HDB Financial Services offers a large portfolio of lending products catering to a diverse customer base through a wide omni-channel distribution network. AUM of the company has increased at a CAGR of 23.71% to Rs 107260 crore at March 2025 from March 2023. The company has the second largest and third fastest growing customer franchise serving 19.2 million customers at the end March 2025. It grew at a CAGR of 25.45% from March 2023 to March 2025. The company primarily caters to underserved and underbanked customers in low to middle-income households with minimal or no credit history.

The lending products are offered through three business verticals - Enterprise Lending, Asset Finance and Consumer Finance. The enterprise loans which are secured and unsecured MSME loans accounts for 39.30% of loan book. Income generating asset finance loans are secured loans for purchase of new and used commercial vehicles, construction equipment and tractors and accounts for 38.03% of loan book. In the consumer finance segment, which accounts for 22.66% of loan book, the company offers secured and unsecured loans for purchase of consumer durables, digital and lifestyle products, two-wheelers, automobiles and other unsecured personal loans.

About 80% of branches are located outside India’s 20 largest cities by population and over 70% are located in Tier 4+ towns. The customers mainly comprise salaried and self-employed individuals, as well as business owners and entrepreneurs. The focus has remained on building a highly granular loan book with average ticket size stood at Rs 1.65 lakh at end March 2025. The company has maintained a balanced approach to the secured and unsecured loans mix at 73:27 at end March 2025.

HDB Financial Services also offers business process outsourcing (BPO) services such as back-office support services, collection and sales support services to HDFC Bank as well as fee-based products such as distribution of insurance products primarily to lending customers.

Ramesh Ganesan is MD&CEO of the company who has been with the company since the year of inception and, prior to that, with the HDFC Bank group for over eight years.

The omni-channel “phygital” distribution model combines a large branch network, in-house tele-calling teams and various external distribution networks and channel partners. HDB Financial Services has a pan-India network of 1,771 branches in 1,170 towns and cities across 31 States and Union Territories. The distribution network is complemented by external distribution channel partnerships with over 80 brands and original equipment manufacturers (OEMs) and external distribution networks with over 140,000 retailers and dealer touchpoints at end March 2025.

HDB Financial Services has a hybrid underwriting structure depending on the product, customer segment and ticket size. The loan book is well seasoned as it has weathered multiple credit cycles in India since inception. GNPA ratio was healthy at 2.26% and NNPA at 0.99% at end March 2025. The company is focused on highly conservative policies for provisioning, with 55.95% of Provisioning Coverage Ratio at end March 2025, the third highest amongst the peers and a 3.31% provisioning on loan book at end March 2025.

HDB Financial Services has instituted tech-enabled sourcing, credit assessment, risk management and collections capabilities as well as customer engagement tools helping to streamline operations, reducing turnaround time and improving cost to income ratio. The company leverages automated credit decisioning through rule- and scorecard-based evaluations to enhance underwriting capabilities and have digitalized collection operations. Over 95% of customers were sourced and onboarded digitally and over 95% of collections were done through digital and banking channels.

CRISIL and CARE have assigned the highest rating of AAA/stable to the company allowing it to fund operations at competitive rates and tenors across fixed and floating-rate debt instruments. Average cost of borrowings at 7.90% is the sixth lowest amongst competitors. Debt-to-equity ratio stands at 5.85x end March 2025. CRAR is healthy at 19.22% at end March 2025. The company has not raised any equity capital in the last eight years and during this period the company has recorded Rs 72810 crore growth in the loan book.

The Offer and the Objects

The initial public offer (IPO) consists of fresh issue to raise Rs 2500 crore through issuance of 3.57 crore equity shares at the lower band of Rs 700 per share (face value Rs 10 per share) and 3.38 crore equity shares at the upper band of Rs 740 per share.

The issue also consists of Offer for Sale (OFS) of Rs 10000 crore through issuance of 13.51-14.29 crore equity shares from the promoter – HDFC Bank. The promoter shareholding in the company would decline to 74.2% post- IPO from 94.04% pre-IPO.

The issue is to be made through the book-building process and will open on 25 June 2025 and will close on 27 June 2025. About 10% of the issue is reserved for shareholders of HDFC Bank.

The company proposes to utilize the Net Proceeds from the Fresh Issue towards augmenting the capital base to meet future capital requirements. The company expects to receive the benefits of listing the Equity Shares on the Stock Exchanges, including to enhance brand image among existing and potential customers and creation of a public market for the Equity Shares in India. The listing is also being conducted to comply with RBI‘s regulations, which require UL NBFCs to be listed on stock exchanges.

Strengths

The company is a subsidiary of HDFC Bank, India’s largest private bank, enjoying strong trust and brand equity with consumers.

HDB Financial Services has a highly granular retail loan book, bolstered by a second largest and rapidly growing customer base of 19.2 million with a focus on serving the underbanked customer segments.

Low customer concentration reflected by low ticket size reduces dependence on any particular set of customers.

The company has built a large, diversified and seasoned product portfolio with a sustainable track record of diversification, growth and profitability through the cycles

The company has a basket of 13 lending products and no single product accounting for more than 25% of loan book.

The company also offers BPO services to promoter and fee-based products such as distribution of insurance products primarily to lending customers.

The loan product portfolio has seasoned through multiple economic and credit cycles as well as events such as the 2008 global financial crisis, the 2013-2014 liquidity crisis in India, the NBFC liquidity crisis of 2018 and the COVID-19 nation-wide lockdowns in 2020 and 2021.

The company has an omni-channel and digitally powered pan-India distribution network. Its distribution strategy is complemented by a variety of digital channels, including in partnership with fintechs, a website and its own customized and user-friendly application.

A key focus of credit risk management framework has been to establish a strong credit underwriting and collections capability which has ensured sustainable growth.

The company has advanced technology and data analytics tools driving enhanced customer experience and efficiency across each stage of the customer lifecycle

The company has a well-diversified and strong liability franchise supported by a strong credit rating of AAA. Average Cost of Borrowings stood at 7.90% at end March 2025 is the sixth lowest amongst peers.

Weaknesses

HDFC Bank held a 94.04% stake in the Company. RBI draft circular released on 4 October 2024 aimed at eliminating any overlap in core business activities between a bank and its group entities, requires the promoter to reduce its ownership in the company to below 20% within 2 years from the date on which the Proposed Rules come into effect. Such significant decrease in ownership by Promoter may adversely impact business operations and share price.

The company has witnessed an increase in Gross Stage 3 Loans to 2.26% at end March 2025 from 1.90% at end March 2024. Net stage 3 loans rose to 0.99% from 0.63%.

New-to-credit borrowers constituted 11.57% of loan book at end March 2025 and the company needs to properly assess the credit worthiness of new-to-credit borrowers as these customers have a higher risk of non-performance or default.

Any increase in Gross Stage 3 Loans could adversely impact credit ratings and translate into an increase in cost of borrowings and also leads to higher provisions.

The unsecured loans comprised 26.99% of the loan book. Unsecured loans represent a greater credit risk than secured loan portfolio because they may not be supported by realisable collateral that could help ensure an adequate source of repayment for the loan.

BPO services provided to Promoter, HDFC Bank may be impacted due to any termination or failure to renew agreements with HDFC Bank.

The company relies on the parentage for certain areas such as borrowings for funding of growth, as well as for strong credit ratings and low costs of borrowing. Such parentage and support of promoter may or may not continue following any reduction in shareholding.

There is reliance on a trademark license agreement with HDFC Bank, to use the HDFC Bank logo. Any termination of rights to use the HDFC Bank logo or any reputational harm to the HDFC Bank brand could materially and adversely affect brand recognition, business, financial condition and results of operations. The Agreement will continue to be in effect until the earlier of 1 July 2028, or the time at which the Company ceases to be a subsidiary of HDFC Bank.

Third-party partners contributed to 18.33% of total disbursements for FY2025 and failure to continue to expand the current third-party partner network, could adversely affect business and financial performance.

Valuation

In FY2025, HDB Financial Services generated a net profit of Rs 2176 crore down from Rs 2461 crore in FY2024 mainly on account of two-fold increase in provisions. Net Total Income for the lending business increased from Rs 6257.0 crore in FY2023 to Rs 8693.5 crore in FY2025, reflecting a CAGR of 17.87%. The revenue from lending business as a percentage of total revenue from operations for FY2025 was 92.54% and the revenue from BPO services was 7.46%. Interest income has grown at a CAGR of 24.49% from Rs 8928 crore in FY2023 to Rs 13836 crore in FY2025, driven by a growing yield on Total Gross Loan book, from 13.59% in FY2023 to 14.04% in FY2025. Fee Income also increased at a CAGR of 25.56% from Rs 756.4 crore in FY2023 to Rs 1192.5 crore in FY2025. The company has delivered RoA of 2.16% and RoE of 14.72% for FY2025, which is the seventh and fifth highest amongst NBFC peers.

EPS on post-issue equity for FY2025 works out to Rs 25.5. At the price band of Rs 700 to Rs 740, P/E works out to 27.2 to 29.0 times of EPS for FY2025.

Post-issue, the book value (BV) will be Rs 220.8, while adjusted BV (ABV) net of net stage 3 assets works out to Rs 208.0 per share at the upper price band. The scrip is being offered at price to Adj BV multiple of 3.6 times at the upper price band.

Among peer NBFCs, Cholamandalam Investment & Finance is trading at P/ Adj BV multiple of 6.4 times, Bajaj Finance at 6.0 times and Sundaram Finance at 4.2 times. Further, Shriram Finance is trading at 2.5 times, Aditya Birla Capital at 2.3 times and L&T Finance at 1.9 times.

In terms of PE, Cholamandalam Investment & Finance is trading at 31.3 times its EPS for FY2025, Bajaj Finance at 34.3 times and Sundaram Finance at 28.3 times. Further, Shriram Finance is trading at 13.0 times, Aditya Biral Capital at 20.0 times and L&T Finance 17.8 times.

The ROA of HDB was at 2.2% for FY2025 against 3.0% in FY2024. Among the peers, the RoA of Bajaj Finance was at 4.6%, Sundaram Finance 2.9% and Cholamandalam Investment & Finance 2.4% for FY2025. The RoA of Shriram Finance was 3.0%, Aditya Birla Capital 2.3% and L&T Finance at 2.4% for FY2025.

ROE for HDB was at 14.7% in the FY2025 compared with 19.6% in FY2024. Cholamandalam Investment & Finance recorded RoE of 19.8% for FY2025, Bajaj Finance 19.2%, Sundaram Finance at 16.3%, Shriram Finance 15.8%, Aditya Birla Capital 14.1% and L&T Finance 10.9%.

HDB has recorded strong growth in AUM at 18.5% to Rs 106878 crore end March 2025. The AUM of Cholamandalam Investment & Finance surged 30.0% to Rs 199876 crore, followed by Aditya Biral Capital 26.9% to Rs 157404 crore, and Bajaj Finance 26.0% to Rs 416661 crore end March 2025. The loan book of Shriram Finance and Sundaram Finance gained 17% each to Rs 263190 crore and Rs 51476 crore, while that of L&T finance moved up 14.3% to Rs 97762 crore.

The NNPA ratio of HDB was low at 0.99% end March 2025, while that of Bajaj Finance was at 0.44%, Sundaram Finance 0.75% and L&T Finance 0.87% end March 2025. Net stage 3 asset ratio for Aditya Birla Capital was at 1.05%, Cholamandalam Investment & Finance 2.63% and Shriram Finance at 2.64%.