HDFC Bank Ltd is in initial talks with private credit funds to sell a stake in its IPO-bound lending arm, HDB Financial Services, people familiar with the development said.
The talks with domestic credit funds are part of the ongoing value discovery process for HDB Financial. Five funds are in talks with HDFC Bank to each acquire a 4-7 percent stake in the non-bank lender.
“Conversations with these funds are at a very early stage, and valuations will be a critical factor for the transaction to go through,” a banker aware of the matter said, requesting anonymity.
A spokesperson for HDB Financial said, “We would like to let you know that as per the company policy, we do not comment on market speculations”. A spokesperson for parent HDFC Bank declined to comment.
The talks with the private credit funds were initiated after HDFC Bank’s conversations with large investors about a possible stake sale hit a rough patch due to differences in valuations.
Also, some of the investors approached are said to have asked for board seats. “When an investor takes a huge chunk of stake like 20 percent in a company, it’s fair to ask for board seats. But there’s not much clarity on this,” a person aware of the discussions said, requesting anonymity.
Japan’s Mitsubishi UFJ Financial Group had been interested in acquiring a significant stake in HDB Financial, the Economic Times reported in April.
Valuations, a thorny issue
HDFC Bank owns a 94.64 percent stake in HDB Financial, whose loan book stood at over Rs 90,000 crore as of March 31. The non-bank lender, largely catering to the retail segment, is said to be asking for a relatively high valuation, in the ballpark of 4-5 times book value. HDB’s FY23 book value per share stood at Rs 144.52, while its shareholders funds stood at Rs 11,437 crore. “However, valuations have taken a hit across the financial sector, including for the market leader – Bajaj Finance. The valuations HDB is seeking may be expensive in the current context,” said one of the people cited above, also declining to be identified.
However, a round of secondary share sales by the promoter (HDFC Bank in this case) is seen as an important step ahead of the initial public offering as it helps in price discovery for the entity. According to RBI regulations governing NBFCs, HDB Financial must be listed by October 2025.
Long-drawn IPO plan
HDB Financial Services, touted to be a favourite project of HDFC Bank’s former CEO Aditya Puri, has been looking at listing for many years. In fact, Puri was keen to list the company before his term ended in October 2020. With regulations for NBFCs implemented in October 2022, unlisted systemically important NBFCs such as Tata Capital, HDB Financial, and Bajaj Housing Finance are mandated to list three years from the new rule coming into force. These regulations are scale-based, linked to the NBFC’s size.
While Bajaj Housing has initiated the process of going public in a year, investment bankers said the progress is slow with other companies. “There are barely any talks about it (the IPO),” a banker said, referring to HDB Financial.
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