Emkay Research has initiated coverage on HDB Financial Services (HDBFS) with a resolute BUY call and a 12-month target price of Rs900, representing a 22% upside from the current market price of Rs740. The report positions HDBFS as an exceptionally diversified, retail-focused NBFC, leveraging HDFC Bank’s robust parentage and a seasoned management team to capture the next wave of credit growth in India’s underbanked and rapidly formalizing economy. With a granular loan book, expanding margins, and prudent risk management, HDBFS is forecasted to deliver a 20% CAGR in assets under management (AUM) and a 27% CAGR in earnings per share (EPS) over FY25-28E, underpinned by improving profitability metrics and a scalable operating model. The research underscores HDBFS’s strategic focus on rural and semi-urban markets, its diversified product suite, and its resilience through multiple economic cycles, while also highlighting regulatory risks that could impact its ownership structure and valuation.

Summary of the Investment Thesis

Emkay Research’s BUY recommendation on HDB Financial Services is anchored in:

HDBFS’s status as a large-scale, highly diversified NBFC with over 19 million customers and a granular, risk-mitigated loan book.

Its strategic focus on direct sourcing, rural penetration, and serving the underbanked, driven by a stable, experienced management team.

Favourable macro tailwinds, including an accommodative interest rate cycle and improving credit demand, supporting margin expansion and asset growth.

Strong parentage from HDFC Bank, providing access to low-cost funds, a AAA credit rating, and operational synergies.

A robust risk management framework, prudent underwriting, and a balanced mix of secured and unsecured lending.

Key risks include potential regulatory requirements for HDFC Bank to reduce its stake in HDBFS, which could affect credit ratings and share supply.

Key Investment Highlights

1. Granular, Diversified Lending Platform
HDBFS operates a pan-India, multi-product lending franchise, with a loan book diversified across enterprise lending, asset finance, and consumer finance. Its top 20 accounts constitute just 0.34% of AUM, reflecting minimal concentration risk. Over 70% of branches are located in tier-4 and smaller towns, targeting underserved segments with limited credit history. The company’s direct origination model accounts for 82% of FY25 disbursements, enhancing control over credit quality and customer engagement.

2. Robust Growth and Profitability Outlook
The company is projected to deliver a 20% CAGR in AUM, growing from Rs1.07trn in FY25 to Rs1.86trn by FY28E. EPS is expected to grow at a 27% CAGR, with RoA and RoE improving to 2.7% and 17% respectively by FY28E. This is supported by margin expansion (NIMs rising to 8.1%), moderating credit costs (~2%), and operating leverage from scale.

3. Strong Parentage and Funding Advantage
HDFC Bank’s ownership ensures access to competitively priced capital, a AAA credit rating, and brand trust. HDBFS has not raised external equity since 2017, funding growth through internal accruals and efficient liability management. The cost of borrowings has remained competitive, aided by a diversified funding mix and prudent treasury management.

4. Prudent Risk and Asset Quality Management
The company maintains a sharp focus on asset quality, with 73% of the loan book secured by collateral. Real-time dashboards, early warning systems, and one of the largest in-house collections teams in the NBFC space underpin robust risk controls. GNPA is expected to remain stable at ~2% and NNPA at ~1% by FY28E.

Financial and Valuation Metrics

Below is a snapshot of HDBFS’s key financial projections and valuation benchmarks:

Competitive Positioning Among Peers

HDBFS stands out for its:

Consistent profitability and disciplined growth, even through macroeconomic shocks.

Competitive NIMs and RoEs relative to NBFC peers, supported by a robust risk culture.

Stronger presence in rural and semi-urban markets, where credit penetration remains low.

Prudent cost management and scalable “phygital” distribution model, blending digital innovation with deep on-ground presence.

Key Stock Levels and Investor Targets

Current Market Price (CMP): Rs740
Target Price (TP, Jun-26E): Rs900 (22% upside)
Investment Horizon: 12 months
Valuation Basis: 3.0x FY27E P/BV
Key Metrics for Investors:

RoA: 2.7% (FY28E)

RoE: 17.0% (FY28E)

EPS: Rs55.9 (FY28E)

AUM: Rs1.86trn (FY28E)

Risks and Regulatory Developments

Principal risks include:

Regulatory: RBI’s draft circular (Oct-24) may require HDFC Bank to reduce its stake in HDBFS below 20%, potentially affecting credit ratings and increasing share supply.

Asset quality: Exposure to rural and semi-urban borrowers can heighten vulnerability to economic shocks.

Operational: Risks include cyber threats, keyman risk, and execution challenges in scaling operations.

Bottomline: Why HDBFS Merits a Place in Your Portfolio

In summary, Emkay Research’s BUY call on HDBFS is underpinned by:

A resilient, scalable, and well-diversified lending franchise with a proven track record.

Strong growth prospects, margin expansion, and prudent risk management.

Strategic rural focus and a robust “phygital” distribution network.

Backing from HDFC Bank, ensuring funding stability and operational excellence.

Attractive risk-reward profile at current valuations, with a clear path to value accretion as India’s credit cycle accelerates.

For investors seeking exposure to India’s next phase of retail and MSME credit expansion, HDB Financial Services offers a compelling, risk-mitigated opportunity with robust upside potential.