India’s IPO market is packed with action and is all set for a busy next week when the one of the most anticipated IPOs of the year will open. Yes, the HDB Financial Services, a subsidiary of HDFC Bank, is all set to launch its Rs 12,500 crore IPO. This is the biggest in the NBFC space and the largest overall since Hyundai’s blockbuster IPO last October.
While the grey market premium (GMP) of Rs 83 suggesting a possible 11% listing gain indicates the heightened investor interest, it is important to also carefully consider the risks involved.
Like any big-ticket IPO, this mainboard issue also comes with a set of risks that investors must weigh before hitting the apply button.
Let’s take a look at the 7 key risks flagged by the company in its RHP-
HDB Financial IPO: Macroeconomic headwinds
The first and most key risk stems from the larger economic environment. The company in its DRHP filing said, “Any downturn in the macroeconomic environment in India could adversely affect our business, results of operations, cash flows and financial condition.”
HDB Financial IPO: Asset quality pressures
Although HDB Financial Services has brought down its gross Stage 3 (bad loans) in recent years, the risk still lingers. As per the DRHP, “Gross Stage 3 Loans amounted to 2.10%, 2.38%, 1.90%, 2.73% and 4.99% of Total Gross Loans” at different periods.
HDB Financial IPO: High share of unsecured loans
Nearly 29% of the company’s loan book is unsecured. These are loans without any collateral, which means a higher default risk. As the company cautions, “Our unsecured loan portfolio is not supported by any collateral… we may be unable to collect the unpaid balance.”
HDB Financial IPO: Secured loans are not fully risk-free
While over 71% of HDB’s loans are secured, the DRHP warns that “The value of collateral for our secured loans may decrease or we may experience delays in enforcing collateral.” This essentially means that even when a borrower defaults, recovering money via auction or sale of collateral may not be smooth or sufficient.
HDB Financial IPO: Dependence on HDFC Bank a double-edged sword?
HDB Financial Services brand value and credibility are closely tied to its parent, HDFC Bank. While this association is a strength, it is also a risk. “We rely on the parentage of our Promoter… however, the interests of the Promoter… may conflict with our interests or the interests of our other shareholders,” says the DRHP.
HDB Financial IPO: Loss of brand association a risk?
HDB Financial Services uses the HDFC name under a licensing agreement. A change in this arrangement could be damaging. The DRHP notes, “Any termination of our rights to use the HDFC Bank logo or any reputational harm to the HDFC Bank brand could materially and adversely affect our brand recognition.”
HDB Financial IPO: Regulatory risks in an evolving NBFC landscape
Being an “Upper Layer” NBFC under RBI’s new framework, HDB Financial Services faces more intense scrutiny than many of its peers. Regulatory tightening in lending norms, provisioning, or capital requirements could force the company to alter its business strategy and growth path.