Hero FinCorp: From Two-Wheeler Finance to NBFC Contender – Can Profita... Hero FinCorp: From Two-Wheeler Finance to NBFC Contender – Can Profitability Catch Up With Growth? Read more

Company Overview

Hero FinCorp Limited is an NBFC of India that has been instrumental in enhancing the availability of credit to retail and MSME customers in India. The operation of Hero FinCorp within the larger Hero ecosystem has enabled it to grow into a financial services company that provides access to financing that assists the aspirational middle class and the entrepreneurial citizens of India.

Hero FinCorp is positioned between the traditional banking industry and the underserved and unbanked populations and has made it its focus to provide financing to those customers who may be excluded from the traditional banking system's credit criteria.

Hero FinCorp has achieved a strong pan-India presence through a technology-oriented operating model that enables the company to develop and execute scalable operations that provide customised credit products and comply with prudent risk management practices. The use of a dual approach with respect to the delivery of credit products being via traditional methods and digital underwrite enables Hero FinCorp to reduce turnaround time for customers and provide a higher level of customer satisfaction.

Business Model 

Hero FinCorp has a multi-faceted lending business that provides products to retail clients and micro, small and medium enterprises (MSMEs). The company's three primary areas of business include the following:

• Retail Lending - This is the base of the company's business and consists of the following:
  • Two-wheelers, both new and used
  • Personal Loans
  • Used Car Loans and Auto Refinance Loans
  • Loan Against Property (LAP)
  • Consumer Durable Loans

The company's two-wheeler business drives the continued growth of the company, and customers who are part of the Hero ecosystem (Hero Moto Corp, etc.) give the company a distinct advantage in its financing efforts with the company.

• MSME Financing and SME Financing - Hero FinCorp provides structured credit products for small to medium sized business through

• • Secured Business Loans
  • Working Capital Financing
  • Machinery Equipment Financing
  • Loan Against Property for Business Expansion

The company's goal in providing these products is to support small companies in upgrading technology, producing new products, and generating additional jobs, therefore creating additional economic activity.

• Corporate Lending and Structured Lending - Hero FinCorp also provides select corporate lending with structured security and appropriate risk and portfolio diversification in order to maximize return

Shareholding Pattern 

The shareholding structure of Hero FinCorp showcases significant promoter support and also highlights the trust that has been built with institutional investors over time. The primary promoters of Hero FinCorp are the members of the Hero family, with Pawan Munjal in a dominant leadership position as Chairman. In addition, the company has received considerable investment from top-tier global investors and private equity through the years that has strengthened both its capital resources and governance standards. Having reputable institutional shareholders adds transparency, fiscal discipline and aligns with the company’s long-term strategy.

Hero FinCorp’s current shareholdings are comprised of:

• Hero MotoCorp Ltd. - 41.15%
• Bahadur Chand Investment Pvt. Ltd. - 20.33%
• Otter Limited - 10.11%
• Brijmohan Lall Om Parkash (Partnership) - 9.50%
• Non-Promoters (Investors/Others) - 18.91%

The shareholding structure indicates that although the majority of the ownership is considered promoter-led, there is also a significant portion (approximately 19%) of the ownership that is held by non-promoter investors. This illustrates the external, institutional element that represents some degree of oversight as well as the involvement and interest of these independent institutions, creating a balance of governance.

The presence of the major promoters – most notably Hero MotoCorp Ltd. – provides significant strategic, brand credibility and distribution synergies in the overall ecosystem of the business. At the same time, the outspreading of ownership across many external institutions enhances the financial stability and fiscal discipline of the company’s overall capital structure

Financial Performance

1. Revenue Growth and Business Expansion

• Hero FinCorp has achieved consistent revenue increases over the past 5 years, which signal both significant business growth and an increasing level of lending. During this period, revenue went from ₹4333 million in FY21 to ₹9903 million in FY25, more than doubling.
• The company's exceptional performance in FY23 (74%) was followed by continued strong growth in FY24 (18.46%) and FY25 (15.59%). This suggests that there is strong demand for loans and other financial products.
• Although revenue has experienced steady growth; therefore, the quality of the company’s earnings has experienced a significant level of volatility in FY25.

2. Net Interest Income (NII) Performance

• Core income derived from lending operations, i.e., NII, grew from ₹2,167 crore in FY21 to ₹4,761 crore in FY25 due to a growing loan portfolio and an increased amount of assets that earn interest. 
• NII growth has decelerated; it increased 8.65% in FY25 compared with the previous year's growth rates (ranging from 23% to 38%). This deceleration indicates increasing costs for obtaining funding and downward pressure on lending margins; it also reflects tighter credit availability. 
• Although the lending engine continues to be economically sound, NII has experienced decreased margin growth. 

3. Profitability Trends and Margin Volatility

Trends in Profitability and Margin Volatility

• Recovery Trend (FY23-FY24) - Profit After Tax (PAT) increased significantly from ₹480 crore in FY23 to ₹637 crore in FY24, reflecting operational stability, improved asset quality, and better cost management during this period of recovery.
• Steep Decline in FY25 - In FY25, PAT showed a sharp decline, falling to ₹110 crore for a loss of more than 80%. This drop is sharply indicative of margin compression, increased allowances for loan loss or additional operating and finance costs
• Preceding this trend were also declines in Earnings per Share (EPS); FY24: ₹50, FY25: ₹8.63
  

Thus, the continued erosion of profitability, despite the continued increase in revenue, tells us that Hero FinCorp is currently experiencing earnings stress. 

4. Asset Under Management (AUM) and Loan Book Growth

• Hero FinCorp has continued to expand its Assets Under Management (AUM), which have more than doubled from ₹25,106 crore in FY21 to ₹50,925 crore in FY25, providing additional indication of demand for credit and continuing to expand in the marketplace.
• Hero FinCorp is continuing to further expand its loan book, which reflects the company's confidence in the potential availability of growth in this sector. It is essential that the speed of asset growth is managed with sound and effective credit risk management to maintain profitability.

5. Capital Structure and Leverage Position

• Historically, the company has increased its reliance on borrowing (as indicated by the company's increase in Debt-to-equity ratios) to fund loan growth. Specifically, the company's Debt-to-Equity ratio has increased from 4.7x in FY21 to 8.35x in FY25.
• While leverage is prevalent in the NBFC industry, the current rising leverage, combined with declining profitability serves to increase an organization's financial risk. Efficient use of capital remains critical for achieving sustainable growth in the long term.

6. Return Ratios and Efficiency

• ROE improved from FY24 at 11.04% to FY25 at 1.91%. In other words, FY25 had substantially weaker profits relative to shareholders' equity than FY24.  
• ROA declined from 1.20% in FY24 to 0.18% in FY25 compared to prior years. Therefore, as evidenced by the falling ROA, assets returned less per dollar of investment than in prior years. The declines to both profit ratios indicates that the company's operations may temporarily be under stress and less efficient than they would be under normal conditions.

7. Valuation Perspective

• As of FY25, the company's P/E multiple is approximately 126x, which is historically a very high valuation level relative to companies with similar earnings. Given the magnitude of the drop in earnings experienced by the company in FY25, the current corporate value of the company implies that the market participants expect strong profit recovery in the future years.
• If the company can stabilise earnings and return to healthy profit margins, the current valuation will be appropriate. Conversely, the company's current valuation may be disfavored by the market if the company cannot produce consistent earnings.

Hero FinCorp continues to develop as an expanding Non-Banking Financial Institution (NBFC) with a solid foundation of sound business practices and a growing size. However, the recent decline in profitability indicates that there are operational costs which must be monitored closely. If profitability continues to improve and the leverage of the business is cautiously managed, the business will be able to establish reasonably consistent future growth; however, if the pressures on earnings continue, the business's future financial stability will be negatively impacted.

Peer comparison

In the non-banking finance company (NBFC) sector in India, Bajaj Finance is the industry benchmark for scale and profitability, and Shriram Finance is the second runner-up with a strong presence in asset-backed lending and vehicle financing. Hero FinCorp has a highly focused and ecosystem-aware lending model, with a defined approach to growth.

Scale and Market Share 

• Bajaj Finance is the unequivocal leader in this industry, boasting a market cap of ₹6.35 lakh crore and assets under management (AUM) of ₹4.16 lakh crore. Shriram Finance is second with a market cap of ₹2.04 lakh crore and AUM of ₹2.63 lakh crore, bolstered by a strong commercial vehicle financing operation.
• Hero FinCorp has a market cap of ₹13952 crore and an AUM of ₹50925 crore, indicating a much smaller scale than both Bajaj Finance and Shriram Finance, but indicative of a planned or restricted growth strategy as opposed to a lack of opportunity. Therefore, Hero is positioned as a mid-tier, focused non-bank financial company, as opposed to an aggressively growing company.
  

Profitability and ROI 

• Bajaj Finance leads the industry in operating performance with a return on equity (RoE) of 19.2% and return on assets (RoA) of 3.99%, as a result of its ability to cross-sell and leverage their digital capabilities. Shriram Finance is also efficiently managed with an RoE of 15.6% and RoA of 3.04%, due to its significant volume of high-yield commercial vehicle financing.
• Hero FinCorp's net interest margin (NIM) of 8.59% is broadly in line with its peers, indicating that lending yields continue to be competitive. However, Hero's low RoE of 1.91% and low RoA of 0.18% suggest that either credit costs or the leverage from Hero's operations are exerting downward pressure on performance.

Valuation Perspective:

• The market places a premium on Bajaj Finance's stock (PD 6.16x) because of its strong growth and continued expansion. Shriram currently trades at lower multiples (3.37x PD), which indicates that the market sees it as a stable lender and not as an aggressive growth company like Bajaj.
• Hero FinCorp trades at even lower PD (2.42x) and has a Market Cap/AUM ratio of 0.27, which is significantly below its peers. Therefore, the current market's valuation reflects Hero's earnings volatility as opposed to its actual business model. If Hero's return ratios improve, there is potential for a change in valuation.

Business Model Differentiation:

• Bajaj has multiple sources of revenue through its AI-based retail ecosystem, while Shriram has a strong focus on financing for commercial vehicles and rural asset purchases.
• Hero has positioned itself to provide financing for two-wheelers in coordination with Hero MotoCorp. However, it also has a comprehensive loan product suite encompassing loans against real estate (LAP), financing for used vehicles, and financing for MSMEs. Hero's strategy combines secured lending with higher-yielding retail niches.

While Hero is smaller and less profitable than Bajaj and Shriram, it has substantial lending margin advantages along with conservative underwriting practices. Hero's primary strategic opportunity lies in improving its overall return ratios and achieving operational efficiencies.

Future Prospects

As we look towards the future, the outlook for HFCL's growth from FY26 to FY30 is fundamentally positive due to India's evolving demand for credit, MSMEs being formalised and the adoption of digital lending. Additionally, being a systemically important NBFC-ML under the RBI regulatory framework provides HFCL with credibility through regulatory compliance as well as the ability to operate with flexibility.

Key contributors to future growth include:

1. Continued MSME credit growth, where a large proportion of financing needs remain unmet; 

2. Increased digital underwriting and collection capabilities result in higher cost efficiencies and less leakage of credit; 

3. Ability to increase penetration into underbanked regions, provide portfolio diversification, and 

4. Embedded finance partnerships allow for accelerated loan origination at a lower cost of acquisition.

Updates

Approval has been granted by SEBI for Hero FinCorp to proceed with an IPO, which now includes both a ₹1,790 crore new issue and a ₹1,568.1 crore OFS.

Before the IPO, Hero FinCorp was able to secure ₹50 crores from Vattikuti Ventures at a price of ₹1,400 per share, resulting in a valuation of the company of ₹25,014 crore. Thus, Hero FinCorp has now raised ₹310 crores towards its planned pre-IPO fundraising target of ₹420 crores.

Also, as a result of this placement, the size of the new issue was reduced from ₹2,100 crores to ₹1,790 crores; the proceeds from which will be applied to enhance the Tier-I capital and to help support lending growth.

Conclusion

Hero FinCorp has a strong footing among the growing Non-Banking Financial Company (NBFC) sector due to its solid fundamentals in lending to individuals and MSMEs, its constant growth in AUM and revenue and a wide range of products from 2W, LAP, Corporate Lending and Vehicle Financing. The Company should also continue growing operationally and reach new customers through its investment in technology (Digital Underwriting) and analytics.

When compared to its larger, more established peers - Bajaj Finance and Shriram Finance, Hero FinCorp has some way to go to catch up on profitability and returns metrics. The Company's RoE and RoA metrics are severely below those of these leading competitors. The Company has experienced earnings fluctuations, margin compressions and will experience further decreases in FY25 and FY26 results due to an increase in credit provisions and higher levels of NPAs, indicating asset quality strain.

Regarding valuation, Hero FinCorp's multiples are probably stretched compared to its current earnings profile. Unlisted stock data shows this Company is trading on much higher earnings multiples and book multiples as a result of perceived future growth potential versus actual earning potential, as illustrated by comparing valuation multiples for Hero versus its NBFC peers.

Hero FinCorp's future growth potential is based on three things: the company stabilising its credit costs, managing Non-Performing Assets (NPAs), and improving overall profitability. Additionally, Hero FinCorp will have to efficiently deploy its Initial Public Offering (IPO) proceeds to enhance Hero FinCorp's capital ratios and provide the necessary support for future lending growth. Given the resolution of these items, Hero FinCorp may begin to close the gap that exists between Hero FinCorp and its larger competitors.

INVESTOR RECOMMENDATION PERSPECTIVES: Long-term growth-focused investors with higher risk tolerance, especially those interested in early-stage financial investments, may find Hero FinCorp worthwhile if they feel comfortable with Hero FinCorp's overall ability to stabilise margins and execute its growth strategy. Conversely, income-based or risk-averse investors should avoid it. This share is available at SharesCart.