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Home First Finance: Consistent numbers to support valuation re-rating

June 11, 2024 Bruce Langford

Poised for the next leg of growth.

Key highlights

- Strong disbursal led to higher AUM growth

- More expansion and co-lending tie-ups expected

- Focus on higher yield segments to support NIM

- Robust profitability and improved asset quality

- Government thrust and strong sector tailwinds to aid growth

- Valuation reasonable, considering the strong earnings growth

Home First Finance (CMP: Rs 862; M Cap: Rs 7,630 crore; Overweight) started the year on a strong note, as the company crossed the Rs 10,000-crore-mark in asset under management (AUM), a significant milestone.

In the first cabinet meeting on June 10, the newly elected government reiterated its earlier stance that affordable housing sector will be a focus area.

The stock should be on investors’ radar after the announcement that three crore more houses will be built under PMAY – Garmin scheme (Pradhan Mantri Awas Yojana) in the meeting. Home First will stand to benefit given robust loan growth and stable asset quality.

The March quarter (Q4FY24) performance was characterised by a solid AUM growth, better spread, healthy asset quality, and improving return ratios.

Consistent growth in disbursement, compounding asset base.

Despite intense competition, loan growth momentum continued led by branch expansion in core and emerging states of Uttar Pradesh, Madhya Pradesh, and Rajasthan. The monthly disbursement run rate remain in the range of Rs. 300 to Rs. 350 crore, and the trend will continue.

Technology has played a key role in the rapid growth in disbursement, leading to higher productivity. AUM growth surpassed guidance, reaching Rs. 9,698 crore as at March end.

The company has been focusing on the high-yield loan against property segment due to the stable asset quality, and has guided to increase the share of LAP to 20 percent of AUM (13 percent now) over the next three years.

Co-lending will be favoured given the consistent spread of 5 percent. The arrangement will help in growing the company’s asset base, and is expected to reach 10 percent of AUM (now 3 to 4 percent) in the near-term.

Improving asset quality

The company has made progress in improving the asset quality by continued focus on early delinquency and improved collection efficiency.

This can be seen in the unhindered improvement in bounce rates, 1+ DPD (days past due) coupled with 10 bps sequential improvement in the GNPA (gross non-performing asset).

Credit cost saw sharp sequential improvement 20 bps to reach 0.1 percent in Q4 FY24, and is guided to remain in the range of 0.3 percent for FY25.

Higher profitability, backed by improved operating leverage and lower provision

The higher spread in the quarter was attributed to re-pricing, however, the management plans to absorb any further rise in the funding cost.

While cost-to-income has risen YoY, there has been a continuous effort to ensure optimisation of operating cost, led by the effective use of technology.

The RoA (return on asset) improved aided by higher spread and low credit cost. Higher leverage could lower RoA in the coming fiscal, which is guided in the range of 3.5 percent.

Outlook and valuation

Home first is a tech-driven company (95 percent of customers registered on the app), with strong presence in underpenetrated low-cost housing finance segment. It boast of a better-than-peer branch productivity, and strong capital back-up.

Given the strong headroom for growth, the company plans to add 20 to 25 branches every year with a focus on core geographies.

The management reiterated its AUM guidance of 30 percent and expects some NIM (net interest margin) compression with range-bound spreads (5-5.2 percent). However, continuous improvement in asset quality and benign credit cost will support ROA (return on asset) going forward.

The RoE (return on equity) improved to 16.1 percent in Q4FY24. Leverage would increase further, aiding a higher RoE, which is guided to remain over 16 percent for FY25, as per the management.

Secular demand trends, supply side reforms, and government’s thrust on housing could play a key role in increasing housing credit off-take in the coming period.

The stock bounced back more than 5 percent in the past one week, after correcting over 7 percent year to date. The stock is trading at 2.5 times FY26e book value, which seems quite reasonable as the company offers scalability with improved profitability.

The investor should consider buying the stocks only on big corrections.