In an environment where IPOs are usually positioned as expansion plans, Hero FinCorp's recent Draft Red Herring Prospectus (DRHP) Addendum outlines a capital-raising exercise driven by timing. While the roadshow presentations focus on digital initiatives and credit expansion, the disclosures, financial notes and covenants point to a company managing a capital repair process under a defined deadline.
This is not an IPO positioned at a business peak. The listing follows a need to meet specific conditions linked to the company's capital structure that have implications for profitability if unmet.
The 16% Interest Trap: A Ticking Financial Bomb
The key disclosure in the Hero FinCorp filing relates to its capital structure, specifically its Compulsorily Convertible Preference Shares (CCPS). The company has approximately Rs 3,088 crore of CCPS outstanding, which currently carry a coupon of 3%.
According to the disclosures, if the IPO is not completed by a specified trigger date, the coupon rate on these instruments increases from 3% to 16%. This change would raise the annual interest outgo by about Rs 400 crore on capital of over Rs 3,000 crore.
Given recent pressure on profitability, such an increase would materially affect earnings. The disclosures indicate that the IPO timeline allows the company to convert these instruments into equity before the higher coupon applies.
The Personal Loan Engine: From Growth To NPA
The company expanded into digital personal loans over recent years, supported by brand recognition. Data for the six months ended September 2025 shows a slowdown in this segment.
Digital sourcing accounted for more than 38% of disbursements in the previous year. In the first half of FY26, the share fell to 16.88%. During the same period, mobile app downloads increased to 27.3 lakh.
The filings show a shift in sourcing strategy. Direct sourcing rose to 37% of disbursements, indicating a move away from digital channels. This reflects tighter credit screening practices during the current credit cycle. The disclosures also indicate higher operating costs associated with this approach.
“Kitchen Sinking” The Books
The Gross Non-Performing Asset (GNPA) ratio stood at 5.05% at the time of filing. In the first six months of FY26, the company reported write-offs of over Rs 1,200 crore.
This write-off figure was around nine times the adjusted profit reported for the same period. Despite these write-offs, the GNPA ratio increased to 5.05%, indicating continued stress from earlier personal loan growth.
Asset Under Management growth slowed to 4.53% during the period, compared with close to 20% growth in earlier years.
The Profitability Paradox: Adjusted vs. Statutory
The company reported an adjusted profit of Rs 133 crore for the first half of FY26. The restated statutory numbers for the same period show a loss of Rs 130 crore.
Standalone operations reported a segment loss of Rs 162 crore. Consolidated losses were partly offset by the housing finance subsidiary, which posted a profit of Rs 31 crore.
During the year, the company declared and paid dividends of Rs 14 crore. This occurred despite statutory losses and ongoing capital requirements, as outlined in the filing.
A Hostage Negotiation, Not an Invitation
The IPO comes during a transition for the company, as it reduces exposure to rapid digital personal loan growth and increases manual credit processes, while managing legacy asset quality issues.
If the listing is delayed, the disclosures indicate a higher interest burden on existing instruments. If the company proceeds with the IPO, it does so with asset quality and growth metrics that compare unfavourably with peers.
The decision before investors is whether to provide capital under these conditions, at a time when other non-bank lenders are reporting stronger growth. For Hero FinCorp, the outcome of the IPO determines whether it avoids the higher coupon on its CCPS or absorbs the associated financial impact.
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