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We maintain our BUY rating on HFFC with revised TP of Rs.1,175 as we roll over to Q1FY26E ABV. Home First Finance (HFFC) delivered strong performance in terms of AUM growth, sustaining its 30%+ trajectory with continued momentum in disbursements. Growth is expected to continue driven by higher share of LAP and branch expansion. Margins improved supported by rate hikes and higher NHB borrowing but is expected to see some pressure ahead as costs rise. Asset quality saw some impact due to seasonality; bounce rates remain monitorable. HFFC is our preferred pick in the affordable housing finance space given the consistency in growth, tech focus and strong management team. We believe premium valuation would sustain as it delivers RoE of 14-15% by FY25/26E supported by higher leverage.

* AUM growth remains strong at 30%+:

HFFC reported AUM growth of 33% YoY to Rs.77.8bn led by disbursements growth of 35% YoY/3% QoQ to Rs.8.9bn. The LAP book saw much faster growth at 78% YoY, albeit on a small base, with its share in the AUM increasing to 12%. The BT out ratio has seen marginal increase at 6.5% (vs. 6.1% in Q4FY23) due to higher interest rates. While AUM growth has remained at 30%+ since the past 5 consecutive quarters, management has maintained its growth guidance at 30%. We have factored in AUM growth of 29% CAGR over FY23-26E driven by higher share of LAP, branch expansion and increase in co-lending.

* Margins improve due to price hikes and stable costs -

HFFC witnessed NIM (calc.) improvement of 25bps QoQ to 7.96% as yields improved due to the full impact of rate hike of 50bps taken in April ’23 coming in during the quarter. Reported cost of funds saw marginal increase of 10bps QoQ supported by NHB borrowing. Management has maintained its guidance of 5-5.25% spreads as cost of funds is expected to increase by 20-30bps led by rate hikes by banks while yields would remain range bound. We expect NIMs to see some pressure in the next couple of years as yields remain range bound due to intense competition.

* Asset quality sees seasonality impact:

HFFC reported marginal deterioration in asset quality with gross stage 3 assets 1.64% vs. 1.60% in Q4FY23. Both 1+ and 30+ dpd saw some spike as bounce rates increased to 15%. Management has alluded the rise in bounce rates to seasonality and is not seeing any stress on the ground. Stage 2 assets have increased to Rs.841.7mn vs. Rs.656.5mn and remains monitorable. Credit costs came in at 49bps, flattish QoQ. We have increased our credit costs estimates at 53bps over FY24/25E (vs.48bps earlier) given the stickiness in the bounce rates and higher stage 2 assets.

* Valuation and rating:

HFFC has delivered strong operational performance with AUM growth sustaining at 30%+ and improvement in margins but some impact seen on asset quality on account of seasonality. While growth trajectory is expected to sustain, margins could see some pressure due to higher borrowing costs. HFFC remains our preferred pick in the AHF space and we maintain BUY with a TP of Rs.1,175 as we roll over to Q1FY26 ABV (P/ABV at 4.4x). Key risks: higher than expected NIM compression, bounce rates remaining sticky impacting asset quality.

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