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Narrative and thesis intact; reiterate our conviction BUY

Valuations now attractive to invest in an otherwise quality franchise

* Home First Finance (HomeFirst), in our view, is among the few high-quality and transparent franchises in the listed Affordable Housing Finance (AHFC) sector. Particularly, the company has demonstrated consistent execution on its guided metrics, across AUM growth, margins/spreads, asset quality, and credit costs.

* Arguably, the company did slow down its disbursements during the two COVID waves and report asset quality deterioration (as did the rest of the sector). However, it has shown remarkable resilience to exhibit consistent business momentum and asset quality improvement over the last four quarters.

* We had initiated on HomeFirst in Sep’22. Since our initiation, the stock price has corrected ~22%. Further, the price correction since it reported its 1HFY23 result has also broadly been the same. While there could be other extraneous reasons that could have led to this sharp correction in stock price, we strongly believe that our thesis on HomeFirst and confidence in its ability to demonstrate healthy AUM growth, offset margin compression with a sustainable improvement in cost ratios complemented with benign credit costs still remain intact.

* HomeFirst is an affordable housing franchise that has consistently exceled in technology adoption aiding healthy underwriting and faster turnaround. The company has successfully cracked the connectors and developer channels for its loan originations. It has the core management team, infrastructure and processes in place to ensure healthy AUM growth and low risk-adjusted credit costs.

* We model an AUM/PAT CAGR of ~30%/~23%, respectively, over FY22-FY25E. HomeFirst’s asset quality should exhibit strength and credit costs are likely to remain benign over FY23E-FY25E as there are no sticky NPAs from the past. With an RoA/RoE profile of 3.8%/15.6% by FY25E, we believe that the current valuation of 2.9x FY24E P/BV presents an attractive entry point to a quality franchise. Reiterate BUY with a TP of INR900 premised on 3.5x (earlier: 4.0x) Sep’24E BVPS. Key downside risk is a sharp contraction in spreads/margins due to its inability to pass on higher borrowing costs to sustain business momentum and avoid higher delinquencies.

Leveraging its core strengths; tech platform cutting across business functions

* HomeFirst was one of the earliest adopters of the cloud-based SalesForce platform. The company applies its robust technology infrastructure across its business functions – aggregator app for efficient sourcing of leads, RM app for entering all details with respect to potential opportunities into the system, an integrated customer CRM and LMS on a cloud-based platform and a dedicated portal for legal and technical vendors.

* Connectors form the backbone of originations for HomeFirst. Despite nonexclusivity, connectors pass on the leads to HomeFirst because of the company’s fairness and transparency as well as the quick turnaround, which is appreciated by both the connectors and the customers alike.

Business model centered on managing costs, TAT and risks

* Turnaround time, in our view, is also one of the surrogates for cost. Higher efficiency/productivity of existing branches and employees by deploying automation, technological interventions and digital tools can lead to a steady improvement in cost ratios. HomeFirst, with its lean physical branch network, effectively utilizes its virtual branches and connector network. While investments in physical branches and employee onboarding will keep opex elevated in FY23E, we expect ~40bp decline in opex over the next three years to reach a steady-state opex/average AUM of ~2.2% by FY27.

* The company has adopted technological innovations such as e-NACH, e-Sign, eVault and e-Stamp Paper and has also introduced various apps/web portals for connectors, RMs and customers to make the customer onboarding journey extremely seamless as well as further improve on turnaround times. It has exhibited a consistent improvement in the proportion of loans approved within 48 hours (from the time of login by the RM). In 2QFY23, the company reported that 89% of its loans were approved within 48 hours.

* Centralized underwriting has kept asset quality benign and aids HomeFirst in taking objective credit decisions. Given the company’s strong focus on managing risks, it is not undertaking any activities that would lower its TAT at the cost of higher risks.

* The company has also reduced its exposure to under-construction properties, and the proportion of pre-EMI in its gross loan assets has declined steadily over the last five years. The objective of all these measures is to benefit from its robust underwriting framework in order to demonstrate superior asset quality and low risk-adjusted credit costs across cycles.

Benign credit costs; superior RoA profile among peers

* GNPA/Stage 3 of <1%, in our view, is the gold standard in affordable housing finance, and we estimate the company to move towards that target very quickly over the next three years. Based on our asset quality estimates, we expect HomeFirst’s credit costs to remain benign at ~30bp over FY23-FY25.

* A quick glance at the DuPont table makes it clear that HomeFirst has levers on operating costs and credit costs to mitigate the adverse impact of margin compression. In a normalized environment, HomeFirst can deliver an RoA of 3.7- 3.8% over FY23-FY25E. We have factored in a ~20-40bp YoY improvement in leverage over FY23-FY25E. With this gradual improvement, we estimate the company to deliver an RoE of ~16% by FY25.

A brief update on the 2QFY23 performance

* Disbursements grew 36% YoY to ~INR7b, leading to an AUM growth of 36% YoY to ~INR62.8b. AUM growth was marginally impacted by subsidy received under the PMAY scheme.

* Reported spreads were stable sequentially at 5.8%, while reported NIM expanded 10bp QoQ to 6.5%. Incremental spreads in 2QFY23 declined ~20bp QoQ to 5.4%. The company suggested that the moderation in spreads will continue for the next few quarters since it will transmit only a part of the increase in borrowing costs and absorb the rest.

* HomeFirst’s 1+dpd declined ~30bp QoQ to 4.7%, while bounce rates increased to 15.6% in 2QFY23 and 15.1% in Oct’22 (v/s 14% in 1QFY23). The company attributed the increase in bounce rates to the changing preference or payment behavior of customers (to make repayments through UPI). Gross Stage 3 (including the RBI NPA circular) improved ~20bp QoQ to 1.9%.

A good franchise available at much affordable valuations now

* HomeFirst has invested in building a franchise, which is strongly positioned to capitalize on the growth opportunity in affordable housing finance.

* Given its lean physical distribution network, and ability to effectively utilize the connector and builder channels, HomeFirst enjoys the best productivity metrics (AUM/disbursement per branch or per employee) among its peers. This will help drive cost efficiencies for the company.

* The company has adopted strong risk mitigation measures, including slowing disbursements when the external environment is difficult, limiting exposures to particular projects/apartments, continuously building on its expertise of different geographical pockets and dominant customer profiles to limit risk, and real-time tracking of business volumes as well as collections that are actioned upon (as appropriate). We have extensively covered HomeFirst’s ‘Right to Win’ in affordable Housing Finance in our initiating coverage report (link).

* Technical considerations such as the noise around the supply overhang from the existing private equity promoters aside, we believe that the current valuation of 2.9x FY24E P/BV has made risk-reward highly favorable for a high-growth good asset quality franchise. Reiterate BUY with a TP of INR900 premised on 3.5x (earlier: 4.0x) Sep’24E BVPS.

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