HDB Financial Services IPO analysis

HDB Financial Services IPO (initial public offering) will open for subscription on June 25, 2025, and close on June 27, 2025. Below is a breakdown of the retail-focused NBFC’s strengths, weaknesses and growth prospects to help investors make an informed decision.

HDB Financial Services IPO in a nutshell

• Quality: HDB Financial Services reported a three-year average return on equity (ROE) of nearly 18 per cent during FY23-25. Its gross NPA ratio was an average of 2.3 per cent over the same period.
• Growth: Between FY23 and FY25, its assets under management (AUM) and net profit grew by 24 and 5.4 per cent annually, respectively.
• Valuation: At the upper price band of Rs 740, the stock is expected to be valued at a P/E and P/B ratio of around 28 times and 3.5 times, respectively. In comparison, its listed peers trade at a median P/E and average P/B ratio of 24 times and 3.5 times, respectively.
• Overview: The Indian retail credit market has grown at a strong pace over the last few years and is expected to grow by 14 to 16 per cent per annum between FY25 and FY28. This presents an opportunity for both banks and NBFCs like HDB Financial Services to broaden their customer base. However, the commoditised nature of the industry and competition from other established players remains a risk for the company.

About HDB Financial Services

HDB Financial Services, a subsidiary of HDFC Bank, is a diversified retail-focused NBFC, primarily catering to underserved and underbanked customers in low-to-middle-income households with minimal or no credit history. As of FY25, the company commands a market share of 2.2 per cent by industry AUM. Enterprise lending (MSMEs) accounts for 39 per cent of its total loan book while asset finance (vehicle loans) and customer finance (personal loans) make up 38 and 23 per cent, respectively. Over 70 per cent of its branches are located in tier-4 towns and beyond.

Strengths of HDB Financial Services

• Granular loan book: The company has built a highly diversified loan book, with its 20 largest customers accounting for less than 0.34 per cent of its total gross loans. Also, no single product accounts for more than 25 per cent of its gross loan book.

Weaknesses of HDB Financial Services

• High competition: The lending services industry in India is highly competitive and commoditised as the company faces competition from established banks and NBFCs with large networks, advanced technologies and cross-selling capabilities.

Risk report

Company and business

• Will the company be able to scale up its business?

Yes. India’s credit market is expected to grow 13 to 15 per cent per annum by FY28. The strong demand tailwinds provide a favourable opportunity for the NBFC to scale up its business.

• Does the company have recognisable brands with client stickiness?

Yes. HDB Financial Services significantly benefits from the distinguished parentage, strong trust and brand equity of parent HDFC Bank. Moreover, it has a large and rapidly growing customer franchise, which has grown 25 per cent annually from FY23 to FY25.

• Does the company have a credible moat?

No. HDB Financial Services operates in a commoditised market and competes with other legacy players like Bajaj Finance, Cholamandalam Investment, Shriram Finance, etc.

Financials

• Did the company generate a current ROE of more than 12 per cent and an ROA of more than 1 per cent?

Yes. It reported ROE and ROA of 15 per cent and 2.2 per cent, respectively, in FY25.

• Has the company increased its NII (net interest income) by 20 per cent annually over the last three years?

No. HDB Financial Services’ NII grew by around 17 per cent per annum from FY23 to FY25.

• Has HDB Financial Services’ net interest income (NII) kept pace with the loan book growth?

No. NII growth has trailed loan book growth due to a decline in its net interest margins from 8.3 per cent in FY23 to 7.6 per cent in FY25.

• Is HDB Financial Services’ capital adequacy ratio more than 15 per cent?

Yes. The company reported a capital adequacy ratio of 19.2 per cent as of FY25.

• Does HDB Financial Services have a cost-to-income ratio of less than 50 per cent?

Yes. It reported a cost-to-income ratio of 43 per cent in FY25.

• Can the company run its business without relying on external funding in the next three years?

Yes. Its high capital adequacy ratio of 19 per cent, coupled with the IPO proceeds, should ensure the sustainability of its operations.

• Are the company's three-year average gross NPA and net NPA ratios below 1 per cent and 0.5 per cent, respectively?

No. HDB Financial services reported an average gross NPA ratio of 2.3 per cent and an average net NPA of 0.9 per cent in the last three years.

Assessing an IPO requires a careful evaluation of a company's strengths, weaknesses, and growth potential, just like we've outlined for HDB Financial Services. But wealth creation can only be achieved through a well-researched, balanced stock portfolio.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

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