IPO Size: Rs. 12,500 cr

• Fresh Issue of Rs. 2,500 cr for growth capital and to company with RBI’s listing deadline of Sep 2025, for upper-layer NBFCs
• Offer for Sale (OFS) of Rs. 10,000 cr by the promoter HDFC Bank (94% stake to drop to 74%)

Price band: Rs. 700-740 per share

M cap: Rs. 61,564 cr, implying 20% dilution

• 10% of the issue reserved for HDFC Bank shareholders

IPO Date: Wed 25^th Jun to Fri 27^th Jun 2025, Listing Wed 2^nd Jul 2025

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

HDFC Bank’s NBFC Subsidiary

HDB Financial Services, 94.04% subsidiary of HDFC Bank, provides loans to 1.9 cr customers, through 1,771 branches, 70% of which are in Tier 4 and beyond towns.

The non-banking finance company (NBFC) has assets under management (AUM) of Rs. 1.07 lakh cr, as of 31.3.25, up 18% YoY. AUM is split into enterprise lending (loan against property, business loan, gold loan, salaried personal loan), asset finance (CV, CE, tractor loan) and consumer finance (durables, mobile, auto, micro finance, unsecured personal loan) in the ratio 39:38:23, with consumer finance growing the fastest, at 26% YoY.

Asset quality not as per ‘HDFC Standards’

73% of company’s loan book is secured, yet net NPA is as high as 0.99%, as of 31.3.25, up from 0.63%, as of 31.3.24. HDB’s asset quality is poorer than some of the diversified consumer financiers like Bajaj Finance (0.44%) and Sundaram Finance (0.75%). Asset quality concerns doubled provisions to Rs. 2,113 cr in FY25, contracting PAT by 12% YoY to Rs. 2,176 cr.

On an equity of Rs. 796 cr, EPS for FY25 was at Rs. 27.3. On net worth of Rs. 15,820 cr, HDB’s RoE was at 14.7% in FY25, trailing Bajaj Finance (19.2%), Cholamandalam (19.8%), Shriram (15.6%) as well as Sundaram Finance (15.5%).

Even Cost of Borrowing not the Lowest

As of 31.3.25, total borrowings stands at Rs. 87,400 cr. Rated AAA but average cost of borrowing of 7.9% is higher than most peers - L&T Finance 7.1%, Bajaj Finance 7.4%, Sundaram Finance 7.4% and even M&M Finance 7.7%.

Parent HDFC Bank has long been loved by the investors, for its ability to raise funds at one of the lowest costs, coupled with impeccable underwriting skills. It appears that HDB Financial has some ground to cover on both these counts!

Pressure on NIMs

With yields of 14% and cost of borrowing of 7.9%, HDB’s net interest margin (NIM) stood at 7.6% in FY25. NIMs have steadily declined from 8.2% in FY22 to 7.9% in FY24. Although going ahead, in a falling interest rate scenario, scope for NIM expansion is not ruled out.

Regulatory Uncertainty

RBI’s Oct 2024 draft circular on ‘Forms of Business’ can be disruptive for the company and its parent, which prevents banks from conducting business carried out by their subsidiary. If implemented, either of HDB Finance or HDFC Bank, having common lending products, may have to discontinue some lines of business. While this is not a threat today, it has potential to become one, in the future.  

‘Nothing Left on the Table’ Pricing

On FY26E book value per share of Rs. 250, current year PBV multiple is 3x, fully in-line with company’s financial position and peer comparison:

• L&T Finance, with similar size (Rs. 98,000 cr AUM) and comparable asset quality (0.97% net NPA) but stronger NIM of 9.4%, is trading at a PBV of 1.7x
• Diversified NBFC Shriram Finance is trading at only 1.9x, for Rs. 2.6 lakh cr AUM, up 17% YoY, 8.6% NIM and 15.6% RoE
• Auto NBFC Sundaram Finance, with Rs. 51,500 cr AUM, up 17% YoY, is trading at PBV of 3x for a better asset quality (0.75% net NPA) and superior RoE of 15.5%
• Bajaj Finance’s PBV of 4.7x is for 26% YoY AUM growth on a large base of Rs. 4.2 lakh cr, best-in-class 0.44% net NPA and one of the highest RoE of 19.2%
• Even Cholamandalam’ PBV of 4.5x is for 27% YoY growth in AUM to Rs.1.85 lakh cr and 19.8% RoE.

Peers L&T Fin and Shriram are ruling much lower than HDB, for a superior margin or return ratio, while Chola and Bajaj are growing much faster than HDB, despite a large book.

HDB’s IPO price fully captures business value along with ‘HDFC’ badge premium, leaving little room for expansion in valuation multiple. It is rather surprising to see an HDFC Group company not leaving 10-15% on the table for prospective investors.