Brokerages split on HDB Financial as margins improve but growth lags

HDB Financial Services’ December-quarter (Q3FY26) results have drawn mixed reactions from brokerages, with improving profitability and stabilising asset quality offset by muted balance-sheet growth and lingering stress in select portfolios. 

 

While Emkay Global has downgraded the HDB Financial Services stock citing a growth-profitability mismatch, JM Financial sees early signs of a cyclical recovery and has upgraded its rating, albeit flagging limited upside at current valuations.

 

In Q3FY26, HDB Financial reported a steady operating performance marked by margin expansion, moderating credit costs and stable asset quality. However, AUM growth remained soft, underscoring the key debate among analysts on the sustainability of the recovery.

 

Margins and profitability show traction

Both brokerages acknowledged improvement on the profitability front. Net Interest Margins (NIMs) expanded to about 8.1 per cent during the quarter, aided by a favourable product mix and stable cost of funds. Profitability metrics strengthened, with return on assets improving to around 2.2 per cent and return on equity to about 13 per cent.

 

JM Financial highlighted that year-on-year (Y-o-Y) profit growth turned positive after five consecutive quarters of decline, with PAT rising 36 per cent Y-o-Y and 11 per cent Q-o-Q. Net interest income grew 22 per cent Y-o-Y, while lower credit costs helped absorb the one-time operating expense impact related to the implementation of new labour codes.

 

Emkay also noted that, adjusted for the labour law impact of roughly ₹56 crore on the lending business, operating expenses remained range-bound and cost-to-income improved sequentially. Credit costs moderated during the quarter, and management reiterated its long-term guidance of a 10-20 basis point (bps) reduction from current levels as portfolio quality improves.  ALSO READ | Groww stock price soars 9% on huge volumes; analysts expect more upside

Asset quality stabilises, stress pockets persist

Asset quality trends were broadly stable across brokerages. Gross stage-3 assets stood at about 2.8 per cent sequentially, with early delinquency buckets showing improvement. Management commentary suggested that stress in the commercial vehicle (CV) and construction equipment (CE) segments has plateaued, supported by recoveries and lower incremental slippages.

 

JM Financial pointed to marginal improvement in net stage-3 assets and a rise in provision coverage, while noting that pain in the unsecured MSME portfolio, evident over the past several quarters, has started to ease. Overall expected credit loss levels remained steady.

 

However, Emkay remains cautious, warning that any resurgence of stress in vehicle finance and unsecured lending could pose near-term downside risks to earnings.

Growth remains the key concern

The sharpest divergence in views lies around growth visibility, analysts said. HDB Financial’s AUM grew 12 per cent Y-o-Y and 2.8 per cent Q-o-Q, despite healthy disbursements of ₹17,900 crore during the quarter. Higher repayments and a conscious focus on yields over growth constrained balance-sheet expansion.

 

Emkay believes growth and profitability are ‘not firing together,’ prompting it to trim FY26-28 AUM growth assumptions by 2-4 per cent and slightly raise credit cost estimates. This has led to a 5-6 per cent cut in EPS estimates over the period and a downgrade of the stock to ‘Reduce’ from ‘Buy.’ The brokerage has also lowered its December 2026 target price by about 12 per cent to ₹750, valuing the stock at 2.2 times FY28 estimated book value.

 

JM Financial, on the other hand, sees HDB at an inflection point. Disbursement growth rebounded sharply, led by consumer finance and enterprise lending, while management reiterated medium-term AUM growth guidance of 18-20 per cent CAGR and stable-to-improving margins. On this basis, JM Financial upgraded the stock to ‘Add’ and raised its target price to ₹810, valuing it at 2.4 times FY28 book.  ALSO READ | LTIMindtree up 6% on winning CBDT's 'Insight 2.0' deal worth ₹3,000 crore

Valuation caps upside

 

Despite differing recommendations, both brokerages agree that valuation remains a constraint. At around 2.3x FY28 estimated book value, the stock already factors in a gradual recovery in growth and profitability.

 

While improving asset quality and margin stability lend comfort, the pace at which growth accelerates will be crucial in determining whether HDB Financial can command a meaningful re-rating from current levels.   

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