HDB Financial Services Limited (of HDFC Bank) Considers an IPO

An Overview of the Company

Featured as a non-banking financial company that is heavily touted by HDFC Bank, HDB Financial Services Limited has sought to raise INR 8,600 Crores by issuing non-convertible debentures (or NCDs) in order to offset its expenses.

While there has been talk of HDB launching an initial public offering, there have been no firm moves made to initiate the same. It wouldn’t be unreasonable to assume, therefore, that HDB is waiting for the current turbulence present in the economy and markets to tide over as it can bring with it unwanted hurdles.

HDB serves as a subsidiary to the biggest private sector bank that is responsible for looking out for those involved in informal enterprises and work in addition to serving those who are self-employed.

Objectives

Funds raised via the issuance of non-convertible debentures would be allocated towards providing new lending opportunities in addition to refinancing HDB’s pre-existing borrowed funds and enhancing where their existing capital stands.

Keeping in mind the low interest rates that could witness a rise at any time owing to the fact that inflation presently governing the economy, HDB has the potential to use this situation to take advantage of the debt market and offer previously highly-priced debt at a more reasonable, lower amount.

Financial Performance and Positions

Capital Facts – HDB Financial Services Limited has a capital adequacy ratio amounting to 9 per cent which should be viewed against the regulatory requirement which lists an appropriate amount to be 15 per cent. Keeping in mind the present state of the economy, HDB’s desire to raise funds in order to enhance their capital appears to be the logical way forward.

Financial Performance in 2019-2020 v/s 2020-201 – As mentioned above, HDB is responsible for meeting the non-banking financial requirements of those operating within the informal and self-employed domains. Each of these was affected most owing to the Coronavirus pandemic and consequent imposition of lockdowns imposed in varying degrees across the country. This was most evident in the resultant net profits HDB derived for FY2020-2021 which fell by 50% from the previous financial year i.e., from INR 1,004 Crores to INR 502 Crores.

Understanding the role played by NCDs – Presently, HDB has issued NCDs that account for 40 per cent of their liabilities with the outstanding NCDs amounting to a value that surpasses INR 20,000 Crores.

Understanding the role played by Term loans – Following NCDs, HDB has issued term loans that amount to 28 percent of their liabilities with outstanding term loans amounting to a value that surpasses INR 15,000 Crores.

Other Pertinent Information

As a non-banking financial company, HDB stands to benefit greatly in the capital market in the future as HDFC Group’s stock price is likely to witness a rise in valuation in the stock market.

Non-performing assets issued under HDB presently amount to 3.9 per cent. The Reserve Bank of India previously indicated that gross NPAs of the banking sector could witness a rise of over 5.5 per cent as of March 2021 amounting to a value as high as 14.7 percent which is the highest it would ever be over the past two decades.

HDB Financial Services Limited presently has 1,319 branches spread across 959 cities.

As of March 31, 2021, HDBs loans in their entirety amount to a value of INR 58,947 Crores.

The fact that the non-banking financial sector is being able to consider generating funds via varied sources is promising as it helps highlight the economy slowly but steadily beginning to heal from the 2^nd wave of the pandemic.

Concluding Thoughts

By issuing more non-convertible debentures, HDB Financial Services Limited could generate the INR 8,600 Crores it presently requires thereby offsetting the hurdles brought on by the Coronavirus and consequent lockdowns required to be imposed across the country.