HDB Financial Services, the non-banking financial company (NBFC) and business process outsourcing (BPO) arm of HDFC Bank, is embarking on a significant capital-raising initiative through an Initial Public Offering (IPO). The company plans to raise a total of Rs 12,500 crore, comprising Rs 2,500 crore through fresh equity to augment its capital base and an additional Rs 10,000 crore via an offer for sale by its parent, HDFC Bank. This move is strategic, aiming to reduce HDFC Bank's stake in HDB Financial Services from 94.3% to 74.2% post-IPO.

Ahead of its public listing, HDB Financial Services successfully raised Rs 3,369 crore from 141 anchor investors. The company allotted 45 million shares to these institutional investors at the upper price band of Rs 740 per share. Notable anchor investors include major financial institutions such as LIC, ICICI Prudential Mutual Fund, and SBI Mutual Fund, among others. The IPO is set to open on June 25, 2025.

HDB Financial Services operates across various lending segments, with 39.3% of its loan book dedicated to enterprise lending, 38% to asset financing (including commercial vehicles and construction equipment), and 22.7% to consumer financing. Its gross loans have demonstrated robust growth, increasing by 23.5% annually to reach Rs 1,06,877.6 crore between FY23 and FY25. Additionally, the company provides BPO services, including back-office and collection services, to HDFC Bank, with this segment contributing Rs 1,216.7 crore to its revenue in FY25, forming 7.5% of its total income from operations.

Despite strong loan growth, HDB Financial Services faces certain challenges regarding profitability metrics when compared to larger peers. The company's net interest income (NII) grew by 17.3% annually to Rs 7,445.6 crore in the three years leading up to FY25. However, net profit for FY25 saw a year-on-year decline of 11.6%, settling at Rs 2,175.9 crore, primarily due to higher credit costs. The net interest margin (NIM) also decreased to 7.6% from 8.3%, and the cost-to-income ratio rose to 42.8% from 39% during the same period. The gross non-performing asset (NPA) ratio stood at 2.3% in FY25, a slight increase from 1.9% in the previous year, though an improvement from 2.7% in FY23.

The company's valuation demands a post-IPO price-to-book (P/B) multiple of up to 3.4 based on FY25 financials, which is discounted compared to larger peers like Bajaj Finance and Cholamandalam Investment and Finance, trading at P/B ratios around 5.8. This lower valuation reflects HDB's comparatively reduced margins and return ratios. Furthermore, potential regulatory changes from the Reserve Bank of India (RBI), which propose to avoid overlap in the businesses of banks with their subsidiaries, are expected to cast an overhang on the company. These guidelines could even prompt banks to divest their stakes, adding a layer of uncertainty. Given these factors, investors are advised to await further clarity post-listing before making investment decisions.