Is the Grey Market Premium Misleading? Decoding the Valuation Gap in HDB Financial’s IPO

HDB Financial Services, the non-banking financial company (NBFC) subsidiary of HDFC Bank, is set to launch its highly anticipated initial public offering (IPO) on June 25, 2025, aiming to raise ₹12,500 crore. The IPO, comprising a fresh issue of ₹2,500 crore and an offer for sale (OFS) of ₹10,000 crore by HDFC Bank, has been the talk of the market. However, the grey market premium (GMP) and the significant valuation gap between the unlisted market and the IPO price band have sparked debates among investors. Is the GMP misleading, and what does the valuation gap tell us about HDB Financial’s IPO? Let’s dive in.

The HDB Financial IPO: Key Details

HDB Financial Services’ IPO will open for subscription from June 25 to June 27, 2025, with a price band fixed at ₹700–₹740 per share. The issue is the largest NBFC IPO of 2025, surpassing Hexaware Technologies’ ₹8,750-crore offering earlier this year. At the upper end of the price band, the IPO values HDB Financial at approximately ₹61,388 crore, or 3.72 times its FY24 book value, aligning closely with peers like Bajaj Finance and Shriram Finance.

The IPO structure includes a reservation for eligible HDFC Bank shareholders, requiring at least one HDFC Bank share to qualify for the shareholder quota, which accounts for 10% of the issue. The proceeds from the fresh issue will primarily strengthen HDB’s Tier-I capital base to support its growth in India’s retail-focused lending market.

HDB Financial is a dominant player in the NBFC sector, classified as an upper-layer NBFC by the Reserve Bank of India (RBI). As of March 31, 2024, its total gross loan book stood at ₹902.2 billion, making it the seventh-largest retail-focused NBFC in India. For FY23–24, the company reported a net profit of ₹2,460.84 crore on revenue of ₹14,171.12 crore, showcasing strong financials backed by HDFC Bank’s brand strength.

The Grey Market Premium: A Rollercoaster Ride

The grey market, an unofficial platform where shares trade before their official listing, has been a focal point for HDB Financial’s IPO. Prior to the IPO price band announcement on June 20, 2025, HDB Financial shares were trading in the unlisted market at ₹1,200–₹1,350 per share, a staggering 70–80% premium over the IPO’s upper price band of ₹740. Some reports even noted prices as high as ₹1,455 earlier in the month.

However, the announcement of the ₹700–₹740 price band sent shockwaves through the grey market, wiping out over 30% of the premium. As of June 23, 2025, the GMP has cooled significantly, ranging between ₹47.5 and ₹53 per share, indicating a potential listing price of ₹787.5–₹790 and a modest listing gain of 6–7%. This sharp decline has left investors who purchased shares in the unlisted market at higher prices facing notional losses.

Why the Valuation Gap?

The dramatic gap between the grey market valuation and the IPO price band has raised questions about the reliability of GMP as an indicator of investor sentiment and listing performance. Several factors contribute to this discrepancy:

1. Overhyped Unlisted Market: The grey market often reflects speculative enthusiasm rather than fundamental value. HDB Financial’s unlisted shares soared due to its HDFC Bank parentage and the NBFC sector’s growth prospects. However, these prices ignored key metrics like return on equity, which is lower than peers like Bajaj Finance. The IPO pricing at ₹700–₹740 brought valuations back to a more realistic level, aligned with industry standards.
2. Conservative IPO Pricing: HDB Financial’s IPO price band represents a 42% discount to its peak grey market valuation, a strategy seen in other IPOs like Tata Technologies and PB Fintech. This conservative approach aims to ensure strong subscription demand and minimize listing-day volatility. Bankers have emphasized that the IPO pricing was not influenced by the grey market’s 70% premium, focusing instead on peer valuations and long-term investor confidence.
3. Market Dynamics and Investor Behavior: The grey market thrives on fear of missing out (FOMO), with retail and high-net-worth investors piling into unlisted shares anticipating supply constraints or high listing gains. The HDB Financial IPO’s large size and shareholder quota may have alleviated these concerns, reducing speculative demand in the grey market.
4. Valuation Alignment with Peers: At ₹740, HDB Financial’s IPO is priced at a post-issue price-to-book (P/B) ratio of 3.2–3.4x, comparable to listed NBFCs like Bajaj Finance and Shriram Finance. This alignment suggests that the IPO pricing is fair, despite the grey market’s earlier exuberance.

Is the Grey Market Premium Misleading?

The grey market premium is often viewed as a gauge of investor appetite for an IPO, but its reliability is questionable. GMP is driven by unofficial trades in an unregulated market, lacking transparency and prone to manipulation. For HDB Financial, the GMP’s sharp decline highlights its limitations:

• Short-Term Speculation: GMP reflects short-term sentiment rather than long-term fundamentals. The initial 70–80% premium was fueled by hype around HDB’s brand and market position, not a rigorous assessment of its financials.
• Volatility and Risk: Investors who bought HDB Financial shares at ₹1,200–₹1,350 in the unlisted market now face potential losses if the stock lists at ₹790. This underscores the risks of relying on GMP for investment decisions.
• Not a Guaranteed Indicator: While GMP can signal demand, it does not guarantee listing gains. HDB Financial’s muted 6–7% GMP suggests modest listing returns, but market conditions, subscription rates, and broader economic factors will ultimately determine the stock’s performance.

Brokerages like Centrum and SBI Securities have cautioned investors against over-relying on GMP, recommending a focus on HDB Financial’s strong fundamentals, growth potential, and fair valuation.

Should You Subscribe to the HDB Financial IPO?

Despite the grey market’s volatility, HDB Financial’s IPO has garnered positive recommendations from analysts. Here’s why:

• Strong Parentage: Backed by HDFC Bank, HDB Financial benefits from a trusted brand, robust financial discipline, and access to capital.
• Growth Prospects: HDB’s focus on Tier-2 and Tier-3 markets positions it well in India’s expanding retail lending space. Its diversified loan portfolio and AAA credit ratings from CARE and CRISIL enhance its stability.
• Reasonable Valuation: Priced at 3.2–3.4x P/B, the IPO is competitively valued compared to peers, offering long-term value for investors.
• High Subscription Potential: The IPO’s large size, shareholder quota, and backing from 12 leading investment banks (including Goldman Sachs, Morgan Stanley, and UBS) suggest strong institutional interest.

However, investors should be mindful of risks, including potential asset quality concerns in the NBFC sector and market volatility. The red herring prospectus (RHP) highlights HDB’s focus on maintaining asset quality, but macroeconomic factors could impact performance.

The Bigger Picture: Lessons from HDB Financial’s IPO

The HDB Financial IPO underscores a broader trend in India’s primary markets: the growing disconnect between grey market valuations and IPO pricing. As unlisted shares gain popularity among retail and high-net-worth investors, the risks of speculative trading become evident. The 42% discount in HDB’s IPO price compared to its grey market peak is a stark reminder that GMP is not a foolproof predictor of value.

For investors, the key takeaway is to prioritize fundamentals over market hype. HDB Financial’s IPO offers a compelling opportunity for those seeking exposure to a well-capitalized NBFC with strong growth prospects. While the grey market’s earlier exuberance may have misled some, the IPO’s conservative pricing and alignment with peer valuations make it an attractive bet for long-term investors.

Conclusion

The grey market premium for HDB Financial’s IPO has been a rollercoaster, plummeting from a 70–80% premium to a modest 6–7% as the IPO approaches. This valuation gap highlights the limitations of GMP as a reliable indicator, driven by speculation rather than fundamentals. With a fair valuation, robust financials, and HDFC Bank’s backing, HDB Financial’s IPO is poised to attract strong interest, despite the grey market’s misleading signals. Investors are advised to focus on the company’s long-term potential and subscribe with a balanced perspective.