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* Home First Finance (HomeFirst)’s 1QFY24 PAT grew 35% YoY to INR692m (in line). NII rose 33% YoY to INR1.25b (5% beat). Non-interest income jumped 94% YoY, driven by higher assignment income and advertisement income.

* Opex rose 43% YoY (11% above est.), due to new branch openings, addition of manpower and resultant higher employee expenses. PPoP grew 40% YoY to INR978m (6% beat). Annualized credit costs stood at ~40bp (PY: ~30bp).

* HomeFirst has been opening new branches and expanding its distribution network in Tier 2/3 cities. It has also been investing in technology and analytics to improve its underwriting and credit assessment capabilities, which will help the company target right customers in these markets. A strong and steady execution positions HomeFirst well to capture the significant opportunity in the affordable housing segment.

* We model an AUM/PAT CAGR of ~32%/~27% over FY23-FY25E. HomeFirst’s asset quality should strengthen and credit costs are likely to remain benign over FY24-FY25E. We cut our FY24/25 EPS estimates by 2%/3% to factor in higher operating expenses. Reiterate BUY with a TP of INR1,010 (premised on 3.7x FY25E BVPS).

* Key downside risks: a) sharp contraction in spreads and margins due to the company’s inability to pass on higher borrowing costs to sustain business momentum and b) higher BT-OUTs leading to lower AUM growth.

Business momentum strong; BT-OUTs marginally elevated

* Disbursements grew 35% YoY to ~INR8.9b, leading to an AUM growth of 33% YoY to ~INR77.8b in 1QFY24. LAP contributed ~13% to AUM mix and HomeFirst continued to guide for this to rise to ~15% in the medium term.

* In 1QFY24, the company undertook direct assignments of INR790m (flat YoY) and co-lending transactions were also stable QoQ at INR350m.

* BT-OUTs in 1QFY24 stood at an annualized run-rate of 6.5% (PY: 5.6%). BTOUTs were marginally elevated even though they were within the guided range of 4-6%. BT-OUTs were primarily to large commercial banks who offered lower interest rates to the customers.

Increase in 1+dpd and bounce rates seasonal in nature

* GS3 (including the RBI NPA circular) and NS3 were stable QoQ at 1.6% and 1.1%, respectively. PCR declined ~3pp QoQ to 31% (PQ: 34%).

* 1+dpd deteriorated 30bp QoQ to 4.3% while bounce rates increased to 15% in 1QFY24 and 15.1% in Jul’23 (v/s 13.6% in 4QFY23). Management attributed the increase to the seasonality typically observed in the first quarter and expects it to normalize in the second half of the fiscal year.

* Capital adequacy ratio stood at 46.0% (Tier 1: ~45.5%) in 1QFY24.

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