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Technology Superstructure

We initiate coverage on Home First Finance Company (HFFC), a tech-focused housing financier catering to a niche clientele, with an ACCUMULATE rating and TP of Rs900. Focus in the key affordable housing markets, and targeted customer segment has seen HFFC report superior AUM growth and market share gains therein. However, balancing the asset growth while containing the 3Cs – the cost of capital, operating costs and credit costs is vital from attaining a more steady-state ROE that currently is suppressed following excess capital. We believe that a tech-backed lending model (entailing contained credit costs) and scale benefits (operational efficiency) will see ROE transit to a steady state.

* Strong growth drivers in place: Strong growth drivers in place: HFFC has a presence in key affordable housing markets of Gujarat, Maharashtra, and Tamil Nadu, which contribute 67% to the AUM. Expansion into the dominant Western and Southern regions, where the housing finance industry is concentrated, is likely to drive growth for HFFC. Focus on the underpenetrated EWS/LIG segment (77% of AUM) along with market share gains should also result in strong AUM growth. We factor in 30% CAGR growth in AUM over FY21-24E.

* Tech focus and omni channel sourcing ensure quality growth: HFFC has focused on being a tech-driven lender and all the processes from sourcing to collections are digitized. Its proprietary machine learning platform and integration with third-party sources like Hunter, Perfios, etc., enable it in better credit underwriting. It has a differentiated sourcing model where 70% of the leads are generated by ‘Connectors’. It has also tied up with PayTM, Paisabazaar for lead generation. Centralized underwriting with omnichannel sourcing and the use of data analytics ensure quality growth.

* Focus on 3Cs to drive ROE: Niche clientele and limited competition therein have enabled HFFC to enjoy stable yields. Further, a diversified borrowing mix with a respectable rating (rating outlook revised upwards to ICRA A+ positive) has aided in lowering the cost of borrowings. The success of the business model is contingent on the ability to contain 3C’s – cost of capital, operating cost, and credit cost. While a rising interest rate will have a bearing on NIM, the same will be offset by the scale benefits and tech-backed lending model. The culmination of the above, we see ROE inch to 11% by FY24E (vs ~9% in FY21).

* Valuation & Risks: We have valued HFFC on a PE basis and arrived at a target price of Rs900. Our blue-sky scenario suggests potential TP at Rs1,100. The bear-case TP is at Rs600. We recommend an ACCUMULATE on HFFC given strong growth drivers, improving productivity and stable asset quality. Key risks: higher than expected delinquencies, aggressive expansion leading to elevated operating costs and NIM compression due to higher cost of funds

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