HDB Financial Services Limited (HDBFS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '27 Earnings Conference Call hosted by HDB Financial Services. Please note this conference call is only for analysts and investors and not for media. [Operator Instructions] I now hand the conference over to Mr. Vishal Patel, Head Investor Relations of HDB Financial Services. Thank you, and over to you.

Good evening, and I welcome you all to the 2Q earnings call of HDB Financial Services. We have with us Mr. G. Ramesh, MD and CEO; Mr. Jaykumar Shah, CFO; and the senior management team of the company. I hope all of you would have had a chance to [peruse] our financial results, investor presentation and press release which were filed with the stock exchanges earlier today and also available on our website. We will start with the management remarks and then open up the call for Q&A. The audio recording of this call will be available on our website shortly after the call ends. I now request our MD and CEO, Mr. G. Ramesh, for his opening remarks, following which, our CFO, Mr. Jaykumar Shah, will provide a brief on the financial results before we open up the call for Q&A.

Thank you, Vishal, and a very good evening to all of you who have joined in today. Starting with the macros. Indian economy remained resilient despite global headwinds and real GDP growth projections have been revised to 7.1% for FY '27, as highlighted by RBI in its monetary policy. On the monetary policy front, there has been a stance -- change in stance to calibrate it tightening and increase in reported by 25 basis points on October 7, 2026. While sentiment around global uncertainty and deficiency, deficient monsoon have had some impact. The outlook for H2 is positive with [indiscernible] season and continuing momentum in domestic economic activity. However, the impact of uneven spatial distribution of monsoon on food production and inflation remains a key monitorable. Coming to vertical-wise commentary, enterprise lending, which is our book -- which is a business consisting of unsecured loans, loan against property and [gold] loans. Q2 disbursements for the segment grew by 25.5% year-on-year. Disbursements for LAP and enterprise business, which is our mortgage book grew by 30% year-on-year, and we anticipate this upward trajectory to continue. Our gold loan disbursements grew over 60% year-on-year. Gold Loan is positioned for continued traction in the coming quarters. Our unsecured business loans business return to sequential growth trajectory this quarter. We expect momentum to continue unsecured business loans going forward as well. Portfolio quality and collections are stable for enterprise lending. On asset finance, our commercial vehicle book registered a moderate growth of 8% Y-o-Y, while our construction equipment book grew by 12% in the same period. Festive season demand, led by increasing last-mile volume post-monsoon pickup in construction activity and stable fleet utilization levels [all good] well for asset finance business as we enter H2 with confidence. We did notice some seasonality effect in asset quality and asset finance in line with expectations. We expect this to normalize in the coming months. Consumer finance. Disbursements for consumer finance vertical grew over 25% Y-o-Y, while the book expanded 22% Y-o-Y. Consumer durables book, which consists of loans for purchase of consumer durables and digital products, that book grew by 49% Y-o-Y and the auto loan book grew by 22% Y-o-Y. Our relationship PL, which is our cross-sell product to our customers grew by 16% Y-o-Y, portfolio quality and collections were stable for the consumer finance vertical. So the festive season is expected to be a big [flip] for this business. Overall, in Q2, our disbursements continued on growth trajectory, growing by 18% Y-o-Y profit after tax grew 34% Y-o-Y. Conversations with our channel and OEM partners indicate strong confidence on the back of festive demand, and we look forward to a strong H2. On the technology front, we spoke to you all about our AI journey [chicken]. I'm glad to share some updates in terms of the outcomes we are seeing in some of our focus areas. So we've begun a project on AI-led customer onboarding, which basically reduces the time it takes to onboard a customer. And that has started for our consumer finance business, and we expect benefits to build as we build and roll out that project to the larger ecosystem. Collections in early buckets has worked out well over 1 in 5 calls of telecalling that we make on early buckets is now through an AI-powered bot. We will continue to update you on our technology implementation. With that, wishing everyone a very happy festive season ahead. I will now hand over to Jaykumar, our CFO, for an update on the financials.

Thank you, Ramesh, and thank you all for tuning in. Moving on to the financial performance for the quarter. Customer franchise grew to $24.8 million, with an increase of 18.4% year-on-year. Disbursements for the quarter ended September 30, 2026, was INR 18,522 crores, up 18.7% year-on-year. Gross loan book. As of September 30, 2026, stood at INR 14,469 crores, growing 11.7% year-on-year and 2.2% sequentially. Secured loans comprised of 73.9% of the gross loan book. Profit after tax for the quarter ended September 30, 2026, was INR 780 crores in an increase of 34% year-on-year. Gross Stage 3, which is the same as GNPA for us, as of September 30, 2026 stood at 2.43% as against 2.81% as of September 30, 2025 and 2.34% as of June 30, 2026, while the PCR was at 55%. Net interest income for the quarter was INR 2,534 crores, an increase of 15.6% year-on-year. for Q2 FY '17 was at 8.23% versus 7.95% in Q2 FY '26 and 8.35% Q1 FY '27. I Cost-to-income ratio for our lending business was 39.3% in Q2 FY '27 as compared to $4.7 million in Q2 FY '26 and 39.9% in Q1 FY '27. PPOP for the quarter, which is pre-provisioning operating profit, was at INR 1,756 crores, an increase of 16.9% year-on-year and 1.7% quarter-on-quarter. Credit cost for the quarter was 2.7% and as against 2.32% for the prior quarter. ROA annualized for the quarter ended September 30, 2026, stood at 2.2%, and ROE for the quarter ended September 30, 2026, stood at 14.4%. Earnings per share for the quarter was INR 9.4 and book value per share stood at $266.7 million. Our borrowing mix remains well diversified and a positive cumulative mismatch across all buckets up to 5 years. We remain well capitalized with the total capital adequacy of 21.37% as at September 30, 2026. The -- in addition to the above, the Board of Directors have declared an interim dividend of INR 2 per equity share with a record date of October 23, 2026. We can now open for Q&A.

[Operator Instructions] We'll take our first question from the line of [indiscernible] from [indiscernible] Securities.

Just two things. One on this launch NIM outlook, right? So when we look at the SMT movement on sequential basis, so despite being higher growth in consumer finance business, the asset moderated a bit -- so just wanted to understand what is happening on the active side. And similarly, on cost of fund when we look at on the half-yearly basis, it is already up 15 basis points. So it is due to the spike in my moterates recently. And now since we have already entered the rising cycle, how do you see cost of funds trending over like 3 to 4 quarters ultimately, where do you see NIM trending from 1 of 8.3%, if 1 has to assume maybe a 500 basis point of cumulating to reported like 1 year.

Thanks for the question. I think from a NIM point of view, I think we spoke a little bit about even in the last call. Quarter 1 is generally higher by around 10 to 12 bps -- and what we've arrived at from an 8.34% to 8.23 per site Pretty much in line with expectations. In fact, we're able to manage it better. We are up by if you ask me. Now the key thing there is we've also been able to hold while rates had started to peak in Q2 itself. We managed to hold on to our rates well -- and the number that you see today, if you were to look at the 1 impact, et cetera, which a lot of treasury guys fall out, we're pretty much similar to where we want it to be in terms of Q1 and Q2. So going into Q2, with a 25 bp increase on the repo, at this point in time, the real aim that we have is to hold on to while long term, we obviously want to be at 8% plus, we would want to hold on to where we are as and really come up to an 8.2% plus at least in the near term. Long term, if you ask me when rates go up, if they do, by 50, 75, we will have to watch that space closely and see how the market really absorbs it because there are certain consumer products, which may be elastic, may not be elastic towards 700 bps -- but at least from a current standpoint, I think going into Q3, there will be a minor impact. We don't expect anything major in terms of an impact on our NIM.

Okay. And would you like to share later the fixed rate percentage on tenajnts?

I'll tell you, NCDs because NCD is pretty much in the public domain. So NCDs today going around 8.25%, 8.2%, right? That said, availability of various other instruments also helps us balance it with our current borrowing cost of $7.7 million 7.4%, sorry, right? We'll see how much in a small range, does it move around? So if I were to sum up in terms of -- for you and for all the investors, right? And anybody is there. I think fundamentally, NIM is something which we will work heavily towards holding in a very, very narrow range from where we are today, at least for the near term, over the next couple of quarters. If the rates increase in Q4, right, if the RBI takes a decision in December, et cetera, we'll deal with it at that point in time. But on an as-is basis is what I'm telling you.

Got it. So I mean, is it a to assume that, in a sense, when you say we're able to manage NIM in a nano range. So basically, we are managing ALM in a way which will help us absorbing or maybe navigating this rising rate cycle better. I mean is that the insolation?

So I think there are two parts to it. One is we do have a lab book, which is on the floating side. So when rates increase and rates come through, we have the ability to pass on. Second is, like we've had a Q1 product mix impact, I think Q3 also helps us with a little bit on the product mix. So a combination of those will help us. It is not that when we came into the quarter end, we were not expecting a rate movement. So I think a lot of actions have been done because there is no surprise in what has come through to be honest.

Got it. Got it. Okay. And then second question, obviously, on the growth side, right? So though there has been a, I would say, sequential uptick in the business spend, and it is exactly in line with what we've been guiding in parts. But somehow because of the high repayment rate, it is hurting the growth. So I mean what is our internal discussion around how you guys can accelerate growth, assuming this will be a new loan mix in near term in your repayment rate will continue to demand?

So the way I would look at it, [Danish], is that focus on disbursement growth, right? And we have spoken to a number of people. If you look at Slide 22, right left-hand side, I think the focus for us is to try and get that trajectory with a reasonable CAGR up, right? So we've gone to 18%, quarter 3 is generally better for us as compared to quarter 2 and quarter 4 is better than quarter 3, right? So I genuinely expect that trajectory to start moving in the right direction upwards from here on is what I would put out. And I think repayments will happen. I mean that's just a matter of last year having a lower disbursement growth. But with this, we are turning out of the ELD, I think there's a reasonable runway.

Next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Just this asset finance, for the last couple of quarters, I mean, disbursement growth is weak, it is weak. So just trying to understand where is the it new? Is it been used? What is plaguing the the vehicle finance sets business?

Sure. So we did -- again, let's divide into 2 parts. In case of asset finance on the new side, we are hitting our budgeted numbers. So not really stressed with that. We're doing the segment that we want to lose. On the used piece, we've had some certain challenges, and that's where we have taken certain actions internally, and we expect to see a turnaround as we go through over the coming months. And you will see an uptick, right, from there on.

Got it. Okay. And with that end, I mean, you are saying that it is just the growth, which is the problem in used and there is no problem on the asset quality front? It is just that maybe the replacement demand is being that is the reason is this not picking up? Or is there some other reason for you is not picking up?

From a pickup point, you are exactly right. It's just about that. Some things we need to do internally something -- there is a market challenge and the LatAn is a slightly larger one, the way we see it. And hopefully, as we go into festive the expectation on the field and how we see it, we're seeing more positivity. And I'm hopeful that, that starts to show up. Within that, there has been certain challenges on the longer-dated delinquent book, which is what we had discussed before as well. So I think that challenge, we haven't really come off. And I'm very hopeful that in Q3 when we speak, we start to turn around the corner on the asset finance quality as well. So it's a little bit of new and a little bit of use. The combination of both, but that said, to be honest, Abhijit, I look at the last 6 years, in fact, post-COVID every single time. Quarter 2 has been a lot more challenging for us. honestly, with a 6 bp movement or a 7 bp movement on Stage 3 overall between quarter 1 and quarter 2, that would be the least amount of movement that we would have had in the last 6 years and Q1 to Q2 basis. So we've held up quite well. Obviously, our aspiration is to do better, and that should start to reflect from Q3 onwards with more positivity on that front.

[Operator Instructions] Next question is from the line of Shreya Shivani from Nomura.

Congratulations on a good momentum. I have 2 questions. My first question is on the droughts that several states have faced, and we've been hearing about in media. So any concerns that you have in any geographies with your asset finance book because of that, could the recovery in growth get delayed because of that? Any color on that would be useful. My second question is on the OpEx ratio. I think the trajectory in the first 2 quarters has been quite healthy, particularly if I see on Y-o-Y basis. So if you can -- and you've spoken about your journey on the AI bit, probably still making investments over there. So if you can give a bit of guidance on the OpEx ratio for FY '27 and for the next 2 years also.

Right. Shivani, thank you for that question. So drought, as of now has been declared in some districts in Maharashtra. I think the first product that gets impacted in terms of announcement of drought is potentially agricultural loans, right? And given that we are an NBFC, we really don't top loans and other such product categories at this point of time. our exposure to some of the states where there's a drought declared in terms of our tractor portfolio is quite small, but we're still monitoring that, and we have taken some plans in terms of how do we look at that business going forward. I think the key monitorable out of drought situation could be potential impact on inflation because of food prices. As we speak, we don't think there's a major concern around it in terms of food production at this point of time across the country. but it's still something that we'll continue to monitor. On productivity, you're right, our cost to income has declined from about 40.7% to 39.3%. We have also had a much significant improvement in our OpEx ratio compared to last quarter, it's down about 10 bps a number of initiatives that we are taking basically focuses on improving productivity of our field teams. So the focus and 1 of the projects that I spoke to about in checkers about how do I use AI to enable faster onboarding of customers. So can I read documents faster that come in? Can I analyze them faster, which means I can -- my salesperson spends a lesser amount of time with each customer. And so in any given day, is able to spend more time with customers or with more customers? So if you take, for example, our consumer finance business, bulk of the business happens between 5:00 p.m. and APM on weekends, right? That's a large part of our business. So those 3 are are critical in terms of how many customers the salesperson is able to turn around. So that's showing up in our cost to income. Jay, do you want to add any specific in terms of outlook?

Yes. So Shreya, I would put it is that we focus on making sure we consistently are able to deliver at a 2.5% on an annual basis in terms of ROA that we've spoken about in the short to medium term. And for that, there are levers which will move around. All I can tell you is that we're making sure as we make investments in AI, we won't let cost balloon where it hurts us because we're making sure that also helps us on the productivity front. That's the way I would put it. So you will see this improve a little bit. The key focus is really how do we push better growth and consistently be able to deliver on an annualized basis of 25% 0.5% plus in terms of ROE.

Next question is from the line of Raghav Garg from AMBIT Capital.

I just have one question. So if I hear you out on the asset quality improvement but I think that's also reflecting in the net slippages declining this quarter. But when I look at Stage 2 ratio, right, there seems to be some buildup quarter-on-quarter which is higher than the buildup that we saw in Q2 of FY '26 and FY '25. The question is, why is that accretion higher in Stage 2 ratios if you can point out which portfolios are contributing to this. That's my only question.

Thanks, Raghav. So Raghav, as I mentioned, there has been some stretch in terms of the CV and CE portfolio, CV primarily. It is seasonal we expect it to revert back to, I would say, previous quarter levels in the near future or in the coming quarter.

You said the asset finance portfolio?

Yes. CB especially a little bit of.

We'll take our next question from the line of Viral Shah from IIFL Capital.

I have two questions. One is a now this will be the second year where in our growth will -- so even this year, most likely, we will not be reaching say, 17%, 18% kind of growth. With the kind of pickup that we are seeing now in disbursements, are we confident that, say, at least F 28 will be a year where we will see a 17%, 18% kind of growth? That would be my first question.

So Viral, I can only tell you one thing. I am very hopeful that we should be moving pretty much in that direction and hopeful that Q4 starts to show that in terms of direction.

Got it. And then the second point is, I know you spoke about cost of funds and NIMs, et cetera. But just wanted to get your sense on basically what is the conversation that you currently have with banks, given that the 25 bps rate hike has come through, and especially, of course, in this previous very truncated rate cut cycle, the pass-through was inadequate and banks were reluctant to kind of say, ensure an adequate transmission, be it in terms of either MCLR or even EBLR wherein they were renegotiating the spread, do you see in that context, the say, the movements from bank borrowings to fully reflect the app moment? Or is there some cushion there?

Viral, I fully understand your question. Let me reply a bit differently. We're working hard towards making sure that we manage our borrowings in a manner that the interest cost increase or the borrowing rate increase is as low as possible. It could be with a variety of factors of managing how we borrow on which instrument, number one, we borrow on which benchmark and then work with banks where we're able to get the right rate. So combination of these, obviously, there will be a stretch and a stretch stretch and stress in terms of the rates that the bank needs to charge or the investors expect. And it's our job as a company within our treasury as a treasury function to make sure we're able to come as close to the 7.04% that we've done in the current quarter and support the business in terms of being able to hold on to our NIM. So it's a number of pieces in place, and we're very hopeful that the delta is the least.