Whalesbook
Profit Boosted by Margins, Not Loan Volume
HDB Financial Services reported a strong quarterly profit driven by an improved net interest margin (NIM) of 8.23%, supported by a significant drop in its cost of funds. This efficiency helped boost earnings, even as overall loan growth remained subdued. Assets Under Management (AUM) grew by 10.7% year-on-year to ₹1.19 trillion by March 31, 2026. Although new loan disbursements picked up, higher repayments from existing customers offset this increase, limiting the overall expansion of the loan book. This situation creates a gap between the company's robust profitability and its core business growth rate.
Loan Growth Trails Sector Amid High Repayments
The company's 10.7% AUM growth for the quarter fell short of the broader non-bank financial sector's estimated 16% expansion. This slower pace of loan origination is primarily due to high customer repayments. Despite these challenges, HDB's NIM of 8.23% performed well compared to other lenders facing rising funding costs. For the full fiscal year FY26, HDB Financial's Net Interest Income (NII) grew 21.6% year-on-year to ₹2,399 crore, and its profit after tax reached ₹2,544 crore, up 16.9%. Asset quality remained stable, with Gross Stage 3 loans rising slightly to 2.44% from 2.26% a year earlier.
Valuation Questions and Mixed Analyst Views
Despite the significant profit increase, questions remain about HDB Financial's valuation. While Motilal Oswal views its estimated P/BV multiple of 2.3x for FY27E as fair given its growth potential, some market estimates place its P/B ratio between 2.59x and 3.15x. Motilal Oswal maintained a 'Neutral' rating with a ₹720 target price. This suggests current valuations may already reflect its medium-term growth prospects. Analyst opinions are divided: Jefferies has a 'Buy' rating and a ₹845 target, expecting faster AUM growth and annual earnings growth of 22% over FY26-28. Morgan Stanley holds an 'Equal-weight' rating with a ₹720 target.
Risks and Future Projections
The main challenge for HDB Financial is accelerating loan growth, which is currently held back by high customer repayments. This dynamic limits how quickly its loan book can expand. The company also operates with a high debt-to-equity ratio, between 4.68x and 5.56x, increasing its financial leverage. While management reports no impact yet from the West Asia conflict, it represents a potential risk for FY27. Analysts, such as Motilal Oswal, emphasize the need for sustainable improvements in profitability ratios, which will likely require faster growth in core lending.
Looking ahead, Motilal Oswal projects compound annual growth rates (CAGR) of 14% for disbursements, 16% for AUM, and 20% for net profit between FY26 and FY28. They forecast return on assets (RoA) of about 2.5% and return on equity (RoE) of 14.3% in FY28E. Other analysts anticipate an average annual earnings growth of 22% over the same period. For HDB Financial to achieve a higher valuation, it must demonstrate stronger loan growth, successfully navigate industry trends, and show sustained improvement in its returns. The next fiscal year will also challenge the sector's resilience against economic pressures and geopolitical uncertainties.