Will Home First Finance’s disbursements sustain despite stiff competition?
Strong quarter across all operating and financial parameters; spread beats guidance.
Highlights:
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- Strong disbursal led to higher AUM growth
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- Distribution/geographic expansion & market share gains
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- Robust Profitability
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- Valuation reasonable, considering the strong earnings growth
Home First Finance (HFFC; CMP: Rs 936; M Cap: Rs 8,250 crore; Overweight)
posted strong earnings in Q2FY24, with net profit rising around 37 percent year on year (YoY) on the back of a strong growth in asset under management (AUM).
The company reiterated the AUM growth guidance of 30 percent and expects it to cross the Rs 10,000-crore-mark in the next 12 months, driven by distribution expansion and market share growth.
Q2FY24 update
Robust loan growth
HFFC grew its book by over 33 percent YoY on the back of buoyant demand from tier 2/3 cities in the core regions of Gujarat (32 percent) and Maharashtra (14 percent), coupled with a strong policy thrust.
Backed by robust growth in disbursements (up 37 percent YoY) in Q2, the lender’s AUM reached Rs 8,365 crore in September.
The management expects a similar growth trend to continue in the second half of the current fiscal (H2FY24), and has guided disbursements to reach Rs 4,000 crore in FY24, and be range-bound between Rs 4,800 crore and Rs 5,000 crore in FY25.
The company’s focus remains on deeper penetration into the key areas of western and southern markets, where the average ticket size is higher (ATS of Rs 10 lakh). It plans to double presence to 400 cities in the next 3-4 years in these markets. That said, expansion into the northern states (low ATS, but low penetration) will be the key driver to achieve the next AUM milestone.
Stable asset quality, benign credit cost
There was a marginal sequential deterioration of 6 basis points (bps) in Gross Stage 3 (GS3) ratio in Q2 at 1.70 percent. However, the asset quality has stabilised to pre-COVID levels and the GS3 ratio has improved by 20 bps YoY.
GS3 assets are loans which have been overdue for more than 90 days.
As the company penetrates deeper into tier 3 towns, more self-employed customers (30 percent of AUM) will be on-boarded, and the mix of salaried customers could reduce to 60 percent of AUM in the long term, according to the management. The asset quality will need continuous monitoring as the AUM mix changes.
That said, credit cost remains benign at 0.4 percent in Q2 and it is expected to be range-bound between 30 bps and 40 bps in FY24.
Scalability with profitability
Despite interest rate challenges, HFFC achieved a spread of 5.5 percent in Q2, well above the guidance of 5.25 percent.
As operational efficiencies kick in, there has been a sharp reduction in cost-to-income ratio (down 110 bps QoQ) in each subsequent quarter, boosting profitability.
HFFC achieved industry-leading return on equity (RoE at 15.6 percent in Q2), way ahead of expectations, and the management expects a similar trend in the next 2-3 years on the back of strong fundamentals and sector tailwinds. The guided range for RoE is between 15 and 16 percent for the near term.
Outlook and valuation
Low housing penetration in under-served markets: Affordable housing finance is a multi-year growth opportunity with high yields across cycle.
Growth outlook strong: Currently, HFFC holds only a 2 percent market share and plans to reach 5 percent, suggesting a strong growth potential. HFFC added seven branches in Q2 (total 120 braches as at September-end) and plans to add 20-30 branches annually to maintain the asset growth guidance.
The branch expansion strategy will involve simultaneously entering new markets and deepening presence in existing ones. Moreover, technology has been at the centre of business since inception, and as the company grows, digital adoption remains the key focus area.
Although competitive intensity had increased, given the higher balance transfers in subsequent quarters, the management stated that the transfers are due to consecutive lending rate hikes, and the same will moderate, going forward.
Margin trajectory: The management expects a borrowing cost hike of 10-20 bps in H2FY24, and the long-term spread in the 5.25 percent range. That said, Rs 450 crore of NHB sanction line remains unutilised, which can be used based on the business needs. This could lower overall funding costs.
Assuming that there is no change in policy rate, the borrowing cost will remain at 8.1 percent, and NIM (net interest margin) is expected to remain stable at 6 percent in FY24.
At the current market price, Home First is trading at 3.2 times FY25e book value. Valuation seems quite reasonable on the back of scalability (smaller balance sheets), stable asset quality, superior return ratios and continuity in senior management, which, in our view, is a pre-requisite to achieve the stated growth and earnings guidance.
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