HDB FINANCIAL SERVICES LIMITED

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 HDB FINANCIAL SERVICES LIMITED (HDB)

1) Background and Business

Incorporated in 2007, HDB Financial Services Ltd (HDB) is a subsidiary of HDFC Bank Ltd, which holds 95.53% stake in the
company. HDB is an NBFC which offers 4 key products namely – Vehicle Finance, LAP, Unsecured Business Loans and
Other retail loans. Within these 4 key segments it offers gold loan, auto loan, digital products loans, loan against securities (LAS),
Commercial Vehicle (CV) and Construction Equipment (CE) financing, tractor loans, etc. It has a gross loan book of Rs.547bn as
of March 2019.
Besides its lending business, HDB is also a registered corporate insurance agent wherein it sells life and general insurance products
of HDFC Standard Life and HDFC Ergo General Insurance Company. HDB also runs BPO collection services for its parent,
HDFC Bank Ltd. HDB derives major part of its revenue from its lending business (77% of revenue in FY19), followed by BPO
business (19%) and rest from fee income, including income from distribution of insurance products. The company operates through
a network of 1,350 branches across 961 cities in India.
Revenue break up FY19 (Rs. mn) % contribution
Lending business 67,121 77%
BPO services 16,481 19%
Other income (inc. distribution income from insurance, treasury and fee income) 3,646 4%
Total 87,248 100%

Loan Book break up FY19 (Rs. mn) % contribution

Loan Against Property (LAP) 191,483 35%
Vehicle Finance 224,309 41%
Unsecured Business Loans 114,890 21%
Other retail loans 16,413 3%
Total 547,094 100%

Key Product Segments:

HDB reports income under three heads namely – lending business, BPO collection services and non-interest income, including fee
on distribution of insurance products. Key offerings in each product segment are detailed below:
1. Lending business: As part of its lending business, it offers Loan against property (LAP), Vehicle Finance, Unsecured
Business Loans and other retail loans.
Size of Operation of lending business:

Particulars FY14 FY15 FY16 FY17 FY18 FY19 3 yr CAGR 5 yr CAGR

Loan Book (Rs. mn) 133,875 189,891 244,096 340,709 442,683 547,094 31% 32%

 Vehicle finance loans (41% of loan book) – Under this category, it provides commercial vehicle loans (new, used,
refinancing of existing vehicles), construction equipment loans (new, used, refinancing of existing equipment) and
financing for new and used tractor loans.
 Loan against property (35% of loan book) – It provides loan against property to SMEs. Share of this segment has
come down from 60% in FY16 to 35% in FY19 as it diversifies its book.
 Unsecured business loans (21% of loan book) – HDB provides loans to SMEs for working capital, setting up of
machinery, etc. under this segment.
 Other retail loans – HDB has recently expanded its product portfolio and provides a wide array of products like
consumer durable loans (washing machine, refrigerators, televisions, household appliances, etc.), digital products
loans (mobiles, laptops, etc.), gold loan, auto loan, personal loans and loan against mutual fund units.

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2. Sale of insurance products: Company is a registered corporate insurance agent and has license from IRDAI, which is
valid for next three years. It sells life and general insurance products of HDFC Standard Life Insurance Company Ltd. and
HDFC Ergo General Insurance Company Ltd.
3. BPO services: The company provides sales support services, back office, operations and processing support to its parent
HDFC Bank. It has set up 15 call centers with a capacity of over 5,000 seats. These centers provide collection services for
all the retail products of HDFC Bank in 750 cities through its calling and field support teams. In FY17, company
amalgamated with HBL Global Pvt. Ltd. (HBL) and Atlas Documentary Facilitators Company Pvt. Ltd. (ADFL), which
offered marketing and collection services to HDFC Bank. Post the merger, revenue from this segment has grown at a
CAGR of 11% in the last 2 years.

2) Promoters background and Management details

HDB is promoted by HDFC Bank Ltd, which holds 95.53% stake in the company. Mr. Aditya Puri is the Chairman and
non-executive Director of the company. He has more than 4 decades of experience in the banking industry and has been
instrumental in setting up HDFC Bank as its MD and CEO. The bank has made consistent progress on key parameters like
balance sheet size, total deposits, net revenues, earnings per share and net profit under his leadership. Mr. Ramesh G is the
Managing Director and CEO of HDB. He has previously worked with HDFC Bank Ltd. (1999-2004) as Vice President.
Mr. Bhavesh Zaveri and Mr. Jimmy Tata, who are working in the capacity of Non-Executive Director on the board of
HDB, are also currently board members of HDFC Bank Ltd. The board of HDB is also represented by 3 independent
directors namely Dr. Amla Samanta, Ms. Smita Affinwalla and Mr. Venkatraman Srinivasan.

Board of Directors

Management With HDB

Designation Brief Profile and Prior Experience Qualification
Team since

- Mr. Puri is the MD and CEO of HDFC Bank since

its inception. He has more than 4 decades of
Chairman and Non- experience in the banking industry. - Chartered
Mr. Aditya Puri Inception
Executive Director Accountant
- Prior to setting up HDFC Bank, he was the CEO of
Citi Bank.

- Mr. Ramesh has more than 2 decades of

experience in the industry. He was working as a - BE from Annamalai
Managing Director & VP with HDFC Bank Ltd. University
Mr. Ramesh G Inception
CEO PGDM from IIM
- He has previously worked as COO with Intelenet Lucknow
Global Services.
- Mr. Bhavesh is the Head of Operations &
Technology at HDFC Bank Ltd. and has more
than 2 decades of experience in the banking - M Com. from University
industry. of Mumbai
Non-Executive
Mr. Bhavesh Zaveri N.A. - Certified Associate of
Director - He is also on the board of The Clearing Corp. of the Indian Institute of
India Ltd., HDB Financial Services Ltd. and Bankers.
National Payments Corp. of India Ltd. and
Associate for Indian Institute of Banking &
Finance. He has also worked as Principal at
Barclays Bank.
- Mr. Jimmy has more than 3 decades of
experience in the banking industry and works as
Non-Executive Chief Risk Officer in HDFC Bank. - MBA from JBIMS
Mr. Jimmy Tata N.A.
Director - CFA from ICFAI
- He also serves on the board of International Asset
Reconstruction Co. Pvt Ltd.

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3) Business Drivers
 Support from parent – HDFC Bank Ltd holds 95.53% stake in HDB. Besides providing funding support, HDFC Bank
also provides operational and managerial oversight. This gives comfort on the overall risk management and credit policies
followed by HDB. Presence of top managerial personnel of HDFC Bank on HDB board also ensures close monitoring of
company’s performance on day to day basis. Further, HDB provides integral support to its parent in its collection and
marketing activities, making HDB strategically important to HDFC Bank.
 Increasingly diversifying loan book with retail focus – HDB has a diversified loan book with Vehicle Finance, LAP
and Unsecured Business Loans constituting 97% of the book. Company is diversifying its loan book by venturing into
several other retail segments like gold loan, auto loan, digital products loans, loan against securities, personal loans, loan
against lease rental, auto refinance, etc. Contribution from LAP has come down significantly from 60% in FY16 to ~35%
in FY19. Loan book has grown at a CAGR of 31% and 33% in the last 3 and 5 years, respectively. Break up of loan book
is as follows:
Particulars (Rs. mn) FY13 FY16 FY19 3 yr CAGR
LAP 46,351 146,458 191,483 9.3%
% contribution to loan 57% 60% 35%
Vehicle Finance 24,447 51,260 224,309 63.6%
% contribution to loan 30% 21% 41%
Unsecured Business Loans 8,860 36,614 114,890 46.4%
% contribution to loan 11% 15% 21%
Other retail loans 2,379 9,764 16,413 18.9%
% contribution to loan 3% 4% 3%
Total 82,037 244,096 547,094

 Strong growth with improvement in return parameters – Company has grown its loan book at a CAGR of 31% in the
past 3 years and has also consistently expanded its NIM due to change in product mix and portfolio diversification. Strong
growth in total income along with productivity improvement has led to improvement in return parameters. RoA and RoE
have improved from 1.9% and 13.1% in FY17 to 2.0% and 16.1% in FY19, respectively.
 Adequately capitalized – Company is adequately capitalized with CAR of 17.9% as against the regulatory requirement
of 15% and tier 1 at 12.8%. Company even made a rights issue in FY17 to the tune of Rs.10.9bn taking its CAR to
20.79% in FY17. Thus, given its strong parentage, company has been easily able to raise funds to support growth.
 Strong credit rating – Given the linkage with its parent and strong earnings momentum, company has received highest
credit rating of AAA from both Crisil and CARE for its debt instruments.

4) Key risks
 Asset quality – HDB’s asset quality has witnessed some deterioration in the last 3 years, specifically in the vehicle
finance segment, which has seen higher delinquencies. Absolute GNPA has increased by 36% YoY in FY19 to
10.0bn and as a % to loans stood at 1.83% from 1.67% in FY18.
 Change in product mix – HDB’s loan book had higher proportion of LAP at 60% in FY16, which has come down to
~35% in FY19 and is also expanding its portfolio in consumer durable space. Going forward, loan book growth can
vary depending on mix change.
 NIM pressure – Change in product mix can also lead to quarterly fluctuations in yields, which can impact NIM
trajectory.

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 5) Historical Financial Performance and Analysis
FY16-19 FY14-19
Key parameters (Rs. mn) FY14 FY15 FY16 FY17 FY18 FY19
CAGR CAGR
Balance Sheet:
Loan Book 133,875 189,891 244,096 340,709 442,683 547,094 30.9% 32.5%
YoY growth % 63% 42% 29% 40% 30% 24%
Net worth 16,285 31,251 35,618 52,089 60,404 71,785 26.3% 34.5%
YoY growth % 86% 92% 14% 46% 16% 19%
Profit & Loss:
NII 5,907 9,288 14,445 20,372 28,822 33,788 32.7% 41.7%
YoY growth % 89% 57% 56% 41% 41% 17%
NIMs on loans % 4.4% 4.9% 5.9% 6.0% 6.5% 6.2% Avg. 6.2% Avg. 5.9%
Other income 2,067 2,511 2,860 16,243 16,958 20,127 91.6% 57.6%
- Income from BPO services 664 743 799 13,291 15,290 16,481 174.3% 90.1%
-Other income (inc. insurance
1,404 1,768 2,062 2,952 1,668 3,646 20.9% 21.0%
distribution, treasury and fee income)
Total income 7,975 11,800 17,305 36,614 45,781 53,915 46.1% 46.6%
YoY growth % 77% 48% 47% 112% 25% 18%
Cost to Income Ratio % 44.3% 40.5% 41.5% 61.9% 57.2% 56.2% Avg. 58.4% Avg. 51.5%
PPOP 4,439 7,019 10,121 13,950 19,609 23,610 32.6% 39.7%
YoY growth % 109% 58% 44% 38% 41% 20%
Provisions 1,259 1,717 1,942 3,396 5,248 6,369 48.6% 38.3%
Credit Cost % 0.94% 0.90% 0.80% 1.00% 1.19% 1.16% Avg. 1.1% Avg. 1.0%
ETR % 34.2% 34.1% 34.7% 35.5% 35.0% 33.1% Avg. 34.5% Avg. 34.5%
PAT 2,092 3,495 5,344 6,810 9,330 11,532 29.2% 40.7%
YoY growth % 104% 67% 53% 27% 37% 24%
Ratios:
EPS (Rs.) 2.7 4.4 6.8 8.7 11.9 14.7 29.2% 40.7%
BV (Rs.) 21 40 45 66 77 91 26.3% 34.5%
GNPA % 0.81% 0.84% 1.23% 1.89% 1.67% 1.83%
NNPA % 0.42% 0.48% 0.73% 0.84% 1.12% 1.24%
RoA (%) 1.5% 1.8% 2.1% 1.9% 2.1% 2.0% Avg. 2.0% Avg. 2.0%
RoE (%) 12.8% 11.2% 15.0% 13.1% 15.4% 16.1% Avg. 14.9% Avg. 14.2%
Leverage (xs) 8.4 6.3 7.1 6.8 7.5 7.9 Avg. 7.4 Avg. 7.1

Parameter Commentary on historical performance

 Company has presence in 4 key segments, where vehicle financing and LAP constitute majority of the book
Loan Book – CAGR (approx. 75%). Loan book has grown at a strong rate of 31% in the past 3 years (33% in 5 yrs). Company is also
venturing into other retail loans like gold loan, digital products loan, loans for appliances, personal loans, etc.
 NII growth has been higher than loan book growth at 33% and 42% in the last 3 and 5 years, respectively as
NII– CAGR NIMs have expanded from 4.4% in FY14 to 6.2% in FY19. NIM expansion is mainly because of change in
NIMs product mix towards vehicle financing and unsecured business loans. Share of LAP has come down from 60% in
FY16 to 35% in FY19, while share of vehicle finance and unsecured BL has increased to 62% from 36% in
FY16.
 Income from this business contributed 19% to the revenue in FY19 from 2% in FY16. Growth was higher post
BPO income
FY17 due to merger with HBL and ADFC.

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 Parameter Commentary on historical performance
 CI ratio was in line with industry peers till FY17. However, due to merger with ADFC and HBL’s BPO business,
Cost to Income (C/I) ratio employee count increased significantly leading to higher operating expenses. However, it has been declining
since FY17, reflecting productivity improvement.
 Asset quality has witnessed some deterioration in the recent past due to stress in the vehicle finance business.
Credit Cost - Avg/ Provisions Provisions have grown at 49% in the past 3 years (38% in 5 yrs). However, overall GNPA remains much better
than peers.
 PAT has grown at a CAGR of 29% in the last 3 years (41% in 5 yrs) driven by strong loan book growth, NIM
PAT - CAGR
expansion and operating efficiency.
 Return metrics have consistently shown improvement over the years with average RoA of 2.0% and RoE of
Return Metrics
14.2% in the last 5 years.

6) Peer Analysis
HDB has presence in diverse segments in the lending business like Vehicle finance, LAP, Unsecured business loans and other
retail loans. We have compared NBFCs having presence in these segments. Cholamandalam Investment & Finance Co Ltd.
Mahindra Finance and Shriram Transport are vehicle financiers, Bajaj Finance has presence in LAP, consumer durable and SME
loans, while L&T Finance Holdings has exposure towards LAP, tractor loans, etc. Further, all these companies also have a strong
promoter background and parentage.
We have compared the above-mentioned companies based on the following parameters:
 Loan book composition and size – Loan book composition determines yields and size of the book helps in
determining position in the industry.
 NIM – Ability to pass on interest rates, presence in high yielding segments and control on cost of funds determines
NIM trajectory.
 Asset quality – Robustness of risk management policies and strong underwriting skills and exposure towards high
risk segments determine asset quality.
 Return parameters – Companies with presence in high yield segments, having control on asset quality and
operational efficiency have better return ratios.
Summary table:
Company Name Net interest income Loan book PAT
(Rs. mn) YoY YoY
FY18 FY19 FY18 FY19 FY18 FY19 YoY Growth
Growth Growth
HDB Financial 28,822 33,788 17% 442,683 547,094 24% 9,330 11,532 24%
Bajaj Finance 69,716 97,252 39% 791,030 1,125,130 42% 24,964 39,950 60%
L&T Finance 44,292 51,052 15% 853,540 991,210 16% 12,784 22,320 75%
Chola 28,174 33,973 21% 422,530 526,220 25% 9,183 11,862 29%
MMFS 35,287 47,004 33% 485,470 612,496 26% 10,761 15,571 45%
Shriram transport 68,350 78,976 16% 961,984 1,023,075 6% 24,603 25,587 4%

Ratios:
Company Name (Rs. CI Ratio NIM Credit Cost GNPA ROA ROE
mn)
FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19
HDB Financial 57% 56% 6.5% 6.2% 1.2% 1.2% 1.7% 1.8% 2.1% 2.0% 15.4% 16.1%
Bajaj Finance 40% 35% 8.8% 8.6% 1.3% 1.3% 1.4% 1.5% 2.9% 3.2% 15.8% 20.3%
L&T Finance 29% 30% 5.8% 6.5% 2.4% 1.5% 8.3% 5.6% 1.5% 2.1% 11.2% 16.6%
Chola 39% 37% 6.7% 6.5% 0.8% 0.6% 3.1% 2.4% 2.1% 2.1% 18.0% 19.2%
MMFS 40% 38% 7.3% 7.7% 1.2% 1.0% 10.4% 6.6% 2.0% 2.3% 11.2% 14.3%
Shriram transport 23% 23% 7.1% 7.7% 1.8% 2.3% 7.7% 6.9% 2.5% 2.4% 20.3% 16.2%

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Key takeaways from peer analysis:
 Loan book composition and size – HDB has a well-diversified loan book with presence across LAP, vehicle finance,
business loans and is now diversifying in the consumer durable space. This helps in de-risking the portfolio by avoiding
portfolio concentration. In terms of loan book size, it is comparable with peers, while maintaining growth of 33% in the
last 5 years.
 NIM – NIM, although appearing on the lower end when compared to peers, has shown improvement over the years due to
increasing presence in high yielding retail segment.
 Asset quality – Due to linkage with its parent HDFC Bank, company has similar risk assessment capabilities and hence,
asset quality is better than peers with GNPA at 1.8% in FY19.
 Return parameters – Considering its loan book growth, better asset quality and control on costs, company has been able
to maintain its RoA and remains in line with peers (Bajaj Finance has higher RoA due to large retail presence).
Valuation comparison of peers:
Bajaj March
52 week 52 week
1 Finance ending price EPS (Rs.) BV (Rs.) P/E (xs) P/BV (xs)
High (Rs.) Low (Rs.)
Ltd. (Rs.)
High Low Close High Low Close
FY15 448 167 410 15.5 83 28.9 10.8 26.5 5.4 2.0 4.9
FY16 698 394 693 22.0 128 31.7 17.9 31.4 5.5 3.1 5.4
FY17 1,205 677 1,174 31.7 155 38.0 21.4 37.1 7.8 4.4 7.6
FY18 1,989 1,153 1,770 43.0 273 46.2 26.8 41.1 7.3 4.2 6.5
FY19 3,035 1,770 3,025 68.9 340 44.1 25.7 43.9 8.9 5.2 8.9
5 yr Avg 37.8 20.5 36.0 7.0 3.8 6.7

March
52 week 52 week
2 Chola ending EPS (Rs.) BV (Rs.) P/E (xs) P/BV (xs)
High (Rs.) Low (Rs.)
price (Rs.)
High Low Close High Low Close
FY15 123 56 118 5.6 41 22.2 10.0 21.1 3.0 1.4 2.9
FY16 151 108 143 7.3 47 20.8 14.9 19.6 3.2 2.3 3.1
FY17 249 139 193 9.2 55 27.1 15.2 21.0 4.5 2.5 3.5
FY18 302 193 290 11.7 65 25.7 16.4 24.7 4.6 3.0 4.4
FY19 352 208 290 15.2 79 23.2 13.7 19.1 4.5 2.6 3.7
5 yr Avg 23.8 14.0 21.1 4.0 2.4 3.5

L&T 52 week 52 week March ending EPS

3 BV (Rs.) P/E (xs) P/BV (xs)
Finance High (Rs.) Low (Rs.) price (Rs.) (Rs.)
High Low Close High Low Close
FY15 83 60 63 4.1 31 20.3 14.6 15.4 2.7 2.0 2.1
FY16 75 48 64 4.1 33 18.2 11.8 15.5 2.3 1.5 1.9
FY17 124 64 123 5.0 33 24.9 12.7 24.8 3.7 1.9 3.7
FY18 214 119 157 6.1 55 34.9 19.5 25.7 3.9 2.2 2.9
FY19 190 111 152 10.7 64 17.7 10.4 14.3 2.9 1.7 2.4
5 yr Avg 23.2 13.8 19.1 3.1 1.8 2.6

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 March
Mahindra 52 week 52 week
4 ending EPS (Rs.) BV (Rs.) P/E (xs) P/BV (xs)
Finance High (Rs.) Low (Rs.)
price (Rs.)
High Low Close High Low Close
FY15 345 230 254 13.5 92 25.6 17.0 18.8 3.8 2.5 2.8
FY16 294 173 243 10.9 99 27.0 15.9 22.3 3.0 1.8 2.5
FY17 405 232 315 6.5 105 23.3 35.8 48.6 3.9 2.2 3.0
FY18 524 290 462 17.4 156 30.1 16.7 26.5 3.4 1.9 3.0
FY19 538 351 421 25.2 177 21.3 13.9 16.7 3.0 2.0 2.4
5 yr Avg 25.5 19.9 26.6 3.4 2.1 2.7

March
Shriram 52 week 52 week
5 ending EPS (Rs.) BV (Rs.) P/E (xs) P/BV (xs)
Transport High (Rs.) Low (Rs.)
price (Rs.)
High Low Close High Low Close
FY15 1,286 697 1,114 54.6 407 23.6 12.8 20.4 3.2 1.7 2.7
FY16 1,206 737 954 51.9 448 23.2 14.2 18.4 2.7 1.6 2.1
FY17 1,325 778 1,078 55.4 425 23.9 14.0 19.4 3.1 1.8 2.5
FY18 1,543 898 1,441 108.4 440 14.2 8.3 13.3 3.5 2.0 3.3
FY19 1,671 904 1,273 112.8 607 14.8 8.0 11.3 2.8 1.5 2.1
5 yr Avg 20.0 11.5 16.6 3.0 1.7 2.6

7) Conclusion and recommendation

We have done a comparative price analysis of listed players in the NBFC space to arrive at the indicative valuation band within
which HDB can trade post listing. Please note that full price discovery of the stock will happen only after it gets listed. We strongly
believe that HDB should attract premium valuations in the sector given its: -
a) Complete access to HDFC Bank’s retail and SME customer base.
b) Strategic importance to parent operations.
c) Superior risk management and credit assessment capabilities flowing through the parent.
d) Sustained high PAT growth supported by further acceleration in business growth, improvement in cost productivity
parameters and possibility of NIM expansion due to increasing contribution form retail assets.
e) Continued parent support in raising growth capital from the market at competitive rates, when required.
We therefore recommend investing in HDB Financial Services Limited.