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Healthy growth outlook; margins a key monitorable

Disbursements/AUM in Q2 grew 32%/27% YoY to INR17bn/INR180.1bn, aided by stable regional teams, lower attrition & Tamil Nadu’s return to growth. Management reiterated ~25% AUM growth guidance in FY27, with upside risk from a pick-up in the southern states, and we build 26%/25% for FY27/FY28E. We expect NIM (calc.) to compress by 14/17bps to 6.0/5.8% in FY27/FY28E, due to repo-rate transmission. Opex/assets stood at 2.6% in Q2, with management guiding a ~10bps annual reduction. We build ~2.5% for FY27/28E. Asset quality was steady and credit cost stood at ~43bps in Q2. We build an improvement to 35/33bps for FY27/FY28E. We cut our FY28E earnings estimates by 1.7%, mainly to factor in i) the ~35bps ROA impact from the draft insurance distribution rules, to be partly cushioned by a higher LAP share, higher assignment income and pricing/fee changes and ii) higher CoF. We reduce the multiple to 2.5x (earlier 2.6x) with an unchanged TP of INR1,400. Maintain BUY.

Expect AUM growth of 26% in FY27E:

Q2 disbursements saw a growth of 32% YoY/ 4.7% QoQ to INR17bn while AUM grew 27% YoY/ 6.3% QoQ to INR180.1bn. Housing Loans/ LAP/ Shop loans contributed 84%/ 15%/ 1% of the portfolio while the AUM mix in terms of salaried/non-salaried borrowers stood stable at 68:32. Management attributed growth momentum to stability in regional teams and lower attrition. Tamil Nadu returned to growth in Q2 as leadership gaps in certain regions were filled, and growth is expected to strengthen further in Q3 and Q4. Management is scaling up operations in UP. Southern states lagged as they are largely self-construction markets, where a turnaround in growth takes a couple of quarters to be visible. Management reiterated an AUM guidance of ~25% with upside risks in case of strong pick up in southern states. It sees no significant draught/monsoon related impact in Gujarat/MP districts as majority of HFFC customers are in manufacturing and services in larger cities with minimal dependence on agriculture. Management retained the housing to non-housing guardrail at 80:20. We build a growth of 26%/ 25% for FY27/ FY28E.

Expect spread of 5%+ in FY27E:

Reported yield in Q2 saw a moderation of ~10bps QoQ to 12.9%, while CoF remained steady at 7.8% QoQ. Consequently, reported spreads declined sequentially at 5.1%. Management guided to maintaining a long-term spread of 5-5.25%. We expect NIM (calc.) compression to 6.0%/5.8% for FY27/FY28E as transmission of a repo rate hike is partial and lagged as only 20-30% of borrowings are linked to external benchmarks. The decrease in employee cost during the quarter was termed cyclical as campus hiring is concentrated in Q4/Q1. Opex/Assets ratio stood at 2.6% in Q2FY27, and company guided for a reduction in opex/asset ratio of ~10bps every year; we build 2.5% for FY27/28E. Management expects an impact of ~35bps on RoA due to draft insurance distribution rules; however levers are in place to cushion the impact.

Steady asset quality and credit cost:

Asset quality was steady in Q2FY27 with GNPA/NNPA at 1.7%/1.3%. Q2FY27. Bounce rate declined to 15.6% (vs.16.3% QoQ), however early October trends show elevation to 16.6% signalling a range-bound trend. 1+DPD/ 30+DPD stood steady QoQ at 4.7%/ 3.2%. Credit cost declined to ~43bps from 47bps in Q1FY27. Management indicated asset quality remained stable as fewer new customers slipped into delinquency. Management targets holding gross NPA at ~1.7% and credit cost at ~40bps. We build a credit cost of 35/33bps for FY27/FY28E.

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