Emkay Global sees 22% upside for HDB Financial shares from IPO's upper price band

A key risk for the NBFC is the RBI’s October 2024 draft circular.

Even ahead of its listing, domestic brokerage Emkay Global initiated coverage on non-bank HDB Financial Services with a bullish outlook, given the bank's granular customer base, diversification, and its large-scale.

Emkay Global's positive view comes following HDB Financial Services' being a highly diversified (geographically and product-wise), extremely granular (top 20 accounts constitute ~0.34 percent  of AUM), and large-scale lending franchise with over 1.9 crore customers. It has seen multiple credit cycles, Covid, and built from scratch with a bottom-up approach.

The brokerage issued a 'buy' call, with a target price of Rs 900 per share, which implies a 22 percent upside from the upper price band of Rs 740.

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Further, HDFC Bank’s parentage provided HDBFS with the right ingredients (best price, quantum of funds (AAA rating), and strong brand visibility) to become a meaningful lender at scale. This led to HDBFS becoming a lender at scale with over 19mn customers spread over 1,770 branches across 31 states and union territories, with over Rs 1.1 lakh crore AUM.

"HDB Financial’s widespread reach, origination capabilities, and improved capital adequacy post-IPO allow it to capture the credit-demand uptick amid growth stimulation push by the regulator/government, with improving NIM amid frontloaded repo rate cuts," said the brokerage.

Further, the NBFC's focus on the direct origination and collection model results in higher operating expenditure, which should also support relatively higher net yields. Overall, the diversified product mix and continued focus on the overlooked segments should support steady, ~20 percent AUM compounding to Rs 1.8 lakh crore over FY25-28.

Plus, better cost of borrowings and moderated credit costs should drive the RoA to ~2.7 percent (mid-level of FY24 and FY25 RoA) by FY28E, expects Emkay.

A key risk is the RBI’s October 2024 draft circular,  which demands no overlap in business between the bank and its subsidiary. If this is adopted, then HDFC Bank might have to reduce its ownership in HDB Financial Services to under 20 percent within a specified duration.

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