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Home First delivered an in-line performance characterized by robust growth momentum, material compression in spread and incremental improvement in asset quality. As per management, strong trends in AUM growth and asset quality are likely
to continue and portfolio spread may not decline incrementally much. We have raised FY24/25 earnings estimates by 2-3% on lifting AUM growth assumptions. We now estimate AUM/earnings CAGR of 30%/25%, avg. RoA delivery of 3.6% and RoE reaching closer to 16% in FY25. Consistent strong execution on growth and asset quality underscores our conviction on Home First. Retain BUY with unchanged 12m PT of Rs1,030. Stock trades at 2.7x/18x PABV/PE on FY25 estimates.

No softening of growth; co. expects 30% p.a. AUM growth for few years

Aided by restrained and competitive pricing of new loans, branch addition and augmentation of connector base, the disbursements grew 11% qoq/36% yoy,underpinning an AUM growth of 6.6% qoq/33.8% yoy (8.5% qoq/36.6% adjusted for higher CLSS subsidy receipt). Annualized BT Out ratio inched-up to 6.1% v/s 4.8% qoq due to seasonality.

Co. expects AUM growth of 30% p.a. over the next couple of years driven by a) addition of touchpoints (branches + new branch location + digital branches to increase from current 265 to 400 by March’25) in Tier 2 & 3 towns of existing states (GJ, MH, AP, TL, TN & KTK), b) increasing market share to 5%+ in existing locations/markets, and c) expansion of addressable customer segments via co-lending. Management expects co- lending portfolio to swiftly reach 10% of AUM. Connector-based operating model offers immediate scalability at new branches/locations and of new products like LAP & Co-lending HL in current distribution. Strong traction in LAP is likely to continue on a lower base with its AUM share reaching 15% in the medium term.

Stabilization of portfolio spread in H1 FY24

Portfolio Spread contracted qoq from 5.7% to 5.5% due to sharp increase in CoF. CoF increased from 7.4% to 7.9% with marginal CoF further rising to 8.8% (8.5% in Q3 FY23). No NHB funding was availed in past 3-4 quarters, and thus its share in
borrowings has declined steeply from 25% as of Q1 FY23 to 15% as of Q4 FY23. Portfolio Yield improved sequentially from 13.1% to 13.4% on the back of 50 bps rate hike from Dec 1st and small increase in marginal lending rate (13.5% v/s 13.2% in Q3
FY23). Co. has taken another lending rate hike of 50 bps effective April 1st, and this along with availment of low-cost NHB re-financing worth Rs6bn in the same month could likely improve portfolio spread marginally in Q1 FY24. With expectation of CoF
peaking at 8.2% in Q2 FY24, the management is confident of maintaining spread well above 5.25% in medium term.

Asset quality improves further; provisioning strengthened

Overdue buckets continue to shrink with 1+ dpd declining to 4% from 4.4% qoq and 30+ dpd decreasing to 2.7% from 3% qoq. Stage-3 assets improved from 1.8% to 1.6% with <90 dpd NPL stable at 0.7%. Material recoveries from SARFAESI actions continued and write-offs remain marginal (~Rs30mn in Q4 and ~Rs100mn in FY23). Credit cost was moderate at annualized 40 bps and was mainly driven by enhancement of ECL coverage on Stage-3 assets (34% v/s 29% as of Q3 FY23). Overall ECL provisions were maintained at 0.9% of loan assets. Management expects some incremental improvement in asset quality through FY24 and thus assesses credit cost of 30-40 bps.

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