The recently listed NBFC major, HDB Financial Services, is in focus. The share price is down 5% from the levels it listed at, but Jefferies sees significant room for upside. The international brokerage house initiated coverage on HDB Financial Services with a Buy rating. They have a target price of Rs 900 per share and this implies an upside of 19% from current levels.
According to Jefferies, “HDB, a subsidiary of HDFC Bank, has built a moat with a diversified portfolio, deep distribution, large customer base and a competitive cost of funds,” and they believe that this should “support valuations and drive returns.”
Even though FY26 is expected to show subdued metrics for the list of finance sector stocks, they believe HDB Financial’s “franchise can deliver 18% AUM growth annually on a compounded basis between FY25-FY28. They expect the ROE to improve to 16% by FY28 from 13% in FY26.
Jefferies on HDB Financial: Well-rounded lending franchise
According to Jefferies, HDB Financial, with AUM of Rs 1.1 trillion, offers a granular portfolio of 13 loan products across three verticals (vehicle, MSME and consumer finance). They have a deep distribution network of 1,771 branches (80%+ outside top 20 cities) and 140k dealer touch-points across India.
Jefferies highlighted that funding cost is competitive given its AAA rating and strong HDFC Bank parentage (HDFC Bank holds a 74.19% stake) and its 20 million customer base offers potential to cross-sell.
Jefferies on HDB Financial: AUM growth to improve H2 onward
HDB Financial’s AUM grew 20% CAGR over FY22-25, but the NBFC saw growth moderate to “14% as of Q1FY26 Vs 19% in FY25.This is due to weak demand in its key segments. Though Jefferies expects the “near-term trends to remain soft but growth should stabilise in H2 and improve in FY27.”
Jefferies expects the pick-up in economic activity and rural demand on the back of “a good monsoon and onset of festive season.” Network expansion and scale-up of new products (like gold loans) should also aid growth. According to them, the “AUM may grow at 19% CAGR over FY26-FY28 Vs 15% growth in FY26.”
Jefferies on HDB Financial: NIMs to expand by 30 bps over FY25-FY28
Not just the AUM, Jefferies sees HDB Financial‘s NIM to also expand to 7.8-7.9% over FY25-FY28 due to easing rates and some change in loan mix. “77% of its advances are fixed-rate loans, and 39% of liabilities are floating rate.”
They believe “Opex ratios (3.8% of assets) can improve slightly over FY25-28e on operating leverage benefits.”
Jefferies also pointed out that credit cost may moderate on the back of “an increase in stress in unsecured (esp. MSME BL) and CV loans due to slow economic activity, subdued utilisation & unseasonal rains.”
Asset quality environment is tough, but a potential pick-up in activity levels post-monsoon, tax cut benefits & lower rates may ease the pressure in H2, as per Jefferies. They expect credit cost to moderate to 2% by FY28 from 2.3% in FY26.