HDB Financial shares get first 'Buy' call; Emkay Global predicts 22% upside

HDB Financial Services enjoys a strong parentage from HDFC Bank, which provides it with the right ingredients to become a meaningful lender at scale, Emkay Global said

Don't want to miss the best from Business Standard?

HDB Financial share listing: HDB Financial Services, the non-bank financial arm of HDFC Bank, has received its first 'Buy' rating with brokerage Emkay Global Financial Services predicting roughly 22 per cent upside in the share price.

 

In a recent note, analysts at the brokerage said HDFC Bank’s ‘strong’ parentage provided HDB Financial Services with the right ingredients (best price, quantum of funds (AAA rating), and strong brand visibility) to become a meaningful lender at scale.

 

"Further, HDB's stable top management has helped it become a lender for the underbanked and unbanked segments, to enterprise 'Bharat'. HDB Financial Services, now, caters to over 19 million customers spread over 1,770 branches, with over ₹1.1 trillion asset under management (AUM)," Emkay Global said.

 

On the bourses, HDB Financial Services listed on the stock exchanges at a 13 per cent premium. As against the issue price of ₹740 per share, HDB Financial listed at ₹835 per share on the BSE and the National Stock Exchange (NSE). The stock, later, hit a high of ₹845.75 per share on the BSE and ₹849.85 per share on the NSE.

 

Prashanth Tapse, senior VP (Research) at Mehta Equities said investors should hold the stock from a long-term perspective.

 

 "Those. who did not receive any allotment. may consider accumulating on any post-listing corrections. As we see HDB Financial Services offering a value-driven opportunity with both defensive and growth characteristics, it is best suitable for investors with a 3–5 year investment horizon," he said.  Emkay Global, on its part, has set a one-year share price target of ₹900, implying 22 per cent upside over the issue price. The brokerage values the stock at 3 times FY27E price-to-book (P/B).

 

"The 20 per cent AUM CAGR, and 2.7 per cent RoA and 17 per cent RoE, backed by the credible and stable management, will drive a gradual re-rating," it said in its coverage initiation report.   READ STOCK MARKET UPDATES TODAY LIVE 

HDB Financial outlook: Emkay Global view

According to Emkay Global Financial Services, HDB Financial Services' widespread reach, origination capabilities, and improved capital adequacy post-IPO will allow it to capture the credit-demand uptick amid growth stimulation push by the regulator/government, and improve net interest margin (NIM) amid frontloaded repo rate cuts.

 

HDB Financial's focus on the direct origination and collection model, it added, 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, AUM growth, compounding to ₹1.8 trillion over FY25-28E. Plus, better cost of borrowings and moderated credit costs should drive the RoA by FY28E," Emkay Global said.  ALSO READ | Laurus up for 9th straight day, soars 23% in 1 month. What's driving stock?

HDB Financial: A long-term buy

Notably, HDB Financial Services has been able to grow its AUM and pre-provisioning operating profit (PPoP) at a 23.7 per cent and 12.9 per cent CAGR, respectively, over FY23-25, compared to the peer average of 25.3 per cent AUM growth and 19.4 per cent PPoP growth.

 

"We expect that its AUM and disbursement will witness higher growth compared to FY25, led by higher urban and rural consumer demand driven by government's intervention in reducing income tax rates, RBI’s efficient inflation management and expected cuts in GST rates for the overall consumption basket,” said those at Deven Choksey Research in a pre-IPO note.

 

Given that HDB's initial issue was priced at 3.4x TTM P/B, compared to the peer average of 4.4x TTM P/B, the brokerage viewed the stock as "attractively priced" considering its parentage, peer group ROA average, and its growth potential.

 

"Strong parentage and much smaller in size as compared to its core peer (Bajaj Finance) provides a long runway for growth. Additionally, a favourable macro environment will act as a tailwind for the sector in the near to medium term. We remain assertive from a medium to long-term perspective," analysts at Mirae Asset Sharekhan noted.