HDB Financial Services shares get their first ‘buy’ rating on listing day with 22% upside

Shares of HDB Financial Services Ltd., the non-bank lending unit of India’s largest private lender HDFC Bank Ltd. have received their first “buy” recommendation on the day of their listing on Wednesday, July 2.Brokerage firm Emkay has initiated coverage on HDB Financial Services with a “buy” rating and its price target of ₹900 implies a potential upside of 22% from HDB Financial’s issue price.
Emkay’s positive outlook stems from HDB Financial’s strengths as a highly diversified and large-scale lending institution. Key reasons include:
Diversification and granularity: The company boasts a wide geographic presence and diverse product offerings. Its loan book is also highly granular, with the top 20 accounts making up only 0.34% of its assets under management (AUM).Resilience and experience: HDB Financial has navigated multiple credit cycles, including the challenges of Covid-19, and has built its operations from the ground up with a bottom-up approach.

Strategic focus: Its strategy of direct sourcing (82% of FY25 disbursements), focusing on remote areas (70% of branches in Tier 4 towns and beyond), and catering to low-to-mid-income groups with limited or no credit history has been crucial. This strategy is driven by a skilled top management team, most of whom have been with HDB Financial Services for over 10 years, demonstrating strong conviction and consistency.
Emkay believes HDB Financial is well-positioned for future growth. With a favorable interest rate cycle, driven by frontloaded repo rate cuts leading to NIM expansion and credit cost moderation, along with an improving growth outlook, HDB Financial is expected to boost profits and growth.The brokerage expects a Return on Assets (RoA) of 2.7% and a Return on Equity (RoE) of 17% by March 2028. Additionally, it anticipates an AUM CAGR of 20% and an EPS CAGR of 27% between FY25 and FY28.

The much-awaited IPO of HDB Financial Services is set to make its Dalal Street debut today.

The ₹12,500 crore IPO, which closed for subscription last week, received a healthy response, particularly from institutional investors and the high net worth individuals.

The qualified institutional bidders (QIBs) portion received bids for 55.47 times the shares on offer, while the non-institutional investors (NIIs) portion was also subscribed 10 times.

However, retail investors chose to exercise caution with the portion reserved for them getting bid for only 1.4 times the total shares on offer.

HDB Financial investors placed bids for 217.7 crore shares as against 13.04 crore shares that were put up for bidding.

HDFC Bank currently holds a 94.36% stake in HDB Financial Services.