HDFC Bank is gearing up for the much-anticipated initial public offering (IPO) of its subsidiary, HDB Financial Services, according to reports.
Holding an impressive 94.7% stake in HDB Financial Services, HDFC Bank is strategically planning to divest around 10% in the IPO, potentially resulting in an IPO size ranging from Rs 7,500 to Rs 10,000 crore. As a non-deposit-taking lender, HDB Financial Services is expected to achieve a valuation between $9 billion to $12 billion (approximately Rs 75,000 to Rs 1 lakh crore) during the IPO, contingent upon market conditions.
The bank has initiated discussions with leading investment banks to gauge interest and evaluate valuations for the proposed IPO. Simultaneously, there are deliberations regarding a pre-IPO share placement with potential investors.
Considering a timeline for the share sale, HDFC Bank aims for either the last quarter of 2024 or the first quarter of 2025. A successful IPO in 2024 would mark a significant milestone as the first listing from the merged HDFC Bank and HDFC entity.
The urgency for HDB’s IPO is driven by regulatory compliance, as the company must list before September 2025 to adhere to Reserve Bank of India regulations. With 1,492 branches nationwide as of March 31, 2023, HDB stands as one of the largest listed finance companies in terms of market capitalization.
The financials
Its core focus areas include vehicle loans, loans against property, and personal loans.
The positive sentiment has already been reflected in HDB shares, which have surged over 30% in the past three months in the unlisted market, indicating promising prospects for its debut.
HDB’s performance has witnessed a robust recovery, both in terms of asset growth and asset quality, after facing challenges during the pandemic. The company’s asset under management (AUM) stood at Rs 83,989 crore as of the end of December and has shown a Compound Annual Growth Rate (CAGR) of 8.4 percent in the last five years.
Secured loans constitute around 75.8 percent of the total portfolio as of March 31, 2023, with the remaining being unsecured. HDB has diversified its product base, expanding into consumer durable financing, gold loans, digital product loans, and related segments.
Reducing NPAs
Its gross stage 3 assets/NPA have reduced to 2.25 percent, as of December 31, 2023, from 2.73 percent, as of March 31, 2023. The company’s restructured book has also substantially reduced to around 0.7 percent of the AUM, as of March 31, 2023, from 7.14 percent, as of March 31, 2022.
HDB has maintained a stage 3 provision coverage ratio of 68 percent, as of December 2023-end. The company’s profitability has witnessed an uptrend, with a strong net interest margin (NIM) of 7.7 percent in the last quarter (Q3FY24).
While the spreads of the company have marginally contracted during 9M FY24, continued moderation in credit cost and operating expenses has enabled improvement in return metrics. The strong brand value of the HDFC group further supports HDB’s high valuation.
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