IGI Logo

Granular Strategy, Scalable Execution

An execution-led franchise with embedded levers for secular growth

* HDB Financial Services (HDB) is the seventh-largest diversified, retail-focused NBFC in India with an AUM of ~INR1.1t as of Jun’25. The company delivered a ~20% AUM CAGR over FY22-FY25 and has a wide nationwide footprint, operating more than 1,770 branches across 31 Indian States.

* HDB has developed its growth strategy around India’s vast and underserved middle-income segment, which encompasses salaried individuals, selfemployed professionals, and small business owners. This focused approach has driven steady expansion of its franchise while minimizing concentration risk.

* HDB is well positioned to benefit from a declining interest rate cycle, with ~77% of its loan book on fixed rates, while ~33% of its borrowings on floating rates will benefit from the decline in the policy repo rate. Coupled with its AAA credit rating, the company is already experiencing benefits on its incremental cost of funds (CoF), which will pave the way for a NIM expansion in FY26.

* Opex ratios have remained elevated over the past few years due to substantial investments in expanding the physical infrastructure. However, with the distribution footprint now largely in place and volumes expected to improve, we anticipate a steady improvement in its cost ratios. We expect its cost-toincome ratio to dip ~330bp and opex/assets to improve ~20bp over FY25-FY28.

* HDB’s lending strategy is underpinned by a focus on maintaining strong asset quality, supported by data-driven underwriting, rigorous portfolio monitoring, and effective recovery processes. Over the last year, asset quality came under some pressure, leading to higher credit costs, largely due to macroeconomic challenges and stress in select segments such as CV and unsecured business loans. Encouragingly, HDB is already experiencing early signs of stabilization in these segments, and we anticipate an improvement in asset quality from the second half of this year.

* HDB has built one of India’s most granular and credit-disciplined lending franchises, rooted in a bottom-up approach that combines product breadth, geographic depth, and robust risk management. With a strategic focus on underserved segments across Tier 2 and beyond, a direct sourcing-led origination engine, and execution precision honed over multiple credit cycles, HDB is now entering a phase of scalable, profitable growth. Backed by HDFC Bank’s institutional ethos and a seasoned management team, the company is positioned to deliver 19% AUM CAGR (over FY25-28E) with expanding RoAs (from 2.2% in FY25 to 2.6% by FY28) — without compromising on asset quality or governance.

* With the benefits of scale now beginning to kick in, we project HDB to deliver a PAT CAGR of ~26% over FY25-FY28 and an RoA/RoE of 2.6%/16.5% by FY28, supported by a gradual decline in credit costs and higher operating leverage. We initiate coverage on HDB with a Neutral rating and a TP of INR860 (premised on 2.7x Sep’27E P/BV). With valuations largely factoring in medium-term growth potential, we would look for clearer evidence of stronger execution on loan growth, ability to better navigate industry/product cycles, and structural (not just cyclical) improvement in its return ratios.

Granular origination at scale

* HDB employs a diversified omni-channel sourcing model. Direct sourcing contributed ~82% of its FY25 disbursements. This phygital (physical + digital) approach integrates in-house distribution teams, external partners, and strong digital capabilities to efficiently target customers. Over 70% of HDB’s branches are located in tier-4 and even smaller towns, enabling a strong rural presence across 'Bharat' and reaching underbanked and unbanked segments. This is complemented by a strong in-house tele-calling team, which serves as the primary distribution channel for products like personal loans and consumer durables, leveraging analytics to identify eligible borrowers.

* HDB also partners with a vast external ecosystem, including auto OEMs, consumer durables and digital brands, vehicle and equipment dealers, point-ofsale outlets, lifestyle goods vendors, and Direct Selling Agents (DSAs), to broaden its reach and product distribution. The company is well-positioned to deliver a ~19% AUM CAGR over FY25-28E.

NIM tailwinds in a softening rate cycle

* HDB’s yield profile remains well-supported by its diversified product mix, with higher-yielding segments such as unsecured enterprise loans and select retail products balancing the lower-yield secured portfolio. On the asset side, ~77% of the loan book is on fixed rates, which will prevent any downward pressure on the backbook yields. Continued focus on direct origination and operationsin underserved markets will enable better pricing power, sustaining healthy blended yields.

* About 33% of HDB’s liabilities are on floating rates, within which ~90-95% of its bank borrowings are linked to EBLR and have been repriced already in line with market/external benchmarks. The company benefits from HDFC Bank’s strong parentage and AAA credit rating. With the interest rate cycle having already turned favorable with the recent repo rate cuts, funding costs are expected to decline, creating tailwinds for margin expansion. We expect HDB to expand its NIM to 8.0% over FY26–28E (compared to ~7.8% in FY25).

Operating efficiencies to drive improvement in cost ratios

* HDB’s current productivity and efficiency metrics trail peers, reflecting the deliberate scale-up of its branch network and employee base in recent years. With the distribution platform now largely built out and business volumes poised for healthy growth, the company stands to benefit from meaningful operating leverage, driving sustained improvements in cost efficiency.

* HDB’s scale benefits, digital origination, and centralized processing are expected to deliver sustained operating leverage over the medium term. The cost-toincome ratio, which stood at ~43% in FY25, is projected to improve by ~330bp to ~40%, and opex/avg. assets would improve ~20bp, reaching 3.5% by FY28. This will be driven by productivity gains, process automation, and better operating spread across an expanding branch network. These efficiency gains will provide a structural boost to profitability.

Near-term headwinds, but asset quality anchored to prudent underwriting

* HDB has built a risk-calibrated and diversified loan portfolio, balancing growth with prudent underwriting. While the company primarily serves the low- and middle-income segments, which inherently carry higher risk, it has maintained a conservative approach in customer selection. As of FY25, NTC customers constituted only ~12% of the overall customer base, with the majority being customers with a credit track record, helping to anchor portfolio quality. ~73% of the portfolio comprises secured loans backed by underlying collateral.

* The company employs a dual-track underwriting model: small-ticket, shorttenure loans are evaluated through a centralized automated engine, while largeticket loans are appraised on the ground by local credit managers. This approach blends physical assessments with data-driven analytics to deliver a thorough and balanced credit evaluation. The company has a sizable in-house collection infrastructure deployed across branch, regional, and national levels.

* We expect headline GS3 to remain broadly range-bound at the current levels of 2.5-2.6% over FY26-FY27, with credit costs gradually moderating to ~1.9% by FY28E from 2.2% in FY25.

Expect ~19% AUM CAGR to translate into a PAT CAGR of 26% over FY25-28

* HDB delivered an AUM and PAT CAGR of 20% and 29%, respectively, over FY22- FY25. However, FY25 was a tough year for HDB, with macro and industry weakness translating into weakness in AUM growth and profitability

* HDB will grow faster than system credit, with an expected AUM CAGR of ~19%, a PAT CAGR of ~26% over FY25-FY28, and an RoA/RoE of 2.6%/16.5% in FY28.

Valuation and View: Strong franchise, but positives priced in

* HDB offers a play on India’s high-growth, underpenetrated retail lending market. With an AUM of ~INR1.1t and ~20m customers, the company has built a granular, largely secured loan portfolio (~73% secured) and demonstrated credit discipline. With strong governance, in-house collections, and a differentiated sourcing model, HDB has the foundations for sustainable value creation.

* At 2.7x FY27E P/BV, HDB offers exposure to a retail-heavy NBFC with a long runway for growth. As operating leverage kicks in and the cut in policy repo rates brings down the borrowing costs, we expect margin expansion and a gradual RoE improvement. We initiate coverage on the stock with a Neutral rating and a TP of INR860 (premised on 2.7x Sep’27E P/BV). With valuations largely factoring in medium-term growth potential, we would look for clearer evidence of stronger execution on loan growth, ability to better navigate industry/product cycles, and structural (not just cyclical) improvement in return ratios.

* Key risks:

1) HDB’s focus on low- to middle-income and self-employed segments exposes it to higher credit sensitivity during economic slowdowns, despite its secured portfolio mix;

2) execution risk remains in translating scale into sustained profitability, as operating efficiency metrics currently lag peers;

3) rising competition in semi-urban and rural lending, potential yield compression, and any dilution of parent linkage benefits (e.g., in raising liabilities) could also impact margins; and

4) the RBI’s draft circular issued in Oct’24 may require HDFC Bank to reduce its stake in HDB to ~20%, potentially altering the ownership structure.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412