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Emkay Global's optimistic outlook on HDB Financial Services stems from a confluence of factors, primarily rooted in the company's robust business model and favorable macroeconomic conditions. The brokerage firm initiated a 'Buy' rating on HDB Financial Services ahead of its stock market listing, setting a share price target of Rs 900. This target reflects a projected 22% upside from the issue price of Rs 740 per share. Emkay's valuation is based on an estimated FY27 book value of 3 times, indicating confidence in the company's future performance and growth trajectory. The rationale behind this positive assessment is multifaceted, encompassing HDB Financial Services' diversified lending portfolio, granular asset management, and strategic focus on underserved segments. The company's ability to navigate multiple credit cycles, including the disruptive COVID-19 pandemic, underscores its resilience and adaptability. The success is also attributed to a bottom-up approach, suggesting a strong operational foundation and meticulous attention to detail. This approach contrasts with top-down strategies that may be more susceptible to macroeconomic shocks or unforeseen events. HDB Financial Services' emphasis on direct sourcing (82% of FY25 disbursements) provides greater control over its lending processes and reduces reliance on intermediaries. This direct engagement allows for a more thorough assessment of borrowers' creditworthiness and mitigates potential risks associated with indirect lending channels. Moreover, the company's focus on remote areas, with 70% of its branches located in tier 4 towns and beyond, demonstrates a commitment to financial inclusion and tapping into underserved markets. By serving low-to-mid-income groups with limited or no credit history, HDB Financial Services fills a critical gap in the financial ecosystem. The experience and stability of the top management team, with most members having been with HDBFS for over 10 years, further reinforces the company's credibility and operational efficiency. Their long tenure reflects a strong conviction in the company's mission and a consistent approach to achieving its goals. Furthermore, the current macroeconomic environment presents a favorable backdrop for HDB Financial Services' growth prospects. An anticipated interest rate cycle characterized by frontloaded repo rate cuts is expected to drive net interest margin (NIM) expansion. This NIM expansion, coupled with credit cost moderation and an improved growth outlook, positions HDB Financial Services to enhance its profitability. The company is projected to achieve a 2.7% return on assets (ROA) and a 17% return on equity (ROE) by March 2028, demonstrating its potential for sustained and profitable growth. The NBFC is also expected to deliver a 20% asset under management (AUM) and a 27% earnings per share (EPS) compound annual growth rate (CAGR) over FY25-28E, highlighting its strong growth momentum and potential for value creation.
The unlisted market has already reacted positively to HDB Financial Services' impending stock market debut. The unlisted stock was trading at Rs 811 apiece, commanding a grey market premium of 9.59%. This premium suggests strong investor demand and hints at a decent listing pop upon its official market entry. The grey market premium serves as an indicator of market sentiment and expectations, reflecting the perceived value of the stock relative to its issue price. A higher premium typically indicates greater investor enthusiasm and a higher likelihood of a positive initial trading performance. Emkay Global attributes a significant portion of HDB Financial Services' success to its parentage, HDFC Bank. HDFC Bank's backing has provided the company with several key advantages, including access to funding at competitive rates (AAA rating), a strong brand reputation, and a robust operational framework. These factors have enabled HDB Financial Services to scale its operations and become a significant lender in the Indian financial landscape. The synergy between HDFC Bank and HDB Financial Services has fostered a culture of excellence and a commitment to serving the underserved. HDB Financial Services' ability to cater to lower-to-mid-income groups in remote areas with limited or no credit history is a testament to its innovative business model and its understanding of the Indian market. The company's promoters and top management have demonstrated unwavering conviction in this approach, leading to impressive execution and a hallmark of its parent company, HDFC Bank. This focus on the underbanked and unbanked segments of the population has enabled HDB Financial Services to tap into a vast and largely untapped market. By providing access to financial services to these segments, HDB Financial Services plays a crucial role in promoting financial inclusion and driving economic growth at the grassroots level. This focus on 'enterprise Bharat' aligns with the government's efforts to empower small businesses and entrepreneurs in rural areas.
HDB Financial Services has successfully built a lender at scale, serving over 19 million customers across 1,770 branches in 31 states and union territories. Its AUM stands at over Rs 1.1 trillion, a remarkable achievement considering the various challenges the company has faced over the years. Despite shocks from demonetization, GST implementation, and the COVID-19 pandemic, which significantly impacted HDB Financial Services' borrower segments, the company has maintained consistent profitability since 2009-10 and has not raised any external capital since 2017. This financial resilience is a testament to the company's prudent risk management practices and its ability to adapt to changing market conditions. HDB Financial Services' diversified product mix and its continued focus on overlooked segments are expected to support steady AUM growth of 20%, compounding to Rs 1.8 lakh crore over FY25-28E. The company's diversified product portfolio allows it to cater to a wide range of customer needs and reduces its reliance on any single product or market segment. This diversification enhances its resilience and reduces its exposure to sector-specific risks. Furthermore, better cost of borrowings and moderated credit costs are expected to drive the ROA to 2.7% by FY28E. The company's ability to secure funding at competitive rates and manage its credit costs effectively is crucial for maintaining its profitability and competitiveness in the market. In conclusion, Emkay Global's positive outlook on HDB Financial Services is based on a comprehensive assessment of the company's business model, financial performance, and growth prospects. The brokerage firm believes that the company's strong fundamentals, favorable macroeconomic conditions, and experienced management team position it for sustained success in the Indian financial services industry. The projected 20% AUM CAGR and 2.7%/17% ROA/RoE, backed by credible and stable management, are expected to drive a gradual re-rating of the stock. Emkay initiated coverage on HDB Financial Services with a 'BUY' rating and a June-26E target price of Rs 900, implying a 22% upside. This target price is based on a valuation of 3.0 times FY27E P/B, reflecting Emkay's confidence in the company's long-term growth potential.
Source: HDB Financial Services share price target at Rs 900, says Emkay ahead of stock listing; here's why