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Choice Stock Broking

HDB Financial Services is pricing its IPO 30%-40% lower than the unofficial market rate, aiming to raise INR2,500 crore through fresh equity and INR10,000 crore through an offer for sale by HDFC Bank, which will reduce HDFC's stake from 94.3% to 74.2%. Despite steady growth in interest income, the company faces challenges with profitability due to interest rate volatility and reported a decline in net profit for FY25. Regulatory uncertainties from proposed RBI guidelines may impact investor sentiment and HDFC Bank's future stake reduction.

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9 views2 pages

Choice Stock Broking

HDB Financial Services is pricing its IPO 30%-40% lower than the unofficial market rate, aiming to raise INR2,500 crore through fresh equity and INR10,000 crore through an offer for sale by HDFC Bank, which will reduce HDFC's stake from 94.3% to 74.2%. Despite steady growth in interest income, the company faces challenges with profitability due to interest rate volatility and reported a decline in net profit for FY25. Regulatory uncertainties from proposed RBI guidelines may impact investor sentiment and HDFC Bank's future stake reduction.

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The pricing

Let’s start with the IPO pricing. The management has


shown that investors in the unlisted market were overly
exuberant. By pricing the issue 30%-40% lower than the
unofficial market rate, they have left some room for
upside. However, even at this discounted level, the
valuation is broadly in line with the listed peers – making
it appear fairly, not cheaply, priced.

“At the higher price band, the issue is valued at a P/BV


of 3.4x (based on post-issue BVPS), which is in line with
the peer average, making the issue appear fully priced,”
says Rajnath Yadav, analyst at Choice Stock Broking.
“While the company has delivered steady growth in
interest income driven by the expansion of its gross loan
book, profitability has been impacted by interest rate
volatility. The NIM (net interest margin) has been under
pressure and remains lower compared to peers.”

HDB Financial Services plans to raise INR2,500 crore


through fresh equity to augment its capital base and
another INR10,000 crore through an offer for sale by
HDFC Bank. Post-IPO, the parent’s stake will fall from
94.3% to 74.2%.

The company reported a decline in net profit for FY25


due to higher credit costs, even as most of its peers
posted profit growth. This underperformance is reflected
in the relatively lower valuation of the IPO.

Meanwhile, draft guidelines proposed by the Reserve


Bank of India (RBI) to curb business overlap between
banks and their subsidiaries could weigh on sentiment, if
implemented. These regulations may eventually prompt
HDFC Bank to further reduce its stake. Given these
uncertainties, investors might prefer to wait for greater
regulatory clarity, which could take years to play out.

The business
Incorporated in 2007 as an NBFC, the company serves
underbanked customers and operates majority of its
branches in non-metro regions, with 1,771 branches
across the country.

HDB provides lending to enterprises (39.3% of the loan


book), asset financing including commercial vehicles,
tractors, construction equipment (38%), and consumer
financing including purchase of consumer durables,
automobiles, and lifestyle products (22.7%).

The company has consistently delivered double-digit


gross loan growth in each of the three fiscal years
leading up to FY25. Its gross loans increased by 23.5%
annually to INR106.877.6 crore between FY23 and
FY25. Disbursements rose by 21.4% to INR66,107.5
crore during the period.

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