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Hero Fincorp Limited

1. Background and Business
Incorporated in 1991 as Hero Honda FinLease Ltd., Hero Fincorp Company Ltd. (HFCL) is promoted by Hero Moto Corp Ltd. (HMCL), which holds 41.18% stake in the company. The Munjal family holds 38.7% stake and balance is held by other investors. HFCL offers both retail and corporate loans largely to its parent’s customers. Within retail, it offers two-wheeler loans and used car loans, while in the wholesale segment it offers SME and commercial loans, Loan Against Property (LAP), unsecured business loans, medical equipment loans and loans to doctors. It recently set up a wholly owned housing finance subsidiary in FY18 – Hero Housing Finance Ltd. (HHFL), to offer home loans and LAP. HHFL currently operates from 11 locations and has a loan book of Rs.5.56bn as of March 2019. HFCL’s consolidated loan book stood at Rs.197bn as of March 2019.

Consolidated loan book break-up (Rs. mn)

FY19

% contribution

Retail (including 2-Wheelers)

77,040

39.0%

- 2-Wheeler loans

59,710

30.3%

SME (Including LAP)

59,320

30.1%

Emerging Corporate loans

60,560

30.7%

Others

440

0.2%

Total

197,360

100.0%


Key Product Segments:
HFCL offers both retail and corporate loans, besides providing leasing services. Within the retail segment, it offers two- wheeler financing and used vehicle loans. In the corporate segment, it offers LAP, SME & Commercial Loans, Unsecured Business Loans, Medical Equipment financing and Loans to Doctors. Retail loans constitute 39% of the total loans and balance is contributed by wholesale loans. Key offerings in these segments are detailed below:

Size of Operation of lending business:

Particulars

FY14

FY15

FY16

FY17

FY18

FY19

3 yr CAGR

5 yr CAGR

Consolidated Loan Book (Rs. mn)

8,782

30,140

63,146

96,506

131,581

197,712

46.3%

86.4%

  1. Two-wheeler loans (30% of loan book) – HFCL is the captive financier of the two wheelers sold by its parent HMCL. It started this business in FY14 and as of March 2019, had presence in 946 dealerships through 3,100+ touch points. It provides loan with a ticket size of Rs.10,000 to Rs.1,00,000 having a tenor of up to 48 months. LTV in this segment is high at 95%. It financed about ~16% of HMCL’s two wheelers in FY19.
  2. Corporate loans (61% of loan book) – This segment includes SME & commercial loans, LAP, Unsecured business loans, inventory funding, structured finance, etc.
    1. SME & Commercial Loans – Within this segment, HFCL provides bill discounting, purchase invoice financing, working capital term loans, secured term loans, project finance, loans for machinery, etc. with tenors ranging from 12 to 84 months and LTV in the range of 75-90%.
    2. Loan Against Property (LAP) – LAP is given against both commercial and residential properties to self-employed professionals, manufacturers, traders, etc. with ticket size of Rs.50 lakhs to Rs.15 crores having a tenor of up to 15 years.
    3. Unsecured business loans – Loans are provided for tenure of up to 3 years with ticket size ranging from Rs.5 lakhs to Rs.25 lakhs.
  3. Housing loans (3% of loan book) – HFCL commenced housing finance business in FY19 by setting up a wholly owned subsidiary – Hero Housing Finance Ltd. and offers home loans and LAP. It has an AUM of Rs.5.56bn as of March 2019.
  4. Other loans – HFCL is increasingly providing loans to customers other than those coming from its parent’s ecosystem, which include loans to doctors, medical equipment financing, etc.
 
2) Promoters background and Management details
Hero Moto Corp Ltd. and the Munjal family together hold ~80% stake in HFCL. Mr. Abhimanyu Munjal is the Joint Managing Director and CEO of the company. He has more than 15 years of experience in strategic leadership and people management. Mrs. Renu Munjal is the Managing Director of the company and Mr. Pawan Munjal is the Chairman and Director.

Shareholding Pattern as of March 2019

Category

% shareholding

Hero Moto Corp

41.2%

Munjal Family

38.7%

Credit Suisse

2.4%

Otter Ltd.

10.6%

Others

7.2%

Total

100.0%


Board of Directors

Management Team

 

Designation

With HFCL since

 

Brief Profile and Prior Experience

 

Qualification

 

 

Mr. Abhimanyu Munjal

 

 

Joint MD and CEO

 

 

 

2013

-          Mr. Abhimanyu has over 15 years of experience in strategic leadership and people management and has held various executive positions in Hero Group companies. He has been instrumental in expanding HFCL’s AUM.

-          He has also set up a VC Fund called AdvantEdge Partners and made investments in 18 startups.

 

 

 

N.A.

 

Mrs. Renu Munjal

 

Managing Director

 

Inception

-  Mrs. Renu Munjal is the Managing Director of Hero FinCorp.  She also serves as a director on the Board of Easy Bill. She is the former Executive Director of Hero MotoCorp.

 

N.A.

 

 

Mr. Pawan Munjal

 

 

Chairman and Director

 

 

 

Inception

-          Mr. Pawan Munjal is the Chairman, Managing Director and CEO of Hero Motocorp Ltd.

-          Under his leadership, Hero Moto has become the world’s largest two-wheeler company in the world.

-          He has been a prominent member of several industry bodies and has regularly contributed to policymaking in India.

 

 

 

N.A.

 

 

Mr. Jayesh Jain

 

Chief Financial Officer

 

 

2018

-          Mr. Jayesh has over 17 years of experience across strategic planning, budgeting, accounting, auditing, etc.

-          He has previously worked with PNB Housing and Gruh Finance as their CFO.

 

-   Chartered Accountant

-   CFA

 

Mr. Ajay Sahasrabuddhe

 

CEO – Retail Finance

 

 

2013

-          Mr. Ajay has more than 25 years of experience in retail financing.

-          He has previously worked as Chief Business Officer with Family Credit and as National Sales Manager at Tata Capital.

-  Diploma           in business management from Amravati University

 

 

Mr. Mahesh Sanghavi

 

 

Chief Business Officer

 

 

 

2015

-          Mr. Mahesh has more than 20 years of experience in credit risk management with expertise in underwriting, portfolio and stressed asset management.

-          Prior to joining HFCL, he was the head of credit risk at ING Vysya Bank and has also worked with HSBC, ICICI Bank, IndusInd Bank.

 

-   CWA

-   MBA             from INSEAD

-   CFA

 

 

Mr. Samir Mehta

 

Chief Business Officer

 

 

2014

-          Mr. Samir has over 18 years of experience in setting up and managing SME and MME asset businesses.

-          He joined Hero Fincorp as Business Head – Corporate Finance in 2014.

-   B Tech. from NIT, Kurukshetra

-   MBA from IIM Lucknow



3) Business Drivers
  1. Synergistic benefits from parent – Hero Moto Corp (HMCL) along with Munjal family holds ~80% stake in the company. HFCL derives operational, financial and managerial support from its parent. Notably, HFCL provides complementary services to the parent. It provides bill discounting and corporate loans to the vendors and suppliers of HMCL. Further, in FY14, it commenced captive financing of HMCL’s two wheelers, and financed about 16% of its vehicles in FY19. About 45% of its business is sourced from its parent’s ecosystem (source: Crisil rating report April ’19). The parent and the Munjal family have regularly made capital infusion in the company to sustain growth momentum. It also has 2 directors of HMCL on the company’s board of directors.

Particulars

FY15

FY16

FY17

FY18

FY19

HMCL two-wheeler sales (no.)

6,431,686

6,421,913

6,483,655

7,382,718

7,612,775

HFCL financing volumes (no.)

226,000

468,000

670,000

860,000

1,200,000

% contribution

4%

7%

10%

12%

16%

  1. Diversifying loan book to reduce concentration risk – HFCL started with providing leasing and bill discounting services to the vendors of HMCL. Over the years, it has diversified its loan book to provide two-wheeler financing, used vehicle loans, SME & Commercial loans, medical equipment financing, loans to doctors, etc. It also commenced housing finance business in FY19. Loan book mix is moving towards retail loans as tabulated below:

Loan book mix %

FY15

FY16

FY17

FY18

FY19

Retail (including 2 wheelers)

26.5%

28.4%

30.9%

32.4%

39.0%

SME (including LAP)

29.0%

32.4%

36.4%

36.1%

30.1%

Emerging Corporate

42.5%

38.1%

32.0%

31.0%

30.7%

Others

1.9%

1.1%

0.7%

0.5%

0.2%

Total

100%

100%

100%

100%

100%


  1. Consistently grown across all parameters – HFCL’s gross loan book has grown at a CAGR of 46% and 86% in the last 3 and 5 years, respectively. Despite change in product mix, yields have been maintained in the last 3 years at~11%. Productivity improvement is also seen as CI ratio has come down from 71% in FY15 to 62% in FY19. Further, credit cost has been maintained at sub 1% levels. Overall, therefore, PAT has grown at a CAGR of 44% and 75% in the past 3 and 5 years, respectively.
  2. Adequately capitalized – Company is adequately capitalized with Capital Adequacy Ratio (CAR) of 19.3% as against the regulatory requirement of 15% and tier 1 at 16.3%. The parent and promoters have consistently infused capital in the company. Company also made a rights issue in FY19 to the tune of Rs.11.81bn. Thus, with the support of its parent, company has been easily able to raise funds, which has helped in maintaining leverage at 5-6-xs levels.
  3. Strong credit rating – Given the strong support it derives from its parent and consistent growth across parameters, company has received credit rating of AA+ from both Crisil and ICRA for its long-term debt instruments. This has helped in raising funds at competitive rates.
4) Key risks
  1. Asset quality – HFCL has recently diversified its loan book towards retail products and hence the book is not yet seasoned. It has entered in the housing finance segment only in FY19. GNPA has increased from 4.1% in FY18 to 4.5% in FY19. Slippages have been consistently increasing in the last 5 years.

Asset quality

FY15

FY16

FY17

FY18

FY19

GNPA %

0.30%

1.60%

3.40%

4.10%

4.50%

NNPA %

0.14%

0.55%

1.72%

2.72%

2.97%

Credit cost %

0.3%

0.6%

0.9%

1.0%

0.7%

Slippages (Rs. mn)

44

553

2,428

3,883

4,407

                  Note: NNPA data is based on 90 dpd for FY18 and FY19, while GNPA is based on 90 dpd for all the years
  1. Dependence on parent – HFCL lends mainly to vendors and suppliers of HMCL. It has heavy dependence on its parent’s ecosystem to source clients. It does captive financing of HMCL’s two wheelers which constitutes 30% of its loan book and about 45% of its book is contributed from HMCL’s ecosystem.
  2. Performance in new businesses remains monitorable – HFCL has recently diversified its loan book and offered products to customers outside of its parent’s ecosystem. Thus, growth, profitability and asset quality of these segments going forward remain key monitorable.
 5) Historical Financial Performance and Analysis


Key parameters (Rs. mn)

FY14

FY15

FY16

FY17

FY18

FY19

FY16-19 CAGR

FY14-19 CAGR

Balance Sheet:

 

 

 

 

 

 

 

 

Loan Book

8,782

30,140

63,146

96,506

131,581

197,712

46.3%

86.4%

YoY growth %

40%

243%

110%

53%

36%

50%

 

 

Net worth

2,175

5,514

10,302

19,187

22,485

36,419

52.3%

75.7%

YoY growth %

4%

154%

87%

86%

17%

62%

 

 

Profit & Loss:

 

 

 

 

 

 

 

 

Net Interest Income

601

1,344

3,375

5,831

8,502

11,212

49.2%

79.5%

YoY growth %

59%

124%

151%

73%

46%

32%

 

 

NIMs on loans %

6.8%

4.5%

5.3%

6.0%

6.5%

5.7%

6.1%

5.6%

Total income

801

2,000

4,790

7,975

10,109

13,938

42.8%

77.1%

YoY growth %

71%

150%

139%

66%

27%

38%

 

 

Cost to Income Ratio %

71.1%

71.0%

66.5%

63.9%

65.5%

62.0%

Avg. 63.8%

Avg. 65.8%

PPOP

231

581

1,603

2,875

3,485

5,292

48.9%

87.0%

YoY growth %

-18%

151%

176%

79%

21%

52%

 

 

Provisions

3

79

355

884

1,362

1,381

57.3%

240.9%

Credit Cost %

0.03%

0.26%

0.56%

0.92%

1.03%

0.70%

Avg. 0.9%

Avg. 0.7%

ETR %

34.4%

34.0%

34.7%

35.1%

32.7%

37.2%

Avg. 35.0%

Avg. 34.7%

PAT

150

332

815

1,292

1,429

2,458

44.5%

75.0%

YoY growth %

-21%

121%

146%

59%

11%

72%

 

 

Ratios:

 

 

 

 

 

 

 

 

EPS (Rs.)

1.3

2.9

7.1

11.3

12.5

21.5

44.5%

75.0%

BV (Rs.)

19

48

90

168

197

319

52.3%

75.7%

RoA (%)

1.3%

1.1%

1.2%

1.3%

1.1%

1.2%

Avg. 1.2%

Avg. 1.2%

RoE (%)

6.9%

6.0%

7.9%

6.7%

6.4%

6.7%

Avg. 6.6%

Avg. 6.8%

Leverage (xs)

5.4

5.7

6.3

5.2

6.0

5.8

Avg. 5.7

Avg. 5.8

Parameter

Commentary on historical performance

 

Loan Book – CAGR

§   Company has presence in in both retail and corporate segments. It is increasingly diversifying its loan book by entering two-wheeler financing, LAP, SME loans, housing finance. Loan book has grown at a strong rate of 46% in the past 3 years (86% in 5 yrs).

NII– CAGR NIMs

§   NII growth has largely been in line with loan book growth at 49% and 79% in the last 3 and 5 years, respectively. NIMs have declined from 6.8% in FY14 to 5.7% in FY19 as cost of funds has risen even as yields have been maintained.

Cost to Income (C/I) ratio

§   CI ratio has been consistently declining from 71% in FY14 to 62% in FY19, reflecting productivity improvement.

 

Credit Cost - Avg/ Provisions

§   Since HFCL has recently diversified its loan book and the book is yet to season, credit cost is lower with an average 0.9% in the past 3 years and 0.7% in past 5 years. GNPA has, however, been rising from 0.3% in FY15 to 4.5% in FY19.

PAT - CAGR

§   PAT has grown at a CAGR of 45% in the last 3 years (75% in 5 yrs) driven by strong loan book growth, stable NIMs and operating efficiency.

Return Metrics

§   Strong growth in profits has resulted in RoA of 1.2% (3 yr average). RoE at 6.6% has been lower due to equity infusion done to maintain leverage in the range of 5-6-xs.


6) Peer Analysis
HFCL has presence in diverse segments in the lending business like two-wheeler finance, LAP, SME loans, medical equipment financing, etc. We have compared NBFCs having presence in these segments. Cholamandalam Investment & Finance Co Ltd. Mahindra Finance and Shriram Transport are vehicle financiers, Bajaj Finance has presence in LAP, consumer durable and SME loans, while L&T Finance Holdings has exposure towards LAP, tractor loans, etc. Further, all these companies also have a strong promoter background and parentage.
We have compared the above-mentioned companies based on the following parameters:
  1. Loan book composition and size – Loan book composition determines yields and size of the book helps in determining position in the industry.
  2. NIM – Ability to pass on interest rates, presence in high yielding segments and control on cost of funds determines NIM trajectory.
  3. Asset quality – Robustness of risk management policies and strong underwriting skills and exposure towards high risk segments determine asset quality.
  4. Return parameters – Companies with presence in high yield segments, having control on asset quality and operational efficiency have better return ratios.
Summary table:

Company Name(Rs. mn)

Net interest income

Loan book

PAT

FY18

FY19

YoY Growth

FY18

FY19

YoY Growth

FY18

FY19

YoY Growth

Hero Fincorp

8,502

11,212

32%

131,581

197,712

50%

1,429

2,458

72%

Bajaj Finance

69,716

97,252

39%

791,030

1,125,130

42%

24,964

39,950

60%

L&T Finance

44,292

51,052

15%

853,540

991,210

16%

12,784

22,320

75%

Chola

28,174

33,973

21%

422,530

526,220

25%

9,183

11,862

29%

MMFS

35,287

47,004

33%

485,470

612,496

26%

10,761

15,571

45%

Shriram transport

68,350

78,976

16%

961,984

1,023,075

6%

24,603

25,587

4%


Ratios :

Company Name(Rs. mn)

CI Ratio

NIM

Credit Cost

ROA

ROE

FY18

FY19

FY18

FY19

FY18

FY19

FY18

FY19

FY18

FY19

Hero Fincorp

66%

62%

6.5%

5.7%

1.0%

0.7%

1.1%

1.2%

6.4%

6.7%

Bajaj Finance

40%

35%

8.8%

8.6%

1.3%

1.3%

2.9%

3.2%

15.8%

20.3%

L&T Finance

29%

30%

5.8%

6.5%

2.4%

1.5%

1.5%

2.1%

11.2%

16.6%

Chola

39%

37%

6.7%

6.5%

0.8%

0.6%

2.1%

2.1%

18.0%

19.2%

MMFS

40%

38%

7.3%

7.7%

1.2%

1.0%

2.0%

2.3%

11.2%

14.3%

Shriram transport

23%

23%

7.1%

7.7%

1.8%

2.3%

2.5%

2.4%

20.3%

16.2%


Key takeaways from peer analysis:
  1. Loan book composition and size – Hero Fincorp has been building up a well-diversified loan book with presence across LAP, two-wheeler finance, SME loans and is also entering the housing finance segment. This helps in de- risking the portfolio by avoiding portfolio concentration. Loan book size is lower than peers, but it has been growing at a faster pace as it is expanding its product portfolio to add newer products.
  2. NIM – NIM is lower when compared to peers due to change in product mix and increase in cost of funds, despite maintaining yields.
  3. Asset quality – Asset quality has been witnessing deterioration leading to increase in slippage across products. Given that its loan book is not yet seasoned, this remains a key monitorable going forward.
  4. Return parameters – RoE has remained lower than peers due to continuous equity infusion in the business resulting in a leverage of sub 6-xs. However, due to strong profit growth of 75% in the last 5 years, RoA has been maintained at 1.2%.
 Valuation comparison of peers:

 

1

Bajaj Finance Ltd.

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

448

167

410

15.5

83

28.9

10.8

26.5

5.4

2.0

4.9

 

FY16

698

394

693

22.0

128

31.7

17.9

31.4

5.5

3.1

5.4

 

FY17

1,205

677

1,174

31.7

155

38.0

21.4

37.1

7.8

4.4

7.6

 

FY18

1,989

1,153

1,770

43.0

273

46.2

26.8

41.1

7.3

4.2

6.5

 

FY19

3,035

1,770

3,025

68.9

340

44.1

25.7

43.9

8.9

5.2

8.9

 

5 yrAvg

 

 

 

 

 

37.8

20.5

36.0

7.0

3.8

6.7


 

2

 

Chola

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

123

56

118

5.6

41

22.2

10.0

21.1

3.0

1.4

2.9

 

FY16

151

108

143

7.3

47

20.8

14.9

19.6

3.2

2.3

3.1

 

FY17

249

139

193

9.2

55

27.1

15.2

21.0

4.5

2.5

3.5

 

FY18

302

193

290

11.7

65

25.7

16.4

24.7

4.6

3.0

4.4

 

FY19

352

208

290

15.2

79

23.2

13.7

19.1

4.5

2.6

3.7

 

5 yrAvg

 

 

 

 

 

23.8

14.0

21.1

4.0

2.4

3.5


3

L&T Finance

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

EPS (Rs.)

BV (Rs.)

P/E (xs)

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

83

60

63

4.1

31

20.3

14.6

15.4

2.7

2.0

2.1

 

FY16

75

48

64

4.1

33

18.2

11.8

15.5

2.3

1.5

1.9

 

FY17

124

64

123

5.0

33

24.9

12.7

24.8

3.7

1.9

3.7

 

FY18

214

119

157

6.1

55

34.9

19.5

25.7

3.9

2.2

2.9

 

FY19

190

111

152

10.7

64

17.7

10.4

14.3

2.9

1.7

2.4

 

5 yrAvg

 

 

 

 

 

23.2

13.8

19.1

3.1

1.8

2.6


 

4

Mahindra Finance

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

345

230

254

13.5

92

25.6

17.0

18.8

3.8

2.5

2.8

 

FY16

294

173

243

10.9

99

27.0

15.9

22.3

3.0

1.8

2.5

 

FY17

405

232

315

6.5

105

23.3

35.8

48.6

3.9

2.2

3.0

 

FY18

524

290

462

17.4

156

30.1

16.7

26.5

3.4

1.9

3.0

 

FY19

538

351

421

25.2

177

21.3

13.9

16.7

3.0

2.0

2.4

 

5 yr Avg

 

 

 

 

 

25.5

19.9

26.6

3.4

2.1

2.7


 

5

Shriram Transport

52 week High (Rs.)

52 week Low (Rs.)

March ending

price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

1,286

697

1,114

54.6

407

23.6

12.8

20.4

3.2

1.7

2.7

 

FY16

1,206

737

954

51.9

448

23.2

14.2

18.4

2.7

1.6

2.1

 

FY17

1,325

778

1,078

55.4

425

23.9

14.0

19.4

3.1

1.8

2.5

 

FY18

1,543

898

1,441

108.4

440

14.2

8.3

13.3

3.5

2.0

3.3

 

FY19

1,671

904

1,273

112.8

607

14.8

8.0

11.3

2.8

1.5

2.1

 

5 yr Avg

 

 

 

 

 

20.0

11.5

16.6

3.0

1.7

2.6


7) Conclusion and recommendation
We have done a comparative price analysis of listed players in the NBFC space to arrive at the indicative valuation band within which HFCL can trade post listing. Please note that full price discovery of the stock will happen only after it gets listed. We remain positive on the company considering the following factors:
  1. Strong growth trajectory witnessed in loan book
  2. Linkage and synergy benefits from parent
  3. Parent’s focus to grow financial services business and consistent equity infusion in the business
  4. Consistent productivity improvement and PAT growth
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HDB Financial Services Limited

1) Background and Business
Incorporated in 2007, HDB Financial Services Ltd (HDB) is a subsidiary of HDFC Bank Ltd, which holds 95.53% stake in the company. HDB is an NBFC which offers 4 key products namely – Vehicle Finance, LAP, Unsecured Business Loans and Other retail loans. Within these 4 key segments it offers gold loan, auto loan, digital products loans, loan against securities (LAS), Commercial Vehicle (CV) and Construction Equipment (CE) financing, tractor loans, etc. It has a gross loan book of Rs.547bn as of March 2019.
Besides its lending business, HDB is also a registered corporate insurance agent wherein it sells life and general insurance products of HDFC Standard Life and HDFC Ergo General Insurance Company. HDB also runs BPO collection services for its parent, HDFC Bank Ltd. HDB derives major part of its revenue from its lending business (77% of revenue in FY19), followed by BPO business (19%) and rest from fee income, including income from distribution of insurance products. The company operates through a network of 1,350 branches across 961 cities in India.

Revenue break up

FY19 (Rs. mn)

% contribution

Lending business

67,121

77%

BPO services

16,481

19%

Other income (inc. distribution income from insurance, treasury and fee income)

3,646

4%

Total

87,248

100%


Loan Book break up

FY19 (Rs. mn)

% contribution

Loan Against Property (LAP)

191,483

35%

Vehicle Finance

224,309

41%

Unsecured Business Loans

114,890

21%

Other retail loans

16,413

3%

Total

547,094

100%


Key Product Segments:
HDB reports income under three heads namely – lending business, BPO collection services and non-interest income, including fee on distribution of insurance products. Key offerings in each product segment are detailed below:

  1. Lending business: As part of its lending business, it offers Loan against property (LAP), Vehicle Finance, Unsecured Business Loans and other retail loans.Size of Operation of lending business:

    Particulars

    FY14

    FY15

    FY16

    FY17

    FY18

    FY19

    3 yr CAGR

    5 yr CAGR

    Loan Book (Rs. mn)

    133,875

    189,891

    244,096

    340,709

    442,683

    547,094

    31%

    32%


    1. Vehicle finance loans (41% of loan book) – Under this category, it provides commercial vehicle loans (new, used, refinancing of existing vehicles), construction equipment loans (new, used, refinancing of existing equipment) and financing for new and used tractor loans.
    2. Loan against property (35% of loan book) – It provides loan against property to SMEs. Share of this segment has come down from 60% in FY16 to 35% in FY19 as it diversifies its book.
    3. Unsecured business loans (21% of loan book) – HDB provides loans to SMEs for working capital, setting up of machinery, etc. under this segment.
    4. Other retail loans – HDB has recently expanded its product portfolio and provides a wide array of products like consumer durable loans (washing machine, refrigerators, televisions, household appliances, etc.), digital products loans (mobiles, laptops, etc.), gold loan, auto loan, personal loans and loan against mutual fund units.

  2. Sale of insurance products: Company is a registered corporate insurance agent and has license from IRDAI, which is valid for next three years. It sells life and general insurance products of HDFC Standard Life Insurance Company Ltd. and HDFC Ergo General Insurance Company Ltd.
  3. BPO services: The company provides sales support services, back office, operations and processing support to its parent HDFC Bank. It has set up 15 call centers with a capacity of over 5,000 seats. These centers provide collection services for all the retail products of HDFC Bank in 750 cities through its calling and field support teams. In FY17, company amalgamated with HBL Global Pvt. Ltd. (HBL) and Atlas Documentary Facilitators Company Pvt. Ltd. (ADFL), which offered marketing and collection services to HDFC Bank. Post the merger, revenue from this segment has grown at a CAGR of 11% in the last 2 years.
2) Promoters background and Management details
HDB is promoted by HDFC Bank Ltd, which holds 95.53% stake in the company. Mr. Aditya Puri is the Chairman and non-executive Director of the company. He has more than 4 decades of experience in the banking industry and has been instrumental in setting up HDFC Bank as its MD and CEO. The bank has made consistent progress on key parameters like balance sheet size, total deposits, net revenues, earnings per share and net profit under his leadership. Mr. Ramesh G is the Managing Director and CEO of HDB. He has previously worked with HDFC Bank Ltd. (1999-2004) as Vice President. Mr. Bhavesh Zaveri and Mr. Jimmy Tata, who are working in the capacity of Non-Executive Director on the board of HDB, are also currently board members of HDFC Bank Ltd. The board of HDB is also represented by 3 independent directors namely Dr. Amla Samanta, Ms. Smita Affinwalla and Mr. Venkatraman Srinivasan.

Board of Directors

Management Team

 

Designation

With HDB since

 

Brief Profile and Prior Experience

 

Qualification

 

 

Mr. Aditya Puri

 

 

Chairman and Non- Executive Director

 

 

Inception

-                      Mr. Puri is the MD and CEO of HDFC Bank since its inception. He has more than 4 decades of experience in the banking industry.

-                      Prior to setting up HDFC Bank, he was the CEO of Citi Bank.

 

 

-       Chartered Accountant

 

 

Mr. Ramesh G

 

 

Managing Director & CEO

 

 

Inception

-                      Mr. Ramesh has more than 2 decades of experience in the industry. He was working as a VP with HDFC Bank Ltd.

-                      He has previously worked as COO with Intelenet Global Services.

 

- BE from Annamalai University

PGDM       from       IIM Lucknow

 

 

 

Mr. Bhavesh Zaveri

 

 

 

Non-Executive Director

 

 

 

N.A.

-                      Mr. Bhavesh is the Head of Operations & Technology at HDFC Bank Ltd. and has more than 2 decades of experience in the banking industry.

-                      He is also on the board of The Clearing Corp. of India Ltd., HDB Financial Services Ltd. and National Payments Corp. of India Ltd. and Associate for Indian Institute of Banking & Finance. He has also worked as Principal at Barclays Bank.

 

 

-         M Com. from University of Mumbai

-         Certified Associate of the Indian Institute of Bankers.

 

 

Mr. Jimmy Tata

 

 

Non-Executive Director

 

 

N.A.

-                      Mr. Jimmy has more than 3 decades of experience in the banking industry and works as Chief Risk Officer in HDFC Bank.

-                      He also serves on the board of International Asset Reconstruction Co. Pvt Ltd.

 

 

-         MBA from JBIMS

-         CFA from ICFAI


3) Business Drivers
  1. Support from parent – HDFC Bank Ltd holds 95.53% stake in HDB. Besides providing funding support, HDFC Bank also provides operational and managerial oversight. This gives comfort on the overall risk management and credit policies followed by HDB. Presence of top managerial personnel of HDFC Bank on HDB board also ensures close monitoring of company’s performance on day to day basis. Further, HDB provides integral support to its parent in its collection and marketing activities, making HDB strategically important to HDFC Bank.
  2. Increasingly diversifying loan book with retail focus – HDB has a diversified loan book with Vehicle Finance, LAP and Unsecured Business Loans constituting 97% of the book. Company is diversifying its loan book by venturing into several other retail segments like gold loan, auto loan, digital products loans, loan against securities, personal loans, loan against lease rental, auto refinance, etc. Contribution from LAP has come down significantly from 60% in FY16 to ~35% in FY19. Loan book has grown at a CAGR of 31% and 33% in the last 3 and 5 years, respectively. Break up of loan book is as follows:

Particulars (Rs. mn)

FY13

FY16

FY19

3 yr CAGR

LAP

46,351

146,458

191,483

9.3%

% contribution to loan

57%

60%

35%

 

Vehicle Finance

24,447

51,260

224,309

63.6%

% contribution to loan

30%

21%

41%

 

Unsecured Business Loans

8,860

36,614

114,890

46.4%

% contribution to loan

11%

15%

21%

 

Other retail loans

2,379

9,764

16,413

18.9%

% contribution to loan

3%

4%

3%

 

Total

82,037

244,096

547,094

 

  1. Strong growth with improvement in return parameters – Company has grown its loan book at a CAGR of 31% in the past 3 years and has also consistently expanded its NIM due to change in product mix and portfolio diversification. Strong growth in total income along with productivity improvement has led to improvement in return parameters. RoA and RoE have improved from 1.9% and 13.1% in FY17 to 2.0% and 16.1% in FY19, respectively.
  2. Adequately capitalized – Company is adequately capitalized with CAR of 17.9% as against the regulatory requirement of 15% and tier 1 at 12.8%. Company even made a rights issue in FY17 to the tune of Rs.10.9bn taking its CAR to 20.79% in FY17. Thus, given its strong parentage, company has been easily able to raise funds to support growth.
  3. Strong credit rating – Given the linkage with its parent and strong earnings momentum, company has received highest credit rating of AAA from both Crisil and CARE for its debt instruments.
4) Key risks
  1. Asset quality – HDB’s asset quality has witnessed some deterioration in the last 3 years, specifically in the vehicle finance segment, which has seen higher delinquencies. Absolute GNPA has increased by 36% YoY in FY19 to 10.0bn and as a % to loans stood at 1.83% from 1.67% in FY18.
  2. Change in product mix – HDB’s loan book had higher proportion of LAP at 60% in FY16, which has come down to ~35% in FY19 and is also expanding its portfolio in consumer durable space. Going forward, loan book growth can vary depending on mix change.
  3. NIM pressure – Change in product mix can also lead to quarterly fluctuations in yields, which can impact NIM trajectory.
5) Historical Financial Performance and Analysis

Key parameters (Rs. mn)

FY14

FY15

FY16

FY17

FY18

FY19

FY16-19 CAGR

FY14-19 CAGR

Balance Sheet:

 

 

 

 

 

 

 

 

Loan Book

133,875

189,891

244,096

340,709

442,683

547,094

30.9%

32.5%

YoY growth %

63%

42%

29%

40%

30%

24%

 

 

Net worth

16,285

31,251

35,618

52,089

60,404

71,785

26.3%

34.5%

YoY growth %

86%

92%

14%

46%

16%

19%

 

 

Profit & Loss:

 

 

 

 

 

 

 

 

NII

5,907

9,288

14,445

20,372

28,822

33,788

32.7%

41.7%

YoY growth %

89%

57%

56%

41%

41%

17%

 

 

NIMs on loans %

4.4%

4.9%

5.9%

6.0%

6.5%

6.2%

Avg. 6.2%

Avg. 5.9%

Other income

2,067

2,511

2,860

16,243

16,958

20,127

91.6%

57.6%

- Income from BPO services

664

743

799

13,291

15,290

16,481

174.3%

90.1%

-Other income (inc. insurance distribution, treasury and fee income)

1,404

1,768

2,062

2,952

1,668

3,646

20.9%

21.0%

Total income

7,975

11,800

17,305

36,614

45,781

53,915

46.1%

46.6%

YoY growth %

77%

48%

47%

112%

25%

18%

 

 

Cost to Income Ratio %

44.3%

40.5%

41.5%

61.9%

57.2%

56.2%

Avg. 58.4%

Avg. 51.5%

PPOP

4,439

7,019

10,121

13,950

19,609

23,610

32.6%

39.7%

YoY growth %

109%

58%

44%

38%

41%

20%

 

 

Provisions

1,259

1,717

1,942

3,396

5,248

6,369

48.6%

38.3%

Credit Cost %

0.94%

0.90%

0.80%

1.00%

1.19%

1.16%

Avg. 1.1%

Avg. 1.0%

ETR %

34.2%

34.1%

34.7%

35.5%

35.0%

33.1%

Avg. 34.5%

Avg. 34.5%

PAT

2,092

3,495

5,344

6,810

9,330

11,532

29.2%

40.7%

YoY growth %

104%

67%

53%

27%

37%

24%

 

 

Ratios:

 

 

 

 

 

 

 

 

EPS (Rs.)

2.7

4.4

6.8

8.7

11.9

14.7

29.2%

40.7%

BV (Rs.)

21

40

45

66

77

91

26.3%

34.5%

GNPA %

0.81%

0.84%

1.23%

1.89%

1.67%

1.83%

 

 

NNPA %

0.42%

0.48%

0.73%

0.84%

1.12%

1.24%

 

 

RoA (%)

1.5%

1.8%

2.1%

1.9%

2.1%

2.0%

Avg. 2.0%

Avg. 2.0%

RoE (%)

12.8%

11.2%

15.0%

13.1%

15.4%

16.1%

Avg. 14.9%

Avg. 14.2%

Leverage (xs)

8.4

6.3

7.1

6.8

7.5

7.9

Avg. 7.4

Avg. 7.1


Parameter

Commentary on historical performance

 

Loan Book – CAGR

§   Company has presence in 4 key segments, where vehicle financing and LAP constitute majority of the book (approx. 75%). Loan book has grown at a strong rate of 31% in the past 3 years (33% in 5 yrs). Company is also venturing into other retail loans like gold loan, digital products loan, loans for appliances, personal loans, etc.

 

NII– CAGR NIMs

§   NII growth has been higher than loan book growth at 33% and 42% in the last 3 and 5 years, respectively as NIMs have expanded from 4.4% in FY14 to 6.2% in FY19. NIM expansion is mainly because of change in product mix towards vehicle financing and unsecured business loans. Share of LAP has come down from 60% in FY16 to 35% in FY19, while share of vehicle finance and unsecured BL has increased to 62% from 36% in FY16.

BPO income

§   Income from this business contributed 19% to the revenue in FY19 from 2% in FY16. Growth was higher post FY17 due to merger with HBL and ADFC.


Parameter

Commentary on historical performance

 

Cost to Income (C/I) ratio

§   CI ratio was in line with industry peers till FY17. However, due to merger with ADFC and HBL’s BPO business, employee count increased significantly leading to higher operating expenses. However, it has been declining since FY17, reflecting productivity improvement.

 

Credit Cost - Avg/ Provisions

§   Asset quality has witnessed some deterioration in the recent past due to stress in the vehicle finance business. Provisions have grown at 49% in the past 3 years (38% in 5 yrs). However, overall GNPA remains much better than peers.

PAT - CAGR

§   PAT has grown at a CAGR of 29% in the last 3 years (41% in 5 yrs) driven by strong loan book growth, NIM expansion and operating efficiency.

Return Metrics

§   Return metrics have consistently shown improvement over the years with average RoA of 2.0% and RoE of 14.2% in the last 5 years.


6) Peer Analysis
HDB has presence in diverse segments in the lending business like Vehicle finance, LAP, Unsecured business loans and other retail loans. We have compared NBFCs having presence in these segments. Cholamandalam Investment & Finance Co Ltd. Mahindra Finance and Shriram Transport are vehicle financiers, Bajaj Finance has presence in LAP, consumer durable and SME loans, while L&T Finance Holdings has exposure towards LAP, tractor loans, etc. Further, all these companies also have a strong promoter background and parentage.
We have compared the above-mentioned companies based on the following parameters:
  1. Loan book composition and size – Loan book composition determines yields and size of the book helps in determining position in the industry.
  2. NIM – Ability to pass on interest rates, presence in high yielding segments and control on cost of funds determines NIM trajectory.
  3. Asset quality – Robustness of risk management policies and strong underwriting skills and exposure towards high risk segments determine asset quality.
  4. Return parameters – Companies with presence in high yield segments, having control on asset quality and operational efficiency have better return ratios.
Summary table:

Company Name (Rs. mn)

Net interest income

Loan book

PAT

FY18

FY19

YoY Growth

FY18

FY19

YoY Growth

FY18

FY19

YoY Growth

HDB Financial

28,822

33,788

17%

442,683

547,094

24%

9,330

11,532

24%

Bajaj Finance

69,716

97,252

39%

791,030

1,125,130

42%

24,964

39,950

60%

L&T Finance

44,292

51,052

15%

853,540

991,210

16%

12,784

22,320

75%

Chola

28,174

33,973

21%

422,530

526,220

25%

9,183

11,862

29%

MMFS

35,287

47,004

33%

485,470

612,496

26%

10,761

15,571

45%

Shriram transport

68,350

78,976

16%

961,984

1,023,075

6%

24,603

25,587

4%


Ratios :

Company Name (Rs. mn)

CI Ratio

NIM

Credit Cost

GNPA

ROA

ROE

FY18

FY19

FY18

FY19

FY18

FY19

FY18

FY19

FY18

FY19

FY18

FY19

HDB Financial

57%

56%

6.5%

6.2%

1.2%

1.2%

1.7%

1.8%

2.1%

2.0%

15.4%

16.1%

Bajaj Finance

40%

35%

8.8%

8.6%

1.3%

1.3%

1.4%

1.5%

2.9%

3.2%

15.8%

20.3%

L&T Finance

29%

30%

5.8%

6.5%

2.4%

1.5%

8.3%

5.6%

1.5%

2.1%

11.2%

16.6%

Chola

39%

37%

6.7%

6.5%

0.8%

0.6%

3.1%

2.4%

2.1%

2.1%

18.0%

19.2%

MMFS

40%

38%

7.3%

7.7%

1.2%

1.0%

10.4%

6.6%

2.0%

2.3%

11.2%

14.3%

Shriram transport

23%

23%

7.1%

7.7%

1.8%

2.3%

7.7%

6.9%

2.5%

2.4%

20.3%

16.2%


Key takeaways from peer analysis:
  1. Loan book composition and size – HDB has a well-diversified loan book with presence across LAP, vehicle finance, business loans and is now diversifying in the consumer durable space. This helps in de-risking the portfolio by avoiding portfolio concentration. In terms of loan book size, it is comparable with peers, while maintaining growth of 33% in the last 5 years.
  2. NIM – NIM, although appearing on the lower end when compared to peers, has shown improvement over the years due to increasing presence in high yielding retail segment.
  3. Asset quality – Due to linkage with its parent HDFC Bank, company has similar risk assessment capabilities and hence, asset quality is better than peers with GNPA at 1.8% in FY19.
  4. Return parameters – Considering its loan book growth, better asset quality and control on costs, company has been able to maintain its RoA and remains in line with peers (Bajaj Finance has higher RoA due to large retail presence).
Valuation comparison of peers:

 

 

1

Bajaj Finance Ltd.

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

448

167

410

15.5

83

28.9

10.8

26.5

5.4

2.0

4.9

 

FY16

698

394

693

22.0

128

31.7

17.9

31.4

5.5

3.1

5.4

 

FY17

1,205

677

1,174

31.7

155

38.0

21.4

37.1

7.8

4.4

7.6

 

FY18

1,989

1,153

1,770

43.0

273

46.2

26.8

41.1

7.3

4.2

6.5

 

FY19

3,035

1,770

3,025

68.9

340

44.1

25.7

43.9

8.9

5.2

8.9

 

5 yr Avg

 

 

 

 

 

37.8

20.5

36.0

7.0

3.8

6.7


 

2

 

Chola

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

123

56

118

5.6

41

22.2

10.0

21.1

3.0

1.4

2.9

 

FY16

151

108

143

7.3

47

20.8

14.9

19.6

3.2

2.3

3.1

 

FY17

249

139

193

9.2

55

27.1

15.2

21.0

4.5

2.5

3.5

 

FY18

302

193

290

11.7

65

25.7

16.4

24.7

4.6

3.0

4.4

 

FY19

352

208

290

15.2

79

23.2

13.7

19.1

4.5

2.6

3.7

 

5 yr Avg

 

 

 

 

 

23.8

14.0

21.1

4.0

2.4

3.5

 

3

L&T Finance

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

EPS (Rs.)

BV (Rs.)

P/E (xs)

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

83

60

63

4.1

31

20.3

14.6

15.4

2.7

2.0

2.1

 

FY16

75

48

64

4.1

33

18.2

11.8

15.5

2.3

1.5

1.9

 

FY17

124

64

123

5.0

33

24.9

12.7

24.8

3.7

1.9

3.7

 

FY18

214

119

157

6.1

55

34.9

19.5

25.7

3.9

2.2

2.9

 

FY19

190

111

152

10.7

64

17.7

10.4

14.3

2.9

1.7

2.4

 

5 yr Avg

 

 

 

 

 

23.2

13.8

19.1

3.1

1.8

2.6


 

 

4

Mahindra Finance

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

345

230

254

13.5

92

25.6

17.0

18.8

3.8

2.5

2.8

 

FY16

294

173

243

10.9

99

27.0

15.9

22.3

3.0

1.8

2.5

 

FY17

405

232

315

6.5

105

23.3

35.8

48.6

3.9

2.2

3.0

 

FY18

524

290

462

17.4

156

30.1

16.7

26.5

3.4

1.9

3.0

 

FY19

538

351

421

25.2

177

21.3

13.9

16.7

3.0

2.0

2.4

 

5 yr Avg

 

 

 

 

 

25.5

19.9

26.6

3.4

2.1

2.7

 

 

5

Shriram Transport

52 week High (Rs.)

52 week Low (Rs.)

March ending price (Rs.)

 

EPS (Rs.)

 

BV (Rs.)

 

P/E (xs)

 

P/BV (xs)

 

 

 

 

 

 

 

High

Low

Close

High

Low

Close

 

FY15

1,286

697

1,114

54.6

407

23.6

12.8

20.4

3.2

1.7

2.7

 

FY16

1,206

737

954

51.9

448

23.2

14.2

18.4

2.7

1.6

2.1

 

FY17

1,325

778

1,078

55.4

425

23.9

14.0

19.4

3.1

1.8

2.5

 

FY18

1,543

898

1,441

108.4

440

14.2

8.3

13.3

3.5

2.0

3.3

 

FY19

1,671

904

1,273

112.8

607

14.8

8.0

11.3

2.8

1.5

2.1

 

5 yr Avg

 

 

 

 

 

20.0

11.5

16.6

3.0

1.7

2.6


 

7) Conclusion and recommendation
We have done a comparative price analysis of listed players in the NBFC space to arrive at the indicative valuation band within which HDB can trade post listing. Please note that full price discovery of the stock will happen only after it gets listed. We strongly believe that HDB should attract premium valuations in the sector given its: -
a) Complete access to HDFC Bank’s retail and SME customer base.
b) Strategic importance to parent operations.
c) Superior risk management and credit assessment capabilities flowing through the parent.
d) Sustained high PAT growth supported by further acceleration in business growth, improvement in cost productivity parameters and possibility of NIM expansion due to increasing contribution form retail assets.
e) Continued parent support in raising growth capital from the market at competitive rates, when required.

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HDFC Securities LIMITED

1) Background and Business
HDFC Securities Ltd (HDFCSEC) was incorporated in the year 2000, and is a subsidiary of HDFC Bank, which holds 97.3% stake in the company. It is engaged in the capital market business of broking and distribution of third-party financial products. It was established as a JV between HDFC Bank, HDFC Ltd and Indocean eSecurities Holdings Limited. Subsequently, HDFC Bank bought the stake from HDFC Ltd and Indocean, post which, HDFCSEC became the bank’s subsidiary.
HDFCSEC is India’s 2nd largest broking company based on the total number of operational clients. HDFCSEC derives major part of its revenue from retail and institutional broking (67.3% of its FY19 revenue) followed by fee income from distribution of 3rd party financial products (16.1% of FY19 revenue) like insurance (life, general and health), Mutual funds, Fixed Deposits, etc. The company operates through a network of 278 branches across 165 cities in India.

Key Product Segments:

Particulars

FY19 (Rs. Mn)

% contribution

Brokerage Income

5,260

67.3%

Fee Income

1,262

16.1%

Interest Income

698

8.9%

Net gain on fair value changes

497

6.4%

Others

103

1.3%

Total

7,820

100.0%


As stated above, HDFCSEC mainly generates its revenue from retail and institutional broking.
  1. Broking Income: HDFCSEC offers broking services, both in cash equity and derivatives market segments, including the currency derivatives division.
    1. HDFCSEC is India’s 3rd largest broking company based on active clients (~6.5 lakh active clients as per NSE list). It is 2nd largest company based on total no of operation clients (~2.4 mn clients as per ICRA credit note) as on 31st March 2019 behind ICICI Sec, which has 4.2 mn operational clients. It earned a total of Rs. 5.2 bn from the broking business, of which 95% was from retail segment.
    2. HDFC Bank provides 3-in-1 facility, which links the customer’s savings account, demat account and trading account, facilitating ease of transaction. This has enabled the company to tap into the bank’s vast pool of customers and grow its client base.
    3. Broking business is the main contributor to the revenue with a contribution of 67% and has grown at a CAGR of 20.9% over the past 5 years. Over the last 5 years, the share of broking income to the revenue has reduced from 77.5% in FY14 to current 67.3% mainly due to higher focus on increasing distribution of 3rd party products.
    4. As per ICRA’s credit rating report, brokerage from retail cash segment forms 20-25% of the volumes, translating to higher yields compared to competitors.
  2. Fee Income from the sale of 3rd Party Products: HDFCSEC distributes 3rd party products like mutual funds, life, health and general insurance, Fixed Deposits, etc. Of the total fee income of Rs. 1.2bn generated in FY19, ~80% was from the sale of mutual funds. Company has focused on increasing income from the sale of these products, which aids in reducing the cyclicity of its revenues. Total contribution of fee income in total revenue has increased from 10.7% in FY14 to 16.1% in FY19.
  3. Interest Income: From FY19, company has started margin trading and has a total book size of Rs. 2.2 bn, on which it earned a total interest income of Rs. 282 mn, yielding ~12.2%. The balance amount comes from interest income on bank deposits.
  4. Fair Value changes on Investments: As on 31st March, 2019, the company has an investment book of Rs. 4.2 bn largely in mutual funds, towards which it earns interest and dividends. Since FY18, as per Ind-AS regulations, the company has been recording both realized gains/loss as well as fair value changes of the investment book. This segment is expected to remain lumpy as it is linked to the capital markets.
2) Promoters background and Management details
HDFCSEC is promoted by HDFC Bank Ltd, which holds 97.3% stake in the company. Mr. Bharat Shah is the Chairman and non-executive Director of the company. He has more than 4 decades of experience in the banking and financial services space. Mr. Dhiraj Relli is heading the management of the company. He has over 26 years of experience in the financial services space. Majority of the company’s top management, including Mr. Relli and Mr. Shah, were earlier deputed with HDFC Bank and possess vast experience required to scale up HDFCSEC.

Key Management Personnel:

Management Team

 

Designation

With HDFC Securities since

 

Brief Profile and Prior Experience

 

Qualification

 

 

 

Mr. Bharat Shah

 

 

 

Chairman

 

 

 

2014

-                      Mr. Bharat Shah is one of the founding members of HDFC Bank and has been with the group since Inception handling multiple roles.

-                      Having retired as an executive director and an advisor to HDFC Bank. He also serves on multiple boards like 3M India, Exide Industries, Hexaware Technology Ltd.

 

-    B. Sc from Mumbai University

-    Higher            National Diploma in Applied Chemistry from London University.

 

 

 

Mr.Dhiraj Relli

 

 

Managing Director & CEO

 

 

 

2015

-                      Mr. Dhiraj Relli is the MD of HDFCSEC since 2015. Prior to the current assignment, he was with HDFC bank for more than 5 years as its Branch banking head.

-                      He has a total experience over nearly 2 decades and has been with HDFC group for over a decade. He is a Charted Accountant from ICAI

 

 

-    Chartered Accountant

-    ACA, Advanced Mgmt. Prog. (IIM Bengaluru)

 

 

Mr.Siddharth Shah

 

 

Head -Branch Dealing

 

 

2010

-                      Mr. Siddharth Shah has a total experience of over 2 decades in the financial industry space.

-                      He heads branch dealing in HDFCSEC. Prior to the current assignment he was employed with HDFC Bank, where he started his career.

 

 

- B Com. from University of Mumbai

 

 

Mr. C. V. Ganesh

 

Chief Operating Officer

 

 

2008

-           Mr. C V Ganesh is the COO and has been employed with the company for over a decade.

-           Prior to the current assignment he was employed with Citi Technology Services Ltd.

 

-         Chartered Accountant

-         Cost      and      Works Accountant

 
3) Business Drivers
  1. Strong parentage and Brand Equity– HDFC Bank holds 97.3% stake in HDFCSEC and is an important subsidiary of the bank as it complements the bank’s offering for services related to capital markets for its customers. HDFCSEC thus benefits from being the bank’s subsidiary in the following ways:
    1. Strong Brand Equity of the HDFC group and benefitting from the credibility associated with the brand.
    2. Access to well-spread retail franchise and nationwide branch infrastructure of the parent.
    3. Benefit from strong operational and managerial integration with HDFC Bank.
  2. Excellent Track record with strong growth– Over the past 5 years, the company has grown at a healthy pace. Revenues and EBITDA have grown at a CAGR of 24.3% and 32.1%, respectively. EBITDA margins have expanded from 48.5% in FY14 to 65.7% in FY19, mainly due to the benefits of operating leverage, low cost operating structure and retail focus on the company. In the same period, company has grown its PAT by 33.3%. This demonstrates the company’s ability to grow at a healthy pace despite consistent investments in technology and personnel indicating strong business model.
  3. Healthy Balance Sheet and Debt Free status–: Current Net worth of the company stands at Rs. 11.9 bn and has grown by 22% CAGR over the past 5 years. Total balance sheet size stands at Rs. 20.3 bn, of which ~50% is comprised of cash & current investments. Company has maintained its debt-free status over the years, which reduces the financial risk of the company.
  4. Significant sector opportunities- As per the data from AMFI, penetration of equity investment in India stands at ~2.5% vs 30%+ in the developed market. As the disposable income in the hands of Indian population increases, so will the need for investment avenues. Thus, there exists strong growth opportunity for the players in Indian capital market.
  5. Asset light business model with healthy return ratios– Due to the asset light nature of business model, company has been delivering healthy return ratios. Return ratios have improved due to operating leverage over the past 5 years. ROE has increased from 17.7% in FY14 to 27.6% in FY19 while ROA improved from 8.1% to 16.2% in the same period. This is despite ~50% cash and investment on the balance sheet.
4) Key risks:
  1. High Capital Market link exposes the company to cyclicity: 67% of the revenue in FY19 came from broking activities, while 16% came from distribution income. Both these sources of income are heavily reliant on the performance of the capital market. Cyclicity also has a margin impact as during the weak capital markets, transaction volume in the market tends to shift from high yielding cash segment to low yielding F&O segment.
  2. Loss of Market share due to rise of discount brokers: Over the past 3-4 years, discount brokers like Zerodha, Samco securities, 5paisa, etc. have shown strong client additions. Thus, market share is shifting from private bank owned brokers to discount brokers. This presents companies like HDFC Sec, ICICI Sec, etc. with added challenge of capturing incremental market growth. However, due to association with parent company and access to retail client base, we expect both the companies to do well.
  3. Increased competitive intensity putting pressure on revenue yields: Emergence of discount broker has put pricing pressure on the market. Pricing based on ‘per transaction’ vs the traditional pricing based on ‘quantity traded’ has lowered the total revenue yield of full-service brokers.

5) Historical Financial Performance and Analysis

Consolidated (Rs. mn)

FY14

FY15

FY16

FY17

FY18

FY19

3yr CAGR (FY16-19)

5yr CAGR (FY14-19)

Net Revenues

2,631

4,170

4,016

5,532

8,000

7,820

24.9%

24.3%

YoY

 

58.5%

-3.7%

37.7%

44.6%

-2.3%

 

 

EBITDA

1,276

2,584

2,066

3,303

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