Reduce HDB Financial Services Ltd for the Target 725 by Emkay Global Financial Services Ltd
HDBFS reported a good quarter in terms of disbursement, asset quality, and profitability, while AUM growth remained soft. AUM as of 1QFY27 stood at Rs1.22trn, growing 11.4% yoy, while the management indicated that the recalibration in the USL and asset finance segments is done and growth will return in coming quarters. Overall asset quality continues to improve despite seasonality, with credit cost broadly stable sequentially, while the management expects credit cost to remain contained at 2.3% on a steady-state basis. Margins (NIMs) are expected to hold above 8%, with COFs broadly stable over the year. The management noted that the impact of the West Asia conflict and monsoon is limited as of now but remains watchful. Further, the management expects operating efficiency to improve as it continues to invest in AI tech and leverage its digital assets. To reflect the 1Q developments and management commentary, we tweak our FY27-29 estimates, leading to ~3-7% increase in earnings (Exhibit 2); we maintain REDUCE, raising our Jun-27E TP from Rs675 to Rs725 (implying FY28E PBV of 2.2x).
A good quarter in terms of disbursement, asset quality, and profitability
HDBFS posted a good quarter in terms of disbursement (growing 16% yoy), asset quality, and profitability (above our and street estimates), while AUM growth remained soft, growing 11.4% yoy to Rs1.22trn. NIM (reported) expanded to 8.35% (up by ~12bps qoq), driven by ~19bps yield expansion, which offset a marginal increase (~4bps qoq) in COFs. Adjusted opex was stable at ~39.9%, while credit cost for the quarter was 2.32%, marginally higher than expectation. Asset quality improved, with GS3 at 2.34%, improving ~10bps qoq/20bps yoy. The management pointed to improving overall collection efficiency; the company has also been able to contain slippages, resulting in strong asset-quality improvement.
Asset finance and unsecured segment to start seeing growth ahead
The management remains confident of improving growth momentum in coming quarters, as the calibration in the asset finance and USL segments are now done, while indicating that the West Asia conflict and the impact of El Niño would be key monitorables. The management also indicated that it targets NIMs above 8% and COFs to remain rangebound; any marginal deviation would be mainly due to a change in asset mix. The management stated it has implemented multiple AI models, which are now yielding rewards. This should moderate opex-to-AUM, while credit cost is likely to hover at ~2.3%, as stress in the CV and USL segments has bottomed; it targets an ROA of 2.5%
Factoring in the 1Q performance, maintain REDUCE with revised TP of Rs725
Factoring in the 1QFY26 developments and management commentary, we tweak our FY27-28 estimates, leading to EPS increasing ~3-7%. We maintain REDUCE, raising our Jun-27E TP from Rs675 to Rs725, implying FY28E PBV of 2.2x. 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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