Emkay Global has reiterated BUY recommendation on HDB Financial Services, maintaining confidence in the company’s medium-term growth narrative even as operational challenges marred the Q2FY26 outcome. While asset quality and credit costs deteriorated versus consensus estimates, management’s assurances of improving CV/CE segment dynamics, stabilizing MSME performance, and a supportive macro backdrop have led analysts to trim target price to Rs850 from Rs900. With expectations of credit cost normalization and robust AUM expansion, HDBFS remains an attractive long-term bet in the NBFC segment, though investors should monitor segmental stress and operational execution over H2FY26.

BUY Recommendation Endures; Target Price Adjusted Downwards

Emkay Global maintains its BUY call on HDB Financial Services, revising the 12-month target price to Rs850 (previously Rs900), reflecting a more cautious outlook on near-term asset quality and credit cost trends. The target price implies an FY27E price-to-book multiple of 2.8x, indicating ample headroom for appreciation from the current market price of Rs743 and an anticipated upside of 14.4% for investors.

Q2FY26 Underperformance Driven by CV/CE Segment Stress

The company posted a softer quarter, with AUM growth at 13% YoY and credit costs rising to 2.7%—both metrics missing street and Emkay’s internal estimates. Gross Stage 3 (GS3) assets increased by 25bps sequentially to 2.81% as heavy monsoons resulted in excess idle vehicle time in the CV/CE segments (35 days versus a normative 20). Disbursements were muted, leading to AUM of Rs1.1 trillion and flat asset growth QoQ. Notably, the MSME segment has stabilized, and asset quality is assessed to have bottomed out, with H2FY26 set for improvement as monsoons recede and festive demand picks up.

Margin Expansion and Cost of Funds Moderation a Positive

HDBFS posted a 20bps sequential improvement in net interest margins owing to lower cost of funds—a testament to prudent liability management. The balance sheet remains well-diversified, with a positive ALM gap across maturity buckets up to five years, and the cost-to-income ratio declined to 40.7% from 42.7% in Q1FY26, reflecting continued operating efficiency gains.

Segmental Performance: Resilience Amidst Volatility

Enterprise Lending growth was measured, as the company exercised greater caution in unsecured business loans. The Loan Against Property (LAP) segment maintained stability, characterized by low credit costs and minimal exposure to micro-LAPs. Gold loan business displayed considerable traction, growing 40% YoY and 10% QoQ, buoyed by regulatory clarity and favorable prices. Within the commercial vehicle vertical, seasonal weak demand and flood-like conditions led to elevated stress, but management expects a rebound in Q3, catalyzed by festive activity and infrastructure spending.

Key Financials Snapshot

Risks and Opportunities: Segmental Stress and Festive Recovery

- The CV/CE segment has borne the brunt of inclement weather and deferred demand, which could recur in adverse conditions. Conversely, a robust festive season and infrastructure push offer visible catalysts for H2 recovery. - Consumer finance is expected to clock superior growth momentum, underpinned by rural demand and GST rationalisation. - Asset quality outside the stressed segments remains robust, with provision coverage at a healthy 55%.

Management Commentary and Strategic Roadmap

- The management projects credit cost normalization at 2.2% over a three- to five-year horizon, with AUM CAGR of 18–20%. - Diversification of funding sources coupled with yield optimization positions the company for sustainable margin expansion. - LAP and gold loans to provide strong ballast against volatility in enterprise and vehicle finance. - Efficiency measures are likely to keep the cost-to-income ratio below 42%, enhancing profitability.

Investor Levels and Technical Zones

- Current Market Price: Rs743 - Target Price: Rs850 (12-month horizon) - 52-week High: Rs892 - 52-week Low: Rs728 - Key Support: Rs728–Rs740 (accumulation zone) - Resistance Area: Rs780–Rs810 - Tactical investors may accumulate at sub-Rs750 levels, with momentum buyers targeting Rs850 over the medium term.

Bottomline: Retaining the Faith Amidst Short-Term Turbulence

Despite heightened credit costs and segment-specific stresses, Emkay's conviction in HDB Financial Services’ long-term trajectory stands firm. With strong retail franchise growth, sectoral leadership, and prudent balance sheet stewardship, HDBFS remains a core holding for investors seeking India’s NBFC exposure. Tactical volatility may persist, but portfolio recalibration and disciplined management are expected to secure the company’s continued outperformance as macro conditions improve.