Neutral HDB Financial Services Ltd for the Target Rs.655 by Motilal Oswal Financial Services Ltd
Business momentum improving; loan growth to pick up in 2H
* HDB Financial Services (HDBFIN)’s 2QFY27 PAT rose 34% YoY to ~INR7.8b (in line). NII grew 16% YoY to ~INR25.3b (in line). Other income stood at ~INR6.5b (down1% YoY).
* Opex grew ~7% YoY to ~INR14.1b. (in line) The cost-to-income ratio (CIR) in lending business declined ~60bp YoY to 39.3% (PY: 40.7% and PQ: 39.9%).
* Yields (calc.) fell ~5bp QoQ to 14.13%, while CoB (calc.) rose ~7bp QoQ to 7.05%, leading to spreads (calc.) declining by ~12bp QoQ to ~7.1%. NIM contracted ~12bp QoQ to ~8.23%, but the sequential decline was more seasonal in nature. Management remains focused on sustaining NIM at ~8.2% in the near term and maintaining it above 8% over the longer term. We estimate NIM of 8.5%/8.4% in FY27/FY28E (vs. 8.25% in FY26).
* HDBFIN expects AUM growth to accelerate to 17-18% from FY28 onward, with momentum improving progressively through 3Q/4QFY27 as disbursements pick up. Following subdued disbursement growth of just 4% in FY26, a stronger disbursement trajectory in FY27 is expected to underpin the recovery in loan growth in FY28. We model AUM CAGR of ~15% over FY26-28E.
* Management attributed the sequential increase in Stage 3 assets primarily to seasonality and slower book growth, rather than any material deterioration in portfolio quality. Asset quality in the used CV business saw some stress due to persistent delinquencies in older loan vintages. However, the company anticipates a potential rollback of slipped accounts from 3Q onward.
* Loan growth recovery is gradual, with management’s expectation of 17-18% AUM growth in FY28 . The anticipated rate-hike cycle could weigh on margins through higher funding costs, while weak monsoons and drought conditions pose downside risks to asset quality. We believe a steady recovery in loan growth and stability in asset quality are key to improving earnings *We keep our FY27E EPS broadly unchanged and cut our FY28E EPS by 4% to factor in lower fee income. We estimate a CAGR of 16%/15%/21% in disbursement/loans/PAT over FY26-28E, with RoA/RoE of ~2.5%/14.4% in FY28. Reiterate Neutral with a TP of INR655 (based on 1.8x Sep’28E BVPS).
* Key risks:
1) Business momentum remaining tepid
2) asset quality deterioration due to El-Nino, weak monsoons and drought situations in multiple states
3) margin compression driven by rise in cost of funds.
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