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HDFC and its subsidiaries may play friendly knight amid the pandemic

HDFC and its subsidiaries may turn to inorganic growth, says Deepak Parekh, non-exec chairman

Housing Development Finance Corp. Ltd (HDFC Ltd) and its arms could be sniffing out potential acquisitions soon, if non-executive chairman Deepak Parekh is to be believed. The group’s subsidiaries could look at inorganic growth, Parekh wrote in the annual report of HDFC. “We have also identified new investment opportunities that will help build the next generation of value creators for HDFC," it said.

Unlike a visionary’s typical rhetoric, the statement is backed by the intent to raise 1.2 trillion from the markets over the next one year. HDFC does not need to raise capital as its adequacy ratios are superior and the need for provisioning is far less than its peers. As such, the plan to raise funds is specifically for acquisitions and infusion of capital into subsidiaries. “The capital raising plan seems to be for infusion into subsidiaries. They are looking at inorganic opportunities for subsidiaries and at the same time would want to keep their stake intact," said Alpesh Mehta, deputy head of research at Motilal Oswal Financial Services Ltd.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

HDFC could also look at acquisitions for itself. Parekh has suggested that the housing finance company would not mind playing white knight to rescue troubled businesses during this pandemic. Analysts also expect consolidation in the non-banking financial company (NBFC) space, given the effects of the pandemic on balance sheets. With not less than 41% of loan books under moratorium on an aggregate basis, as estimated by Jefferies India Pvt. Ltd, NBFCs are having a tough time managing cash flows.

HDFC has in the past reiterated its intention to look at inorganic growth. With its balance sheet growth hitting a plateau in the last few years, acquisitions seem to be the way to scale up. As such, there could hardly be a better time than now to rescue distressed lenders and grow as well.

That said, acquisitions are not a simple process. Valuations become tricky during a crisis. The moratorium has meant that the actual quality of assets of lenders is still shrouded in uncertainty. Analysts do not see any clarity until FY22 on the actual asset quality pressures for NBFCs. India’s largest non-bank home loan lender, therefore, would want to be careful while scouting for purchases. Considering HDFC is the market leader among housing finance companies, acquisitions could help valuations, which have taken a beating in recent months.

The HDFC stock has fallen 23% from its February highs and currently trades at a multiple of 2.6 times its estimated book value for FY22. Analysts term valuations attractive at this level considering the lender’s asset quality metrics among peers. They believe that the stock would re-rate faster than peers once the economy begins to unlock and demand returns slowly.

HDFC is likely to benefit disproportionately given its strong capital and liquidity position. Acquisitions can boost growth and valuations, especially if businesses are acquired cheap.

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