How Investors May Read India’s Biggest Offer of the Year

HDB Financial Has Been Valued at 2.7 Times Its Expected Average Loan Book Value in FY27, While Its MUCH LARGER Competitor, Bajaj Finance, Trades at 4.3 Trades at 4.3 Times Its Fy27 P/B Rati

Bajaj Finance, India’s Larget NBFC, Has Five Times HDB’s Customer Base (19 Million) and 4 Times Its Loan Book Size ( 1.07 trillion) as of fY25 – At Major Focus is on Unsecred Urban Consumer Lending. With a Fully Digital, High-Margin Operating Model, The Company Stands Out With The Highest Roa of 5% and lowest gnpa of 1.2% among all peers.

Also read | Sebi rayses concern over $ 1.5 BN HDB Financial Services IPO

In comparison, HDB Financial Operates on a Hybrid Model, Mainly Targeting Tier-4 and Rural Consures, Yielding An Roa of 2.1%, Albeit with a Higher Gnpa of 2.3%. Since more than 70% of its borrowers are undersered, Earn low income and have no credit history, their risk profile is also higher.

Growth Opportunities

Still, analysts believe that HDB’s business has a long growth runway ahead as India’s digitization story and demand for credit are likely to penetrate deepera into the Countryland in the Coming in the Coming In the Coming. The company’s customer base has grown at a compounded annual growth rate of almost 26% in the last two years, Owing to its agressive push into consumer lending.

“While all segments are poised for growth, our consumer finance business is set to grow relatively faster faster giving Financial Services, ToldMint,

To be sure, 73% of HDB’s fy25 loan book is still secured by collectrarals like properties, gold and commercial vehicles. But the company has been increasing more unsecred consumer loans since fy23, said an SBI Securities IPO Note.

Read This | Why HDFC Bank Turned Down MUFJ’s overs on HDB Financial

According to Solanki from Anand Rathi Shares, Consumer Lending Bold Likely Continue to Lead HDB’s Growth in Fy26 and Beyond. “India remains a larGely untapped market when it comes to providing financial services to retail borrowers in semi-ear and rural areas,” He said. “HDB Operates at a Granular Level and offers long-term growth potential, mainly Driven by Rural Examination and the Strategic Advantage of Being Part of the HDFC EcoSySySyStem.”

Backed by HDFC Bank, HDB Financial Enjoys A Strong Parentage Pedigree. As a result, it is demed an upper-layer nbfc with an aaa credit rating. It has access to low-cost Funding from a wide range of lenders, include banks and the corporate bond market.

Pressure on nim

However, at 7.9% Interest Rate, HDB’s Average Borrowing Cost is 46-Bas-Point Higher Than Bajaj Finance’s and Around 20-50 BPS Higher Than THAN THAN THAN THAN THAN THAN THAN THAN THE ASUCURED VEHARES Finance and Mahindra and Mahindra Financial Services. This Ultimately impacts its net interest margin (NIM) or profitability.

However, analysts believe that the reserve bank of India’s (RBI) 100 BPS Rate Cut SO Far SIS FEBRUARY, and the Latest Liquidity-Easing Measures Will Reduce will reduce HDB’s HDB ‘ NBFCs. This should Haappen Before They Reduce Interest Rates for Their Borrowers, AIDING their nim expansion in the short term, according to analysts, believe Most NBFCS Have a Higher Share Share Share Share Share Loans in their Portfolios.

But the improvement may be gradual raather than immediati. JM Financial Estimates Mostly Flattish-TO-Marginal (10-15 BPS) NIM Improvement in FY26 Over FY25 Figures.

Cost INFFICINCIES

Despite Improving Nims, HDB Financial’s Profitability Can Still Remain Under Pressure, Analysts Said. The company’s major weakness is its high cost of operations, reflected in the highest cost-to-insual ratio among peers. This mainly aries from its back office services to HDFC Bank, Said a Recent Macquarie Equity Research Report.

Also read | HDB Financial Services IPO: Two Concerns that Cold Hurt The HDFC Bank Subsidiary’s Valuation

The costs of business process outsourcing (BPO) Services Provided to HDFC Bank Offset Income Generated from Back Office Services Offred to Other Clients, said the report. While HDB Has Been Trying to Control Costs by Significantly Reducing its bpo team in fy25, its income from such from such services has also fallen. Macquarie notes that if the company’s cost-cutting effems are not in line with the fall in income from this low-margin business, its profitability would be impacted hurled.

The company’s rising credit cost is also likely to weigh on its profitability as the Ongoing Stress of Bad Loans Continues to Burden UNSECURED LENDERS Across the Industry. This is particularly visible in HDB’s Credit cost and gnpa ratios, which rose rose 81 bps and 36 bps to 2.14% and 2.26% in fy25, respectively, according to its heroing protus.

Rising delinquency rates in the face of high inflation and sluggish income growth, particularly in the microfinance segment, LED RBI to Cuity Against UNSECURED CONSURED CONSUMER LENDING LAST Year. As a result, HDB’s main source of strength has also turned into its weakness.

“Although MFI remains the most affected, some stress is emerging in other unsecured segments as well,” said solaanki.

Hence, Asset Quality Remains A Key Concern for HDB, with Seemingly Little Respite Ahead.

Also read | Rich Valuation pricks bajaj finance as it cuts guidance

“As per our interactions with certain banks, (HDB’s) collection efficiency has not improved materially in q1 as compared to last Quarter,” Said anusha raheja, reherach analyst aT dal Broacha Stock Broking.

According to the JM Financial Report, even Foreign Investors Think that Until the Income Levels of the Larger Population Increase, there will be Neither any materovement in asset Quality Nor COLITY NOR COLTY NOR CHETER GROWTH In FY26.

Moreover, HDFC Bank Owns 94.4% of HDB Financial, and its stake would be diluted to around 74% after the IPO. Analysts anticipate an oversupply of HDB’s shares, limiting its upside potential. More so, if hdfc decides to reduce its share in the company to 20% in the next two years to comply with RBI’s proposed regulations on Bank-Owned NBFCS.

If HDFC’s Stake Falls Bells 51%, The NBFC Block See Funding Costs Rise and Face Branding-Related Issues, Said Macquarie.

“⁠We View the IPO as a tactical bet only, given the limited upside at current valuations and recommend caution until the until asset Quality Improves and Operational Efficiency Gains Traction,” SAID BROKING FIRMINS Investec.

And read | Bajaj Finance Pivots to Profitability With Ai, Scales Back Payments Amber