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Improving disbursements and resilient margins strengthen earnings outlook

HDB Financial Services (HDBFS) has entered FY27 on a stronger footing after nearly two years of portfolio recalibration. Improving disbursement momentum, resilient profitability, and healthier asset quality suggest that the company is moving beyond the stabilization phase. While the recovery in originations has yet to fully translate into loan book growth, we believe the next few quarters could mark the beginning of a more balanced growth cycle, supported by improving operating leverage and disciplined risk management

* Disbursement momentum continues to improve after nearly two years of subdued origination growth, although the recovery has yet to meaningfully reflect in loan book expansion. Consumer Finance remains the primary growth engine, while Gold Loans has emerged as an important incremental driver. We believe a recovery in Business Loans and Asset Finance, alongside sustained momentum in Consumer Finance, should support a broader-based acceleration in AUM growth. We model ~15% AUM growth in FY27.

* Margins have expanded meaningfully over the past five quarters, supported by lower leverage following the equity raise, declining funding costs, and stable asset yields from the predominantly fixed-rate loan book. Despite the easing rate cycle, we expect margins to remain resilient as the company prioritizes risk-adjusted returns over headline growth. We estimate an NIM of 8.5%/8.4% in FY27/FY28.

* HDBFS's extensive distribution network remains one of its strongest competitive advantages. With a presence across 1,200 cities and more than 160k retail touchpoints, we believe the next phase of operating leverage will be driven less by network expansion and more by higher productivity of the existing franchise. AI-led ‘Shikhar’ initiatives should improve underwriting, servicing, and collections, supporting a gradual decline in operating expenses as a percentage of assets.

* After nearly 18 months of elevated credit costs, asset quality has improved meaningfully across key retail segments. Better collections, faster customer engagement, and AI-enabled collection tools have contributed to the improvement, while credit costs have remained stable despite seasonal weakness. We expect credit costs to moderate over the coming quarters as portfolio quality continues to normalize, although rural cash flows under a potentially weak monsoon remain a key monitorable.

* HDBFS is transitioning from portfolio stabilization toward a more balanced growth phase, supported by improving profitability and healthier asset quality. We estimate an FY26-28 CAGR of 16%/16%/25% in disbursements/AUM/PAT, with RoA/RoE improving to ~2.6%/15% by FY28. While these improvements are encouraging, we believe current valuations already capture much of the medium-term recovery. We reiterate our Neutral rating with a TP of INR760 (based on 2.3x Mar'28E BVPS).

Portfolio reset now behind; growth to improve ahead

* After nearly two years of prioritizing portfolio quality over headline growth, HDBFS is beginning to witness an improvement in disbursement momentum. While the recovery has yet to meaningfully translate into loan book growth, improving originations suggest that the portfolio recalibration phase is largely behind the company. We believe the next phase of growth will be broader, more profitable, and supported by healthier portfolio economics rather than aggressive expansion.

* Management has deliberately reallocated capital toward businesses offering superior risk-adjusted returns, even at the expense of near-term growth. While this strategy has temporarily weighed on reported loan growth, it has materially strengthened portfolio quality and should position HDBFS to accelerate growth from a much stronger base.

* Consumer Finance continues to anchor growth, while Gold Loans has emerged as an attractive incremental growth engine by leveraging HDBFS's existing distribution franchise. We believe a recovery in Business Loans and Asset Finance will be critical for broadening the growth profile and driving a meaningful acceleration in consolidated AUM over the next few quarters. We model disbursements and AUM CAGR of ~16% each over FY26-FY28E.

Valuation and view

* HDBFS appears to be moving beyond its portfolio stabilization phase, with improving asset quality, resilient profitability, and increasing management confidence to accelerate growth across previously subdued segments. The company enters FY27 with a healthier balance between growth, asset quality, and profitability. We believe the next 2-3 quarters will be crucial in validating this transition, with a broad-based recovery led by Asset Finance and Business Loans, alongside sustained momentum in Consumer Finance, potentially serving as a key earnings catalyst.

* HDBFS currently trades at 2x FY28E P/BV. We estimate a CAGR of 16%/16%/25% in disbursements/AUM/PAT over FY26-28. Reiterate Neutral with a TP of INR760 (premised on 2.3x Mar’28E BVPS). We believe current valuations clearly factor in medium-term growth potential of around 15-18%, alongside improving return metrics, with RoA/RoE of ~2.6%/15% in FY28E.

* Key risks:

1) slower-than-expected growth resulting in subdued AUM growth

2) deterioration in asset quality due to potential spillovers from the West Asia conflict and El Niño-related monsoon risks

3) heightened competition in semi-urban and rural markets, potentially leading to pressure on yields.

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