HDB Financial Services shares in focus as Q2 PAT sees 2% YoY growth

Shares of HDB Financial Services are expected to be in focus on Thursday, October 16, after the company reported a 2% year-on-year (YoY) rise in its net profit for the July–September quarter. The company posted a profit after tax (PAT) of Rs 581 crore in Q2FY26, compared to Rs 571 crore in the corresponding period of the previous year.

HDB Financial also reported a 13% YoY increase in revenue from operations, which rose to Rs 4,545 crore for the quarter. Net interest income (NII) registered a robust 20% YoY growth, coming in at Rs 2,192 crore as against Rs 1,833 crore in the same quarter last year. The rise in NII was supported by higher yields and efficient funding strategies. Additionally, the company’s net interest margin (NIM) improved to 7.9% during the quarter, up from 7.5% in the year-ago period.

However, asset quality showed slight deterioration. The gross non-performing asset (NPA) ratio rose to 2.81% from 2.56% in the previous quarter, while net NPA stood at 1.27%. The provision coverage on Stage 3 assets remained strong at 54.7%. Credit costs increased significantly to Rs 748 crore, up from Rs 431 crore a year earlier.

The rise in provisioning led to a 3.3% YoY decline in profit before tax from the lending business, which fell to Rs 753 crore. For the first half of FY26, HDB Financial reported a profit of Rs 1,149 crore, compared to Rs 1,173 crore in the same period last year.

After the company’s Q2 results, global brokerage firm Morgan Stanley has maintained an “Equalweight” rating on HDB Financials, revising its target price to Rs 805 from Rs 830.

The company’s Q2FY26 profit after tax (PAT) declined 2% year-on-year (YoY), but still beat both Morgan Stanley’s own estimate of a 13% drop and the consensus estimate of a 1.5% increase. This performance was driven by stronger net interest income (NII), which rose 20%, and pre-provision operating profit (PPOP), which increased by 24%.The net interest margin (NIM) came in at 7.92%, slightly above Morgan Stanley’s estimate of 7.76%, supported by a 25 basis points quarter-on-quarter improvement in loan spreads. Credit costs remained elevated, but Stage 3 coverage was steady at 117%.Asset quality concerns persist, especially in the commercial vehicle segment, which was impacted by floods and an extended monsoon season. However, trends in Stage 2 assets are beginning to show signs of stabilization.

Management expects credit costs to ease starting from the third quarter of FY26, with a medium-term target level of approximately 2.2%. The firm has raised its FY26 earnings per share (EPS) estimate by 4%, though the projections for FY27–28 are slightly lower. NIM is forecast to average around 7.95%, and the company’s assets under management (AUM) compound annual growth rate (CAGR) has been trimmed to 16.4% from 18.6%.

In terms of valuation, Morgan Stanley notes that HDB Financials currently trades at 2.6 times FY27E price-to-book and an 18x price-to-earnings multiple, offering only modest upside potential.

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