Initial public offerings (IPOs) from all large and well-respected groups spark investor interest not only for quick listing gains but also for long-term value investment. Deepak Parekh-managed HDFC Group is one such group in the financial services space that has rendered mega returns with complete safety of investments. In fact, the group's listed companies in insurance, banking, mutual fund and housing finance spaces have always shown best corporate governance practices, attracting institutional interest, especially from foreign investors. Currently, HDFC, HDFC Bank, HDFC Life and HDFC AMC are four listed group companies with a combined market capitalisation of Rs 12 lakh crore. Reliance Industries, the most valuable company on Dalal Street, has a market cap of Rs 8 lakh crore. In fact, retail investors also await an IPO from its telecom arm Reliance Jio in the near future.
Currently, all eyes are on the fifth IPO from the HDFC Group. HDB Financial Services, a non-banking finance company (NBFC), is all set to enter the primary market. This little known NBFC, promoted by HDFC Bank with almost 95 per cent stake, has revenues of Rs 8,724 crore and profits of Rs 1,153 crore in 2018-19. The capital adequacy ratio is at a comfortable level of 17.94 per cent with gross non-performing assets at meagre 1.78 per cent. The objective of tapping the market is to unlock the value for the future growth and have broad-based shareholding.
While stock prices of NBFCs have been beaten down in the market post the IL&FS debacle, NBFCs with enough capital, better asset liability management and lowest NPAs still hold value. Take for instance, Bajaj Finance, the consumer financing business of Pune-based Bajaj Group, gets a price-to-book value of over 11 in the market. HDFC Group's HDB also mirrors Bajaj Finance in terms of growth, profitability, capital, better asset liability management and lowest NPAs. The company is also targeting a niche segment of micro loans, which is currently under served by both banks and NBFCs.
If one takes Bajaj Finance as a benchmark for market valuation, the likely or the most optimistic market price of HDB could be Rs 1000 per share. This would translate into a market capitalisation of Rs 78,68,196 crore. This means HDB would easily surpass the market cap of big names such as M&M Financial and L&T Finance Holdings.
The HDB Financial listing would also upset the market cap order within the group. Currently, HDFC Bank enjoys a market cap of Rs 6.79 lakh crore. It moved ahead of the parent HDFC few years ago. HDFC has a market cap of Rs 3.87 lakh crore. The recently listed HDFC Life is at Rs 94,741 crore and HDFC AMC at Rs 44,230 crore.
However, challenges galore for HDB as liquidity lines are drying up for the sector. Stock prices of many NBFCs have corrected sharply over the last six months. Troubles for the NBFC sector appear unlikely to get over anytime soon. There is some competition from small finance banks as well, as they also operate in the micro loan segment. What would be the next step for HDB as it scales up operations? Will it transform into a small finance bank or a full-scale bank? Chances of transforming into a full-scale bank are uncertain, as RBI may not allow this given the HDFC Group already owns a bank.
A long-term investor will surely factor in these uncertainties while buying the stock.