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Play on the multi-year opportunity in affordable housing finance!

* Home First Finance (HomeFirst) is a retail affordable housing financier (ATS: INR1.1m), which operates mainly in the peripheries of urban centers/ Tier1/ Tier2 cities. It has presence across 13 states (top 5 contributing ~77% of its AUM) with a lean distribution network of ~93 branches.

* The company primarily targets the informal salaried segment, which is underserved by banks and large HFCs.

* The company is aggressively leveraging its core competencies to ride on the multi-year growth opportunity presented by affordable housing. HomeFirst’s first mover advantage in technology along with its strategic digital partnerships has resulted in robust underwriting, quicker turnaround and superior asset quality.  Backed by True North and GIC (combined shareholding of ~34%) and Warburg Pincus (~29%) – HomeFirst delivered an AUM growth of ~45% along with robust asset quality over FY17-FY22. Its gross NPA (<=1%) and credit costs (<40bp) have been benign all through, except during Covid. We model an AUM and PAT CAGR of ~29% and ~24%, respectively, over FY22-FY25E.

* HomeFirst has levers to mitigate the potential margin compression with a sustainable improvement in cost ratios. We expect the company to reduce its opex/avg AUM to 2.5% by FY25 (FY20: 3.4%).

* HomeFirst is gradually normalizing its asset quality and we model benign credit costs of ~30bp. Further, we estimate RoA of ~3.8-3.9% over FY23- FY25, which translates into an RoE of ~16% in FY25

* We initiate coverage on HomeFirst with a BUY rating and a TP of INR1,020 (premised on 4.0x Sep’24E P/BV). Key downside risks include: a) high business concentration in India’s best affordable housing states, b) vulnerability to external shocks restraining access to liquidity and c) likely sharp contraction in spreads/margins due to its inability to pass on higher borrowing costs and continued aggressive approach by banks and HFCs.

Consistently excelling in technology adoption

* HomeFirst was one of the earliest adopters of the cloud-based Salesforce platform. The company applies its robust technology infrastructure across its business functions to drive healthy underwriting and faster turnaround.

* HomeFirst also extensively utilizes its technology platform and data analytics, resulting in superior asset quality and better underwriting. Its proprietary property price predictor serves as an excellent tool for valuation of collateral, while the predictive analytics tool effectively forecasts the propensity to default.

* Some of the company’s more recent technology interventions such as eNACH, e-Sign and e-Stamp Paper have exhibited an improving adoption and further enhanced the onboarding journey for its customers.

Multiple sourcing channels with focus on improving throughput

* In addition to the connectors and developer channels (combined ~80% of the sourcing mix), the company also taps the construction community, branch marketing, digital platforms and forge strategic alliances

* HomeFirst recently entered into a co-lending partnership with the Union Bank of India and is also exploring more such partnerships. It has also tied-up with multiple platforms/aggregators including payments banks, credit bureaus and fintechs for digital loan originations.

Building blocks in place for an expected ~29% three-year loan CAGR

* The company’s core management team, infrastructure and processes in place can ensure a healthy AUM growth as well as low risk-adjusted credit costs.

* We expect HomeFirst to deliver a 29% loan CAGR during FY22-FY25 (although its execution needs to be monitored over the period).

Levers to mitigate margin compression with lower cost ratios

* Despite aggressive competition, HomeFirst can avoid a major yield compression by penetrating deeper into its existing states and increasing the proportion of LAP in its AUM to ~12-13% by FY25E. Further, despite expectations of a ~140- 160bp increase in the policy rates, we are building in a ~120bp increase in its cost of borrowings over FY22-FY25E.

* While investments in physical branches and employee onboarding will keep opex elevated in FY23E, we build a sustainable decline of 10-20bp in cost ratios every year and expect steady state opex/average AUM of 2.2-2.3% by FY27.

Restructured loans lower than peers; expect benign credit cost of ~30bp

* HomeFirst is constantly striving hard to improve its TAT and manage risks efficiently.

* Underpinned by improving collections and further decline in bounce rates, we expect a continued improvement in asset quality and model benign credit costs of ~30bp over FY23-FY25E

Multiple growth levers in place; initiate coverage with a BUY rating

* We estimate HomeFirst to deliver an AUM CAGR of 29% over FY22-FY25E and a NIM of 6.1%-6.4% over the same period. We expect cost efficiencies to kick in and drive a sustained improvement in its operating cost ratios.

* 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. Even with an RoA of ~3.8-3.9% over FY23E-FY25E, we estimate an RoE of ~16% in FY25E due to its high capital adequacy.

* We ascribe a target multiple of 4.0x Sep’24E P/BV for HomeFirst (valuation discount of ~5% to Aavas having a target multiple of 4.2x) to arrive at our TP of INR1,020. We initiate coverage on HomeFirst with a BUY rating.

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