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.
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Motilal Oswal Report
We initiate coverage on HDB Financial Services Ltd. with a Neutral rating and a target price of Rs 860 (premised on 2.7x Sep'27E P/book value). 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.
HDB Financials offers a play on India's high-growth, underpenetrated retail lending market. With an AUM of ~Rs 1.1 trillion and ~20 million 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.
Key risks:
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;
execution risk remains in translating scale into sustained profitability, as operating efficiency metrics currently lag peers;
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
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.
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