HDB Financial IPO review (Apply)

•    The company belongs to HDFC group and is the seventh largest leading and diversified NBFC.
•    It posted steady growth in its total revenues for reported periods.
•    It marked set-back in its bottom lines for FY25 following volatility in interest rates.
•    Based on its recent financial data, the issue appears fully priced.
•    Considering rewards from HDFC groups earlier two primary offerings, investors may park funds for short to long term.

ABOUT COMPANY:
HDB Financial Services Ltd. (HFSL) is the seventh largest leading, diversified retail-focused non-banking financial company (“NBFC”) in India in terms of the size of Total Gross Loan book at Rs. 902.2 billion as at March 31, 2024, amongst NBFC peers, according to the CRISIL Report. The Company is categorized as an Upper Layer NBFC (NBFC-UL) by the RBI. It offers a large portfolio of lending products that cater to a growing and diverse customer base through a wide omni-channel distribution network. Its lending products are offered through three business verticals: Enterprise Lending, Asset Finance and Consumer Finance. 

According to HFSL, that the success of its business model and operating philosophy is evidenced by strong and sustained growth and profitability metrics. Its Total Gross Loans stood at Rs. 1,068.8 billion as at March 31, 2025, reflecting a CAGR of 23.54% between March 31, 2023 to March 31, 2025. Its assets under management stood at Rs.1,072.6 billion as at March 31, 2025 reflecting a CAGR of 23.71% between Fiscal 2023 and Fiscal 2025. In Fiscal 2025, it generated a profit after tax of Rs. 21.8 billion, which reflected a CAGR of 5.38% between Fiscal 2023 and Fiscal 2025. HFSL’s Total Gross Loans growth, operating efficiencies and strong asset quality helped it deliver Return on Assets of 2.16% and return on Average Equity of 14.72% for Fiscal 2025, which is the seventh and fifth highest amongst NBFC peers, respectively, according to the CRISIL Report.

The company began its journey in 2007 as a subsidiary of HDFC Bank Limited (“HDFC Bank”), which is the largest private sector bank in India in terms of total assets of Rs. 39,102.0 billion as at March 31, 2025, with businesses (including those of its subsidiaries) spanning across retail and commercial banking, asset management, life insurance, general insurance and broking. Under HDFC Bank’s parentage, it has embedded a philosophy of balancing between delivering long-term sustainable growth and profitability. It has derived benefits from HDFC Bank’s parentage, including its brand recognition, while still establishing a set-up independent from HDFC Bank across various functions including sourcing, underwriting, operations and risk management functions.

HFSL is India’s second largest and third fastest growing customer franchise amongst NBFC peers (for which data is available), according to the CRISIL Report, and it has served 19.2 million customers as at March 31, 2025, which grew at a CAGR of 25.45% between March 31, 2023 and March 31, 2025. The company primarily caters to underserved and underbanked customers in low to middle-income households with minimal or no credit history. As at March 31, 2025, over 80% of its branches are located outside India’s 20 largest cities by population (based on the 2011 census report) and over 70% are located in Tier 4+ towns. Its customers mainly comprise of salaried and self-employed individuals, as well as business owners and entrepreneurs. The company aims to meet the demands of various customer categories with its diversified product offerings, strong geographical presence across India, technology backed rapid turnaround times and strong customer service. It also offers business process outsourcing (“BPO”) services such as back-office support services, collection and sales support services to Promoter as well as fee-based products such as distribution of insurance products primarily to lending customers.

It has a diversified liability franchise supported by a strong credit rating of AAA stable by CRISIL and CARE, which is the highest rating that can be assigned on the credit rating scale for any NBFC in India, according to the CRISIL Report. As of March 31, 2025, it had 1771 branches at 1170 locations, and total 60432 employees on its payroll. Its net NPA as of March 31, 2025, were at 0.99% against 0.63% as of March 31, 2024. Its debt equity ratio stood at 5.85 as of March 31, 2025.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO of fresh equity shares issue worth Rs. 2500.00 cr. (approx. 33783784 equity shares at the upper cap), and an Offer for Sale (OFS) worth Rs. 10000.00 cr. (approx. 135135135 shares at the upper cap). Thus, the overall size of the IPO is 168918919 equity shares worth Rs. 12500.00 cr.  The company has announced a price band of Rs. 700 – Rs. 740 per equity shares of Rs. 10 each. The issue opens for subscription on June 25, 2025, and will close on June 27, 2025. The minimum application to be made is for 20 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 20.36% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize full net amount for augmenting its capital requirements.

The company has reserved equity shares worth Rs. 20.00 cr. (approx. 270270 shares at the upper cap) for its eligible employees, and shares worth Rs. 1250.00 cr. (approx. 16891892x equity shares at the upper cap) for shareholders of HDFC Bank. From the rest, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors.

The twelve joint Book Running Lead Managers (BRLMs) to this issue are JM Financial Ltd., BNP Paribas, BofA Securities India Ltd., Goldman Sachs (India) Securities Pvt. Ltd., HSBC Securities and Capital Markets (India) Pvt. Ltd., IIFL Capital Services Ltd., Jefferies India Pvt. Ltd., Morgan Stanley India Co. Pvt. Ltd., Motilal Oswal Investment Advisors Ltd., Nomura Financial Advisory and Securities (India) Pvt. Ltd., Nuvama Wealth Management Ltd., and UBS Securities India Pvt. Ltd.,, while MUFG Intime India Pvt. Ltd., is the registrar to the issue. J M Financial Services Ltd., Motilal Oswal Financial Services Ltd., Nuvama Wealth Management Ltd., and IIFL Capital Services Ltd. are the syndicate members.

Having issued/converted initial equity shares at par, the company issued further equity shares in the price range of Rs. 15 – Rs. 533 per share (based on Rs. 10 FV), between July 2010, and January 2025. The average cost of acquisition of shares by the promoters/selling stakeholder is Rs. 46.40 per share. 

Post-IPO, its current paid-up equity capital of Rs. 795.78 cr. will stand enhanced to Rs. 829.57 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 61387.94 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 12402.88 cr. / Rs. 1959.35 cr. (FY23), Rs. 14171.12 cr. / Rs. 2460.84 cr. (FY24), and Rs. 16300.28 cr. / Rs. 2175.92 cr. (FY25). Due to higher interest cost on borrowings, lower realization of other sale of services, and impairment on financial instruments, it witnessed degrowth in bottom lines for FY25.

For the last three fiscals, the company has posted an average EPS of Rs. 28.20 and an average RoE of 17.00 %. The issue is priced at a P/BV of 3.72 based on its NAV of Rs. 198.80 as of March 31, 2025, and at a P/BV of 3.35 based on its post-IPO NAV of Rs. 220.80 per share (at the upper cap). 

If we attribute FY25 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 28.21. Based on FY24 earnings, the P/E stands at 24.95. Thus, the issue is fully priced. 

The company has reported net interest margins of 8.25% (FY23), 7.85% (FY24), 7.56% (FY25), and RoE margins of 18.68%, 19.55%, 14.72%, respectively, for the referred periods.

DIVIDEND POLICY:
The company has paid a dividend of 20% for FY23, 30% for FY24 and 30% for FY25. It has already adopted a dividend policy in April 2017 and amended in April 2025, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Bajaj Finance, Sundaram Finance, L & T Finance, Mahindra & Mahindra Financial, Cholamandalam Investment, and Shriram Finance, as their listed peers. They are trading at a P/E of 33.8, 28.5, 18, 16.1, 30.7, and 15.1 (as of June 20, 2025). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The twelve BRLMs associated with this offer have handled 90 public issues in the last three fiscals including the ongoing one, out of which 21 issues closed below the offer price on listing date.