Macquarie: HDB Financial's Valuations Overhyped

Suresh Ganapathy, Managing Director at Macquarie Capital, has highlighted that HDB Financial Services is being valued similarly to Bajaj Finance in the unlisted market, despite having weaker fundamentals. One of the key differences is HDB's return on assets (RoA), which is approximately 30% lower than that of Bajaj Finance. Ganapathy suggests that a fair valuation for HDB Financial Services should be between ₹800 and ₹900 per share, representing a 30% discount to Bajaj Finance's valuation multiples.

The potential impact of HDB Financial Services' IPO on HDFC Bank’s valuation is expected to be minimal. Even if the IPO is priced at the lower end, Ganapathy estimates that the impact on HDFC Bank's stock price would only be around 2% or less of its current market value.

HDB Financial Services has an asset under management (AUM) of ₹1 lakh crore as of H1FY25, with a portfolio heavily skewed towards retail and SME lending. The portfolio includes vehicle finance (47%), loans against property (21%), business loans (15%), and personal loans (12%). Around 29% of the loan book consists of unsecured loans, which is lower than Bajaj Finance but higher than other vehicle finance players.

HDB Financial’s growth has been robust, matching Bajaj Finance with a 29% year-on-year increase in FY24 and 27% growth in H1FY25, driven by a surge in consumer finance loans. However, its net interest margins (NIMs) have contracted by 30-40 basis points from FY22 to FY24 due to rising funding costs. While the increase in consumer finance loans has helped cushion yields to some extent, they remain lower than those of peers like Bajaj Finance and Shriram Finance. This difference is attributed to HDB’s lower share of unsecured loans and a smaller focus on used vehicle financing.

The firm’s return on assets declined from 3% in FY24 to 2.6% in H1FY25, largely due to rising credit costs. Credit costs increased from 1.3% in FY24 to 1.9% in H1FY25, driven by a rise in stage-2 and stage-3 loans, reflecting increased stress in unsecured segments—a trend observed across NBFCs with significant unsecured exposure.

At its current unlisted market price of ₹1,240 per share, HDB Financial Services' FY26F price-to-book ratio stands at 4.6x. In comparison, Bajaj Finance, which delivers a 4% RoA and reported a strong 34% growth in FY24E, trades at a 3.8x FY26E P/B. Shriram Finance, with a 3% RoA, also trades at a significant discount compared to HDB.

If HDB Financial Services is listed at ₹800–₹1,240 per share, this translates to an estimated value of ₹66–₹100 per HDFC Bank share after applying a 20% holding company discount. This range implies only a 1% to 3% potential impact on HDFC Bank’s stock price. Despite concerns about HDB’s fundamentals, Macquarie remains positive about HDFC Bank’s future, reaffirming it as a "marquee buy" with a target price of ₹1,900 per share. Macquarie cites the potential for RoA improvement driven by margin expansion and lower credit costs, supported by HDFC Bank's superior underwriting standards, as key reasons for its bullish outlook.

In summary, while HDB Financial Services shows promising growth, its higher credit costs and weaker RoA make it less attractive compared to Bajaj Finance. Nevertheless, HDFC Bank’s valuation appears resilient, with minimal downside risk from HDB’s IPO, reinforcing its strong long-term investment potential.