Pre-IPO exuberance? HDB Financial unlisted shares valued higher than peers Bajaj Finance, Shriram Finance, despite lower growth and returns

HDB Financial Services is quoting valuations in the unlisted markets, while peers, despite delivering higher ROEs and growth, trade at lower multiples, wrote Suresh Ganapathy, the Managing Director at Macquarie Capital.

At a price of Rs 800, HDB Financial would trade at 3.0x P/BV, representing a ~30 percent discount to Bajaj Finance. However, based on the traded price of Rs 1,240, the implied valuation is FY26F P/B of 4.6x, said Macquarie.

HDB Financial Services: Key Metrics

AUM/Loan Book
The firm's total AUM stands at Rs 1 lakh crore as of H1FY25, with a diverse AUM mix, predominantly focused on retail and SME lending. Its portfolio includes vehicle finance (47 percent), loans against property (21 percent), business loans (15 percent), and personal loans (12 percent). About 29 percent of its loans are unsecured, lower than Bajaj Finance but higher than most vehicle finance peers.

Growth
HDB's growth is at par with Bajaj Finance, with a strong growth of 29 percent on-year in FY24 and 27 percent YoY growth in H1FY25, driven by a surge in consumer finance loans.

NIMs narrow
From FY22-24, HBD Financial Services' NIMs have narrowed by ~30-40 basis points, which is driven by an increase in the cost of funds. This trend is in line with top-rated NBFCs, noted Ganapathy.

"There has been some cushion on the yield front, on account of strong growth in consumer finance loans, but yields are lower than at peers like Bajaj Finance,  which is attributable to a smaller unsecured mix, and Shriram Finance, which we believe is due to a relatively lower share of used vehicles."

Credit Costs, RoAs
The return on asset for HDB Financial Services fell in H1FY25 to 2.6 percent, compared to 3 percent in Fy24, driven by higher credit costs.

The credit cost for HDB Financial Services rose form 1.3 percent in FY24 to 1.9 percent in H1FY25, driven by a rise in stage-2 and stage-3 loans. This is due to increase in stress in unsecured segments, a trend consistent across peers with unsecured exposure.

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Valuations for HDB Financial Services based on its current price in the unlisted market of Rs 1,240 per share imply FY26F P/B of 4.6x. "We note that peers, despite delivering higher ROEs and growth, trade at lower multiples," added the note.

Players like Bajaj Finance, that have the potential to deliver 4 percent ROA and strong growth (34 percent in FY24E), still trade at 3.8x FY26E P/BV. Players like Shriram Finance have the potential to deliver 3 percent ROA, still trade at a discount compared to HDB

Impact on HDFC Bank

Instead of its unlisted market price, if HDB Financial Services shares are valued at Rs 800 per share, there would be a minimal impact on HDFC Bank's stock price.

Assuming that HDB Financial is listed at between Rs 800 and Rs 1,240, which would mean a fair value of Rs 66–Rs 100 per HDFC Bank share (after a 20 percent holding company discount), this implies a 1-3 percent impact on the current market price of HDFC Bank, according to the Macquarie Research note.

The broking firm reaffirmed its bullish view on HDFC Bank, noting that it is a "Marquee buy idea", with a target price of Rs 1,900 per share. The potential for ROA improvement driven by margin expansion and the potential to deliver relatively lower credit costs given best-in-class underwriting standards make it a good bet.

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