Buy HDB Financial Services For Target Rs. 900 By Emkay Global Financial Services Ltd
A play on enterprising Bharat; initiate with BUY
We initiate coverage on HDB Financial Services (HDBFS) with BUY and Jun-26E TP of Rs900 (+22% upside), on FY27E P/B of 3.0x. Our positive view is due to 1) HDBFS being a highly diversified (geographically and product-wise), extremely granular (top 20 accounts constitute ~0.34% of AUM), and large-scale lending franchise with over 19mn customers. It has seen multiple credit cycles, Covid, and built from scratch with a bottomup approach. 2) Its strategy of focusing on direct sourcing (~82% of FY25 disbursements), remote areas (70% branches are in tier 4 towns and beyond), and lowto-mid-income groups with limited to no credit history has been driven by the skilled top management (most have been in HDBFS for over 10Y), reflecting strong conviction and consistency. 3) With a favorable interest rate cycle amid frontloaded repo rate cuts driving NIM expansion, credit cost moderation, and the growth outlook improving, HDBFS is well positioned to improve profits/growth, to achieve 2.7%/17% RoA/RoE, respectively, by Mar-28, and deliver ~20%/27% AUM/EPS CAGR over FY25-28E.
Right ingredients, clear idea, and impressive execution
HDFC Bank’s parentage provided HDBFS with the right ingredients (best price, quantum of funds (AAA rating), and strong brand visibility) to become a meaningful lender at scale. The company serves lower-to-mid income groups in remote areas with limited to no credit history, backed by the promoter and the top management’s conviction in the idea, resulting in its impressive execution (a hallmark of its parent and promoter–HDFC Bank). HDFC Bank’s parentage and HDBFS’s stable top management helped to build a lender for the underbanked and unbanked segments, to enterprise Bharat. This led to HDBFS becoming a lender at scale with over 19mn customers spread over 1,770 branches across 31 states and union territories, with over Rs1.1trn AUM. This achievement was led by a sharp focus on profitable growth despite shocks from demonetization to GST to Covid, which greatly dented HDBFS’s borrower segments. Still, HDBFS has seen consistent profits since 2009-10 and has not raised any external capital since 2017.
Improving external setting complements internal strength to drive growth and RoA
HDBFS’s widespread reach, origination capabilities, and improved capital adequacy post-IPO allow it to capture the credit-demand uptick amid growth stimulation push by the regulator/government, with improving NIM amid frontloaded repo rate cuts. HDBFS’s focus on the direct origination and collection model results in higher opex, which should also support relatively higher net yields. Overall, the diversified product mix and continued focus on the overlooked segments should support steady, ~20% AUM compounding to Rs1.8trn over FY25-28E. Plus, better cost of borrowings and moderated credit costs should drive the RoA to ~2.7% (mid-level of FY24 and FY25 RoA) by FY28E.
Sustained growth, improved profitability to drive re-rating; initiate at BUY
The 20% AUM CAGR and ~2.7/17% RoA/RoE, backed by the credible and stable management, will drive a gradual re-rating. We initiate coverage on HDBFS with BUY and Jun-26E TP of Rs900 (+22% upside), implying 3.0x FY27E P/B. Key risk: The RBI’s Oct-24 draft circular demands no overlap in business between the bank and its subsidiary. If this is adopted, then HDFC Bank might have to reduce its ownership in HDBFS to under 20% within a specified duration.
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