Hi Nikhil:

I searched for a solution to this for a very long time.  I never did find a solution.  However I also learned I really did not need this for my .hddimg.  

For early development booting from a USB stick, I simply used a WIC image partitioned in the way that I wanted my target's flash to be partitioned.   I referenced this thread for the clues I needed to create the partitions I needed on the wic image.

https://stackoverflow.com/questions/56187209/yocto-create-and-populate-a-separate-home-partition

Of course on the WIC boot menu, there is no install option, so that doesn't quite get you to a standalone target running from internal storage.

Then I figured out that if I only use the .hddimage for installation to internal storage rather than for operation, you can modify (by using a bbappend) the installation script to create the partitions you want during installation.  

For us that script was located at meta/recipes-core/initrdscripts/files/init-install-efi.sh .  Its actually unusually well commented so you can probably follow along after a few re-reads and understand what it is doing.  

Getting a software update scheme working (that's a whole other subject) while you are still working on the wic image will allow you to basically install from the .hddimg once (or whenever you trash your target drive :) ) and then use your update scheme to install a new image, and skip the USB stick step altogether.

Sorry to be so wordy, but hope this helps.
Howard