HDB Financial's MD & CEO explains discounted valuation for the IPO

Edited excerpts:

How much your parent will continue to hold after the draft circular by RBI?

We are a subsidiary of the bank. The company was set up to service underbanked and underserved, we have presence all over the country. We haven't been getting any leads from our parent since inception. As a company, we have organically originated all the customers. Our risk management, technology, infrastructure is independent. It's not that our branches share space with HDFC Bank.

We are an independent engine to originate, underwrite and service customers. We are not dependent on HDFC Bank on operating basis.

We have had the benefit of parent capital, strong risk management processes.

The RBI circular is a draft at this point of time, industry has given its feedback. I think beyond that, it's not possible to really speculate on what will be the next step, but we are an independent business, run independently.

Why is there a deep discounting in valuation?

We've been doing road shows for quite some time now, met investors globally and locally. We believe that the value is derived by talking to investors and bankers, and we worked with them to arrive at the value. We have been in business for 17 years, with 1,770 branches in 1,100 cities, and are a large and fast growing customer franchise. We had 9 million customers as on FY22, which increased to 19 million by FY25. We only do retail lending. Our top 20 customers account for less than 0.4% of AUM, that's the level of granularity of our loan book. As we are in retail lending, we had four or five churns of our book since inception.

The IPO is a journey, not something that is an end.

There were earlier talks about MUFG taking up a 20% stake. Later, there were reports that they could possibly show interest to take a majority stake. Would those sort of transactions now interest you given that now you're an independent company?

We are doing an IPO, which includes an offer for sale component, and a primary component. At the current price, HDFC Bank would continue to hold a 75% stake, and the company will continue to be a subsidiary of the of the bank after the IPO.

At this point of time, we are focused on the IPO. Any further dilutions and things like that, I guess it's for the parent to decide at appropriate time.

When do you see the next capital trigger for you to come through?

Whenever you come to IPO, a lot of discussion happens with the bankers, and on an average, it takes three to four years period where this capital should really help us with our growth. And as we grow through that, we'll see where we reach in three to four years time.

When you have healthy capital ratios, what was the trigger for fresh issue?

We're growing well, and we believe that growth plus internal accruals really creates value right for our investors. We also need to keep money ready for a potential growth opportunity, hence we are trying to raise capital and keep it available, in case there's a growth opportunity.

The regulator believes that there's an overlap in the nature of businesses between what the bank does and what the HDB Financial does. Would you want to address that as a valid concern?

What we're really doing is addressing a very different segment, or distinct segment, as compared to the bank, we don't do any business that is regulatory arbitrage, so the businesses that are prohibited activities for banks, we don't do that.

Is there a conscious effort you put in to keep the delinquency numbers low?

We make sure that the product delivery and the service delivery is of a level that the customer is expected to or used to, or expects from us. That's the way the company is organised. Each business has a certain risk reward equation in terms of how you price the product, and what kind of deliverances you can expect in terms of and how we underwrite that business. So, the number that you see is the weighted average of that number, we are quite comfortable with running a business because it reflects our ability to take a certain risk that we understand and create the market.

Going forward, over a period of 12 months, how can we see performance?

We have been a profitable company since second year of our operations. Since inception, we launched a new business almost every other year.

We are in the right space in terms of opportunity. We have a good product portfolio, some of them are quite seasoned, new. Because we had a history of product launch, some of our businesses are 15 years plus. The focus is on engagement there and cross sell there. The focus is on how do we make the product superior so that the customer continues to engage with us.

What are your views on new gold loan circular by RBI?

Our average loan size is about Rs 1.5 lakh. We are actually quite neutral to the gold loan circular, because I think it sort of straightens out the ways in which companies do business.

Unsecured loan stress is seeping in other products, what is your experience?

We have deep geographical presence. We only do business and markets where we have the ability to engage with the customer on an ongoing basis. So, if a relationship in a loan is anything from a few months to a few years, if we don't have the ability to service the customer through their life cycle, we don't. We don't offer credit in those markets. It's a conscious risk management choice to do business where we can service the customer best.

How much share of your customers would be repeat customers?

It really depends on the maturity of the product. The cross sell rate should be much higher. The newer ones would be in the nine to 12 months. Next 12 to 18 months, or 12 to 18 months.