The Non-Banking Financial Company (NBFC) space is buzzing with primary market action, and after the much-anticipated HDB Financial IPO, Hero FinCorp is also slated for its stock market debut. Though the final date hasn’t been shared yet, this Hero MotoCorp Group owned NBFC company was incorporated as Hero Honda Finlease in December 1991. Its name was changed to ‘Hero FinCorp‘ in September, 2011.
The company is a scaled NBFC that offers diversified financial products, primarily targeting the growing retail and micro, small and medium enterprise (MSME) customer segments in India, alongside corporate and institutional finance (CIF) loans.
What is a Scaled NBFC?
Before moving ahead, let’s explain what a scaled NBFC is. In 2021, the Reserve Bank of India (RBI) introduced a Scale-Based Regulation (SBR) framework to regulate NBFCs more strictly depending on their size, activity, and risk level. NBFCs that fall into the upper, middle, and top layers are subject to stringent norms on their capital adequacy, governance, disclosures, IPO listing timelines, etc.
Hero FinCorp IPO: Issue details
The company will be raising a total of Rs 3,668.13 crore from the primary markets through a combination of fresh shares as well as an offer for sale. There will be a fresh issue of Rs 2,100 crore, while the OFS is for Rs 1,568.13 crore.
It will be a fully book-built issuance, and the price band for the same has not been announced yet.
Hero FinCorp IPO: Who’s selling stake via OFS?
Here are the details of key stakeholders selling shares- The list includes:
- AHVF II Holdings Singapore II. will be raising up to Rs 1,000 crore, or 64% of the OFS. The company held 17,036,363 Class A Compulsorily Convertible Preference Shares (CCPS), which will convert into an equal number of equity shares prior to the red herring prospectus (RHP) filing. Making this 10.34% of the pre-offer paid-up equity share capital on a fully diluted basis.
- Apis Growth II (Hibiscus) will be raising up to Rs 250 crore or 16% of the total OFS. The company held 2,048,781 equity shares in Hero FinCorp, representing 1.24% of the pre-Offer paid-up equity share capital on a fully diluted basis.
- Otter will raise up to Rs 3,13.36 crore, which represents almost 20% of the OFS. The company held 12,882,170 equity shares, representing 7.82% of the pre-offer paid-up equity share capital.
The IPO includes a portion for anchor investors, where up to 60% of the Qualified Institutional Buyer (QIB) Portion may be allocated to anchor investors on a discretionary basis. Out of this, one-third of this portion is reserved for domestic Mutual Funds.
Hero FinCorp IPO: Objectives of the issue
The primary objective of the fresh issue is to augment the company’s Tier-I capital base. This is crucial for meeting future capital requirements that are expected to arise from the growth of its business and assets, particularly for onward lending.
Additionally, a portion of the proceeds will be used to cover the expenses related to the offer.
Hero FinCorp IPO: AUM, operational dynamics
The company’s Assets Under Management (AUM) reached Rs 51,820.81 crore as of March 2024, with retail and MSME loans accounting for 65% and 20.8%, respectively. Hero Fincorp has expanded its customer base to 11.80 million by the same time frame and focuses on households with annual incomes between Rs 2 lakh- 10 lakh, which presents a significant growth opportunity.
With strong parentage comes a great advantage. Hero Fincorp benefits from its “Hero” brand and its promoter, Hero MotoCorp. The company leverages an extensive two-wheeler distribution network, financing a considerable portion of Hero MotoCorp’s sales.
The company uses a strong omni-channel, asset-light, pan-India distribution network, reaching across states and Union Territories as of March 2024. However, Hero FinCorp operates in a highly competitive Indian financial services industry, facing competition from a diverse range of entities across its various product verticals.
Hero FinCorp IPO: Meet the promoter
Hero MotoCorp is one of the promoters of Hero FinCorp, holding a significant stake in the company. The automobile major holds 52.43 million equity shares of Hero FinCorp, representing 41.19% of the total fully paid-up equity shares.
In addition to its direct equity shares, Hero MotoCorp also holds 12.73 million Class B Compulsorily Convertible Preference Shares (CCPS). These CCPS will convert into an equal number of equity shares prior to the filing of the Red Herring Prospectus.
Therefore, on a fully diluted basis, Hero MotoCorp’s total holding amounts to 65.16 million equity shares. This fully diluted holding constitutes 39.56% of the company’s equity share.
Hero FinCorp: Assessing the financials
A look at the financials of the company now- Hero Fincorp’s revenue has surged at a CAGR of 20.5% over the last three years. If we break down the revenue, apart from interest income, the company can see some green shoots in the insurance business as well. The insurance commission in FY22 was Rs 15.36 crore, in FY23 it was Rs 21.21 crore, and in FY24 it was Rs 113.99 crore (making 1.36% of total income).
Also, the interest income has grown significantly over the last three years due to the growth of total gross loans, which was driven by the expansion of its customer base and distribution network.
The bottom line is the company swung into black in FY23 with a net profit of Rs 480 crore, while it further increased to Rs 637 crore in FY24.
| Financial year | Revenue | Net profit |
| FY22 | 4,738.65 | -191.9 |
| FY23 | 6,401.59 | 479.95 |
| FY24 | 8,290.90 | 637.05 |
Hero FinCorp: Breakdown of revenue from operations
A look at the detailed revenue of Hero FinCorp and the trend seen in last three years-
Hero FinCorp interest income
- FY22: Rs 4,241.86 crore (88.42% of total income)
- FY23: Rs 5,719.60 crore (88.71% of total income)
- FY24: Rs 7,479.38 crore (89.47% of total income)
Hero FinCorp Profit on sale of investments (net)
- FY22: Rs 43.43 crore (0.91% of total income)
- FY23: Rs 85.62 crore (1.33% of total income)
- FY24: Rs 64.70 crore (0.77% of total income)
Hero FinCorp other charges
- FY22: Rs 398.63 crore (8.31% of total income)
- FY23: Rs 551.16 crore (8.55% of total income)
- FY24: Rs 610.83 crore (7.31% of total income)
Hero FinCorp IPO: Know the key risks
Like every IPO, the DRHO also lists some of the key risks associated with Hero FinCorp issue. Here is a look at the key concerns-
High dependence on Hero MotoCorp’s two-wheeler dealership network: A major part of Hero FinCorp’s business is dependent on Hero MotoCorp. The company sources two-wheeler loans through Hero MotoCorp’s two-wheeler dealership network. The company sourced 99% of its business in FY24 from its promoter, 99.69% in FY23, and 99.93% in FY22. That’s why any decline in demand for Hero two-wheelers could adversely affect the company’s business.
Reliance on New-to-Credit (NTC) borrowers: Hero FinCorp’s retail finance business depends on NTC borrowers, who accounted for 26.55% of its total retail AUM in FY24, 34% in FY23, and 46.33% in FY22. Evaluating the creditworthiness of these borrowers, who do not have established credit histories, can be difficult and might result in an increased risk of non-payment or default on loans.
Exposure to Non-Performing Assets (NPAs) and customer defaults:As the company deals with customers who have no credit history, the company faces the risk of non-payment or default by its customers. However, there’s some good news. The stage 3 loans, which represent credit-impaired assets, have been declining over the years. In FY24, the stage 3 loans constituted 4.02% of the total gross loans, 5.11% in FY23, and 7.54% in FY22. Although the company is averse to the risk, if unable to provide adequate provisioning coverage for these NPAs.
Hero FinCorp: NBFC industry dynamics
As per a Crisil report on the NBFC sector, the IMF expects this segment’s growth to be underpinned by India’s robust economic expansion. The organisation expects the industry to grow to $6.4 lakh crore by FY30 from $3.3 lakh crore in FY23. The IMF thinks that retail and MSMEs will comprise the key growth-driving customers.
There’s a segment called ‘Aspiring India’, which is the households that falls under the bracket of Rs 2- 10 lakh. This segment is expected to grow substantially to 18.1 crore by FY30 from 10.3 crore households in FY22. The driving factors are demographics, rising incomes, and aspirations for vehicles and homes, stated CRISIL.
Hero FinCorp strategically targets this group, with 72.20% of its retail customers belonging to this segment in Fiscal 2024.
The other sector playing a big role in the growth of scaled-NBFCs or NBFCs is Micro, Small and Medium Enterprise (MSME). This sector is contributing approximately 29% to India’s GDP and 45% to its manufacturing output. The government thinks that MSMEs’ GDP contribution will rise to 40-50% in the next four financial years.
The major role of NBFCs comes into play in the penetration of underbanked regions and individuals without traditional credit history. Thus, NBFCs complement the banking system.
Loans or credit through NBFC is estimated to grow faster than systemic credit, at a pace of 16-18% CAGR by FY25, led by microfinancing and vehicle financing in the retail segment, and MSME loans in wholesale.
Specific segments like housing finance are estimated to grow at a CAGR of 13-15%, reaching Rs 51-52 lakh crore by FY27. The vehicle finance sector also benefits from macroeconomic conditions and rural income growth, particularly for two-wheelers.