HDFC: Unlocking value

The impact on the stock should be negligible as most of the positives have already been factored in.

HDFC plans to unlock value from non-core unlisted investments by first shifting them into a special purpose vehicle and then attracting private-equity type investments over the next few quarters, milking the current upbeat market environment.

The proceeds from this and a potential listing of its life insurance subsidiary in the next financial year might be used to fund its education finance business or increase dividend payouts, according to the management. The exact plan and the timeline haven’t been finalised as yet.

The total book value (cost of investment) of its non-core investments added to about Rs 363.5 crore as of March 2009. The key holdings are a 13 per cent stake in IL&FS at a book value of Rs 94.7 crore and a 5 per cent stake in Lafarge cement worth Rs 50 crore.

An HSBC report pegs the current market value of these investments as between 1-6x of book value. The report says a reasonable estimate will peg the value of these investments at about 5x book value, or about Rs 1,800 crore, translating into unrealised gains of about Rs 1,454 crore, about 9 per cent of FY11 book value estimates and 2 per cent of the market cap.

A Kotak report estimates the value of HDFC Standard Life at about Rs 11,300 crore, with HDFC’s 72 per cent stake coming to just over Rs 8,000 crore. The 60 per cent stake in HDFC Standard Mutual Fund is valued at Rs 2,850 crore.

Analysts estimate that the unrealised gains contribute about Rs 50 to the target price. The net impact on the stock’s current market price is expected to be negligible, given that most of the potential gain is factored in the fair value estimates. The stock surged 2.8 per cent on March 31 to Rs 2,713 and trades at a P/E valuation of about 24.4x consensus analysts FY11 earnings per share estimates.

With contributions from Sunaina Vasudev & Ram Prasad Sahu