HDFC chairman Deepak Parekh recently mentioned about plans to spin off some of its non-subsidiary unlisted investments into a special purpose vehicle (SPV) to unlock value. This is expected to boost HDFC profits as these investments are currently at historical value in its books. It is a good move from the management, since it would help realise better value for its investment under buoyant market conditions, especially when there seems to be interest from the private equity players. It is likely the HDFC management could use the sale proceeds towards funding capital guzzling ventures like that of insurance or even education. Yet, it is unlikely to create a substantial run in its stock price. This is because the effect of such gains on the overall profitability of the company is expected to be insignificant. According to HSBC global research, the entire SPV is estimated at Rs 1,800 crore while its market capitalisation hovers around Rs 74,870 crore.
There are 32 unlisted companies in which HDFC invested as at March 2009 at a cost of Rs 363 crore, including companies like Lafarge India, IL&FS, Chalet Hotels, etc. And if HDFC were to sell the entire 100% stake in this SPV, gains that would accrue would be Rs 1,450 crore, which is equivalent to 41% of FY11E earnings or Rs 51 per share, as per HSBC estimates. In terms of market cap it would add a paltry 2% at current prices.This is based on estimates of its market value being at five times its cost of Rs 363 crore.
Credit Suisse for instance expects the gain on the unlisted non-core investment portfolio to be around Rs 1,350-2,250 crore and a 25% stake sale in the SPV to push up FY11 earnings by around 10%. Another broker expects such divestments in the non-core investments to add Rs 53 a share to HDFC?s valuation. The current share price of hdfc is hovering around Rs 2,600 levels.
Going forward, it would be the unlocking of value of its subsidiaries and associates that would act as a trigger to share price of the parent company. As per a broker estimate, the core business of HDFC is valued at Rs 1,933 a share, while the investments in the subsidiaries and associates have been valued at Rs 941 a per share. Some of its subsidiaries ? especially insurance arm as well as that of asset management business are expected to get listed on the stock exchange. This will also help seek better valuation for its the parent company.
HDFC Asset management company for instance, has seen sharp rise in its assets under management. It has today more than Rs 1,00,000 crore of assets under management with equity assets comprising close to 30% of it. While in FY ?09, it made a profit of Rs 129 crore, this year it likely to cross Rs 150 crore in net profit. HDFC holds 60% of HDFC asset management and the latter is among the top three profitable asset management companies in India. HDFC Standard Life Insurance, another subsidiary in which HDFC holds 72.47% of equity, has seen its assets increase 70% as at September 2009. It has a market share of 8% among private sector players .
The latest Credit Suisse report mentions that book value of unlisted subsidiaries, which includes insurance and asset management companies, is Rs 509 crore as against Rs 216 crore for non-subsidiaries (including listed and unlisted). In terms of estimated market value, the unlisted subsidiaries comes higher at Rs 2,636 crore as against Rs 778 crore for its non-subsidiaries.