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Strong growth and improvement in overdue buckets continue

Home First delivers a consistent strong performance characterized by a) strongerthan-expected disbursements/loan growth, b) moderated BT Out, c) adeptly managed portfolio spread, d) benign credit cost on improvement in 30+/90+ dpd buckets and e) enhancement of Stage-3 coverage.

Firmly focused on growth and enabling distribution expansion

Company is looking at growing AUM by 30% p.a. in the next 3-4 years underpinned by distribution expansion and market share gains. Home First’s market share in originations (relatable affordable segment) ranges between 1-3% at current locations/states, which the management aspires to increase to 5%. Connector-based operating model offers greater scalability; around 50% increase in the branch count is planned over coming two years. The key markets/states for the co. would remain GJ, TN, AP, TL, MH and KTK. Strong growth in LAP is likely to continue on a lower base with its AUM share reaching near 15% over time. Momentum is picking-up in the colending segment with monthly originations on the rise. Management does not foresee any meaningful impact on the demand momentum from increased lending rates.

Healthy outlook for Portfolio Spread and Asset Quality

After being stable in H1 FY23, the portfolio spread is expected to gradually come-off over coming quarters. Home First is contemplating another lending rate hike (after 25 bps in June) to mitigate any significant pressure from the funding cost. Portfolio spread should eventually settle at a much higher than pre-Covid level. Overdue buckets continue to shrink with 1+ dpd declining to 4.7% from 5% qoq and 30+ dpd decreasing to 3.3% from 3.5% qoq. Stage-3 assets fell from 2.1% to 1.9% (no write-offs), within which ONAN pool (<90 dpd NPL) reduced marginally to 0.8%. Credit cost was marginal at annualized 30 bps, representing growth related provisions and ECL coverage enhancement on Stage-3 loans (from 22% to 26%).

As per the management, the marginal increase in Bounce Rates during recent months was largely due to peculiar customer behavior. Adjusted for the customer pool clearing through UPI within 2-3 days of bounce, the bounce rates are stable.

Trajectory of growth, spread and asset quality key for durable RoE expansion

Sustained robust execution on growth and asset quality underlies our conviction on Home First. We estimate strong RoA delivery of avg 3.7% over FY23-24 with RoE closer to 15% next year. We have a BUY rating on the stock with 12m PT of Rs1,030. Stock trades at 3.5x/26x PABV/PE on FY24 numbers.

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