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HDBFS reported a strong Q4 in terms of profitability, ahead of consensus and our estimates; however, AUM growth remained soft, indicating management focus on maintaining profitability at the cost of growth. Asset quality improved significantly, resulting from easing stress in the CV and USL segments and the company’s ability to control forward flows; this led to lower credit cost which in turn drove the PAT beat. The management reiterated that it aspires to grow its loan book at ~6-7% over and above the nominal GDP; such growth will be supported by strong disbursement across the product segment. Also, the management expects margin to be stable as disbursements in the USL segment normalize, though it indicated that the West Asia conflict would be a key monitorable. Further, the mgmt expects operating efficiency to improve, as it continues to invest in AI tech and to leverage its digital assets to cater to customers across geographies. To reflect the Q4 developments and management commentary, we tweak our FY27-28 estimates which leads to ~2- 3% increase in earnings (Exhibit 2); we maintain REDUCE on the stock with unchanged Mar-27E TP of Rs625 (implying FY28E P/B of 1.9x).

CoF and credit cost improvement drive marked improvement in profitability

HDBFS posted a good quarter in terms of profitability, while AUM growth remained soft, growing 11% YoY to Rs1.2trn. NIM expanded to 8.23% (up by ~14bps QoQ), aided by cost of fund moderation, while adjusted opex improved, with cost-to-income declining to 39.5%. Credit cost moderated QoQ, and the management highlighted that stress in the CV and USL segments is now behind. Asset quality improved, with GS3 at 2.44%; the management pointed to the overall collection efficiency improving; also, the company has been able to contain slippages, resulting in strong asset-quality improvement.

Management confident of delivering improved growth and profitability

The mgmt remains confident of delivering AUM growth at ~6-7% above nominal GDP in the medium term, while indicating the West Asia war situation would be a key monitorable. The mgmt also indicated it would keep yields broadly intact; any marginal deviation would be mainly due to change in asset mix. Further, it expects NIM to uphold at 8% and above. The mgmt stated it has implemented multiple AI models, which are now yielding rewards. This would lead to opex-to-AUM moderating and maintaining ~3.7% in the near term, while credit cost is likely to hover at ~2.3%, as stress in the CV and USL segments has bottomed out. It expects to see growth in these segments ahead.

Minor changes to estimates; maintain REDUCE with unchanged TP of Rs625

Factoring in the Q4FY26 developments and management commentary, we cut FY27-28E AUM growth by 2-4% and credit cost by 6-8%; this leads to the EPS increasing ~2-3%. With low likelihood of growth and profitability firing together, we maintain REDUCE, with Mar-27E TP of Rs625 implying FY28E P/B of 1.9x. Given that peer NBFC groups are delivering better growth, any re-rating of HDBFS will be contingent on it accelerating growth materially without significant asset-quality issues.

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