subsidiary of HDFC Bank, a well-respected name in the financial industry.

HDB Financial Services' business segments:

• Lending: The company provides an extensive selection of both secured and unsecured loans to its clients. HDBFS is a comprehensive solution for all financial needs, including loans, investments, and protection. By 31 March 2023, the company had established 1,492 branches across 24 states, encompassing 1,054 cities and 3 Union Territories.
• BPO Services: The company's Business Process Outsourcing (BPO) services division specialises in providing back-office and front-office solutions.

The IPO is expected to be launched in either the third quarter or the last quarter of FY25.

The bank needs to complete HDB's IPO before September 2025 to comply with RBI norms.

According to the central bank rule, upper-layer NBFCs like HDB Financial Services must list within three years of being designated as such. Being classified as NBFC back in 2022, HDB Financials has to go public by December 2025.

The central bank has even set the rule for Tata group company Tata sons, which is now looking at how it could avoid the potential Tata sons IPO.

To put things into context, if the IPO of HDB Financial does happen in 2024, it could be one of the biggest public issues of the year.

# Valuation & Unlisted Share Price

According to market reports, HDB Financial Services is expected to be valued between US$ 9 billion (bn) to US$ 12 bn (Rs 750 bn to Rs 1,000 bn) for the IPO, depending on market conditions.

HDFC Bank, holding almost 95% of HDB, may sell a 10% stake in the IPO, potentially raising Rs 75 bn to Rs 100 bn. Additionally, HDFC Bank may consider a pre-IPO share placement with investors.

HDB Financial Services is currently valued at around US$ 7.9 bn (Rs 656.9 bn), with its unlisted shares priced at Rs 830 apiece. After listing, the firm will be one of the biggest listed finance companies in market capitalisation.

HDB Financial Services' Unlisted Share Details

Face Value	Rs 10 per share
Share Price	Rs 875 per share
52-Week High	Rs 900
52-Week Low	Rs 650
Lot Size	50 shares
Depository	NSDL & CDSL

Data Source: media reports on unlisted shares

HDB Financial Services was trading at a high of Rs 1,200 per share before COVID-19 but has corrected a lot since the pandemic.

In recent years, the stock price has been under pressure due to the merger between HDFC Bank and HDFC. Against this backdrop, the HDB Financial Services IPO has been put on the back burner.

Nevertheless, the stock saw a recovery in 2023 due to bad loan cleanup. The price has increased from the level of Rs 570 per share to Rs 875 today.

# Financial Performance

The revenues of HDB Financial Services grew at a CAGR of 4.2% from Rs 109.5 bn in FY21 to Rs 124 bn in FY23.

Despite a slight dip in FY 2022, the gross profit has rebounded, showcasing resilience and growth.

While there is a marginal decline in gross profit margins, they remain relatively robust, indicating operational efficiency.

During the same period, net profit exhibits a significant upward trend, more than doubling from FY2022 to FY2023.

The net profit expanded at a much sharper CAGR rate of 71%.

Along similar lines, the net profit margins have seen a consistent improvement, reaching a robust 15.8% in FY 2023, reflecting enhanced profitability.

HDB Financial Services' Financial Snapshot (2021-23)

Particulars	FY2021	FY2022	FY2023
Revenue (Rs in bn)	109.5	113.1	124
Revenue Growth (%)	1.75	3.3	9.7
Gross Profit (Rs in bn)	799.8	781.1	834.6
Gross Profit Margin (%)	73	69.1	67.3
Net Profit (Rs in bn)	3.9	10.1	19.6
Margin (%)	3.58	8.95	15.8

Data Source: Ace Equity

The company's loan portfolio is mainly composed of vehicle loans, loans against property, and personal loans.

Further, the company has posted an intelligent cleanup of bad loans in FY23. Stage 3 loans, defined as loans where recovery is due beyond 90 days, were capped at 2.7% of gross loans at the end of FY23. This is down substantially from 4.9% as of 31 March 2022.

HDFC Bank's Stake Dilution Rationale

HDFC Bank plans to sell some of its shareholding in subsidiary HDB Financial Services over time.

This is because the country's largest private sector bank plans to get into similar lines of business as its subsidiary over the next few years, and there could be overlaps.

HDFC Bank holds a 94.7% stake in HDB Financial Services.

HDB Financial Services' Shareholding Pattern FY23

Shareholder Name	% to Holding	No. of shares
HDFC Bank Limited	94.84	750,596,670
Others	5.16	4,08,02,413

Moreover, this strategic decision offers HDFC Bank the opportunity to harness additional capital through HDB Financial Services IPO.

Currently holding the majority stake, listing on the stock exchange enables HDFC Bank to divest a portion of its ownership to the public, facilitating the generation of significant funds.

Recognising that HDFC Bank and HDB Financial Services cater to distinct segments of the loan market, an independent listing for HDB Financial Services is seen as a means to operate with enhanced flexibility.

What Next?

HDB Financial Services is likely to prioritise expanding its branch network across India. Their goal is reportedly to have 200 experience centres operational in 120 Indian cities.

This reach will make their financial services more accessible to a larger customer base.

Embracing digital technologies to streamline processes and enhance customer experience will be a key focus area.

The company will prioritise online loan applications, mobile banking solutions, and integration with digital payment platforms.

It further explores partnerships with other financial institutions or fintech companies to broaden their reach and service offerings.

Conclusion

As per the National Council of Applied Economic Research (NCAER), the Indian finance sector is anticipated to experience a Compound Annual Growth Rate (CAGR) of 12.7% from 2022 to 2027.

This projected growth opens up fresh opportunities for financial services companies to cater to the needs of both businesses and consumers.

Moreover, the government is dedicated to enhancing financial inclusion across the nation. This commitment will increase accessibility to financial services for a larger population, thereby contributing to the expansion of the financial sector.

Leveraging HDFC Bank's robust brand reputation and extensive network holds the potential to build trust and attract a burgeoning customer base in this dynamic and growing financial landscape.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions. Ensure that the investment aligns with your financial objectives and matches your risk tolerance level.

For more information on IPOs, check out the list of upcoming IPOs.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...