India’s financial system serves as the backbone of its economy, easing the flow of money between individuals, businesses, and the government. Over the years, this sector has expanded to serve a larger population, reaching both urban centers and rural areas. Among the key players in this space is HDB Financial Services, an NBFC and a subsidiary of HDFC Bank, which has gained some traction recently, particularly with the growing interest in HDB Financial Services Unlisted Shares ahead of its upcoming share offering.
Traditionally, banks have been the primary players in this space. However, given India’s vast size and diversity, traditional banks often struggled to meet the needs of everyone. This gap led to the rise of Non-Banking Financial Companies (NBFCs) which are the institutions that offer similar services as banks but are not classified as banks. These NBFCs provide loans, financing, and other financial services, but unlike banks, they do not accept deposits like savings accounts. What sets them apart is their ability to cater to underserved segments of society.
Highlights from the HDB Financial Services IPO Roadshow
The HDB Financial Services is making headlines with its upcoming Initial Public Offering (IPO), with an estimated valuation pegged between ₹85,000 crores and ₹1,00,000 crores. It includes a ₹10,000 crores offer for sale from its parent company, HDFC Bank, and ₹2,500 crores as a part of fresh issue.
Currently, each share is pegged at [View Current Price of HDB Financial Unlisted Share]. As roadshows with global investors progress, this IPO is expected to set benchmarks for NBFCs, potentially influencing HDB Financial Services share price post-listing.
When HDB Financial Services raises money through its IPO, the company will use the funds for these main purposes:
Understanding HDB Financial Services
The company has a vast product mix that caters to a wide range of customer needs.
Consumer Loans: Simplifying Everyday Financial Needs
Under this category, they offer loans designed to make life easier for everyday people by helping them manage their day-to-day financial needs. These loans are designed to make it easier for individuals to buy essential items or cover personal expenses.
Enterprise Loans: Giving Businesses a Boost
HDBFS also supports small businesses and entrepreneurs. Business Loans are available without the need for collateral, meaning the borrower doesn’t have to pledge any property or assets to secure the loan. These funds can be used to grow the business, buy inventory, or upgrade equipment.
For businesses that own property, Loans Against Property allow them to borrow money by using their property as a guarantee. Think of it as a way to unlock the value of the property to fund business needs. Similarly, Loans Against Lease Rentals let businesses use the rent they receive from leased properties to get funding. If someone has investments like shares or bonds, Loans Against Securities let them borrow money without sell
Asset Finance: Supporting Businesses and Farmers
The company helps people and businesses buy important equipment. For example, Commercial Vehicle Loans are for those who need trucks or other vehicles for work, whether new or used. Farmers or contractors who need tools for construction or farming can apply for Construction Equipment Loans or Tractor loans, making it easier for them to grow their operations without huge upfront costs.
Micro Lending: Small Loans for Big Dreams
HDBFS also offers loans to people in rural areas or small communities who might not qualify for traditional loans. These are called microloans. Instead of giving a loan to one person, the company lends to a group of people, called a Joint Liability Group (JLG). This means everyone in the group is responsible for paying back the loan together, which helps build trust and ensures repayment. Microloans are small amounts of money that can help start or expand a small shop, buy farming supplies, or cover other basic needs.
Beyond Loans: Other Services
They are not just about providing loans. The company also offers services that support its parent company, HDFC Bank, and enhance its overall customer experience. These services can be grouped into two main categories: fee-based products and business process outsourcing (BPO) services.
➢ Fee-Based Products
While the exact details about these products aren’t clear from available information, fee-based products typically include services where customers pay a fee for financial solutions like insurance, investment advice, or processing certain transactions. These products act as an additional revenue stream for HDBFS, beyond lending.
➢ Business Process Outsourcing (BPO) Services
HDB Financial Services plays a vital role in supporting HDFC Bank by handling several behind-the-scenes operations. Let’s break these services down:
Improved Asset Quality & Risk Management
They have significantly improved its asset quality, which refers to how healthy its loan portfolio is. Non-Performing Assets (NPA), or bad loans, have reduced. This shows their ability to become better at managing risk, meaning fewer loans are going unpaid. This is crucial for long-term stability, as the company ensures that it makes safe lending decisions.
Expansion into Underserved Markets and Scalability
With the plan of expanding its presence in rural and semi-urban areas, where financial services are limited. By providing loans to individuals and businesses in these underserved regions, it opens up new opportunities for growth. With 80% of its distribution network outside major cities, they are tapping into an untapped customer base with growing financial needs.
Diversified Funding Sources and Credit Ratings
The sources its funds from various channels like banks, insurance companies, and pension funds, ensuring it has access to the money needed to lend to its customers. This diversification reduces reliance on one source of funding and provides financial stability. Plus, with positive credit ratings from agencies like CRISIL and CARE, they have further strengthened their position.
High Liquidity Coverage
The company maintains a decent liquidity position with a Liquidity Coverage Ratio, significantly higher than the regulatory minimum. In simple terms, this means the company has plenty of cash reserves to cover any unexpected financial needs. This high liquidity ratio ensures that they can weather economic shocks and continue to lend without risking its financial stability.
Decoding the Valuation: Key Insights for Investors
While HDB Financial Services’ P/E ratio of 39.40x is notably above the industry median of 31.75x. This higher P/E ratio indicates that investors are willing to pay more for each unit of the company’s earnings compared to its peers, the premium is justified based on several key factors:
Superior Loan Quality
HDB Financial Services stands out in its peer group by maintaining the lowest NPAs, as a result of its careful credit management and proper provisioning which sets aside funds to cover potential losses while also maintaining a strong liquidity position. This proactive approach helps ensure that the company is financially prepared for any defaults, reducing credit risk. As a result, there are fewer defaults, which enhances profitability. With a proven track record of managing its loan portfolio, the company consistently reduces credit risks, creating a stable financial outlook.
Parentage Advantage
As part of the HDFC Bank ecosystem, HDB Financial Services enjoys brand equity, operational synergies, and access to cost-effective funding. HDFC Bank’s 94.36% ownership provides a solid foundation of financial and operational support, enabling them to benefit from low-cost capital and efficient business practices. This affiliation not only reduces risk but also enhances their credibility in the market, giving it a distinct edge.
Growth in AUM
A 28.75% growth in Assets Under Management (AUM), reaching ₹90,217 crores, supported by customer trust, an expanded branch network, and a diversified product portfolio. While Bajaj Finance leads the sector, the focus on semi-urban and rural regions positions it well to tap into underbanked markets. The Indian economy's growth, coupled with urbanization and government initiatives to support financial inclusion, has led to an increase in demand for credit and financial services.
Capital Adequacy
A strong Capital Adequacy Ratio (CAR) of 19.25% reflects its effective capital management and adherence to regulatory requirements, being a measure of the company’s ability to absorb losses and maintain financial stability. While Muthoot Finance leads with a CAR of 30.37%, HDB Financial Services’ capital adequacy aligns closely with industry players like Sundaram Finance (20.50%) and Shriram Finance (20.30%), driven by its diverse funding sources, including public sector banks, private institutions, and mutual funds, providing stability and supporting future growth.
Financial Position
For FY 2024, it generated ₹12,221.57 crores from its lending activities, up from ₹9,768.95 crores the previous year due to the expansion in its lending business, loan portfolio, better liquidity, and higher interest income.
The net profit stood at ₹2,460.84 crores, compared to ₹1,959.35 crores in FY 2023.
Economic Downturn: A significant risk is the slowdown in India’s overall economy. If the economy faces challenges such as lower consumer spending, decreased business investments, or increased unemployment, people and businesses may struggle to repay their loans. This can lead to an increase in non-performing assets. If more loans default, it could severely impact the company’s profits and cash flow, hurting its financial stability.
Credit Risk from New Borrowers: While lending to new-to-credit borrowers, many of whom may not have a credit history. Without a clear track record of their borrowing habits, it’s harder to assess whether they will repay their loans on time. As a result, there’s a higher risk of loan defaults and increased NPAs.
Collateral Value Risk: Many of the loans are secured by collateral, such as property or vehicles. However, the value of this collateral can fluctuate depending on the market conditions. In times of economic stress or property market downturns, the collateral may lose value, meaning the company could struggle to recover the full loan amount in case of defaults.
Funding and Liquidity Risks: HDB Financial Services gets much of its money by borrowing from banks and other financial institutions. If the company has trouble borrowing money at good rates, it could limit its ability to lend to customers, which could hurt its business. Additionally, they need to keep a certain amount of money (called Tier I and Tier II capital) to meet legal requirements.
The company's focus on expanding into underserved regions, coupled with its asset quality and liquidity management, positions it for growth in a rapidly transforming economy. It will be crucial to observe how HDB Financial Services unlisted shares perform ahead of its IPO. However, the broader economic environment, regulatory shifts, and market conditions will continue to play a major role in shaping its long-term trajectory. As India’s financial inclusion agenda gains momentum, HDB Financial Services remains a key player in driving access to credit and financial services across the country.
Sources: Annual Report, DRHP
