Vault Matters | HDB Financial’s IPO is a much needed reality check

As a brand HDFC is synonymous with retail investors and HDB’s IPO doesn’t reflect optimistic retail sentiments.

When HDB Financial Services announced the pricing for its initial public offering at Rs 700 – 740, it sent a wave unease among investors. There were many retail investors hoarding the stock in the unlisted market (colloquially the grey market) and were betting a bumper IPO pricing for a huge upside. With a near 60 percent discount to the grey market pricing, valuation upside is unlikely in the near-term.

What’s disappointing though is the relatively weak appetite displayed by retail investors. As a brand HDFC is synonymous with retail investors and HDB’s IPO doesn’t reflect optimistic retail sentiments. The issue has been heavy-lifted by high net-worth individuals (HNIs) and institutional investors pretty much at the last moment.

On Day 3 of subscription so far, there is just about full demand from retail investors. Though fully subscribed, demand from non-institutional investor (mostly HNIs) was also just about 6.26 times (2.29 at the end of Day 2) and the one category which seems to have showed more interest is the employee of HDB Financial at 4.27 times.

In July 2018, HDFC Asset Management Company’s IPO was fully subscribed on Day 1, largely anchored on interest from retail investors who showed 1.34 times interest in the IPO. In November 2017, HDFC Life Insurance IPO was subscribed five times with institutional bids accounting for almost 17 times their allocated quantum.

Compared to that, HDB’s IPO hasn’t been brisk. Three aspects have worked against it.

HDB Financial is a 17 year old outfit and pushed for listing due to regulatory requirements. With uncertainties on how much its parent bank – HDFC Bank – can continue to hold, the inventory of HDB’s stock in the market remain at elevated levels in the medium-term. This works against the very thesis of an IPO and takes away the scarcity premium that one may attach to the issue, a factor that is critical in driving interest in the IPO market.

Secondly, the question that merits an answer is whether HDB truly is an alternative to Bajaj Finance. Built on an aim to be the next Bajaj Finance by the former CEO of HDFC Bank Aditya Puri, though HDB is a 17 year old outfit, its financials don’t project a straight line trend yet, particularly on parameters of credit quality. HDB, which was in fact known to be a pet project of Puri, was under reasonable stress during the pandemic with gross non-performing assets peaking to almost 5 percent in FY22. While it was at 2.26 percent in FY25 as per listing documents (up; from FY24’s 1.9 percent), seen against Bajaj Finance’s 0.96 percent gross NPA, there is ample room for improvement. This holds true from a return ratio perspective as well.

With numbers still to improve, the question which resurfaces is whether HDB should have waited a little more for a public issue. More often than not, listing because of a regulator’s mandate works against the interest of investors and the best example is the universe of small finance banks.

Lastly, the HDB IPO is being rolled out at a time when one isn’t fully sure about the future trend of asset quality in the SME lending space. As per CIBIL’s recent assessment, while delinquencies are stable in the MSME space, small-ticket loans less than Rs 10 lakh need attention due to an increasing share of bad loans.

The overall landscape for financial services, from a growth standpoint, is not very jubilant either. Many were hoping HDB’s IPO would turn the fortunes and revive the good times for those in the financial services space waiting to go public.

It’s likely that the positive equity market sentiments may shower listing pop for HDB’s shares on July 2 when it debuts on the bourses. But that its valuations didn’t meet market expectations is a good enough signal that piggybacking on great parentage cannot justify fabulous valuations. While it helped in 2017 and 2018, now with sentiments low for financial services, to each is one’s own in the capital markets space.

Will Tata Capital IPO turn out to be any different? That’s the next big thing investors will look out for.