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Sustained strong delivery to drive further rerating

Our view

Post delivering a resilient performance in a Covid-impacted Q1 FY22, Home First delivered an operationally robust show in Q2 FY22 on both growth and asset quality fronts. Disbursement were best-ever at Rs5.15bn (~15% higher than March quarter), which along with sustained moderate BT Out (BAU portfolio run-off rate at 18%) drove significant expansion of loan book (7.5% qoq/24% yoy). New business originations were driven by Gujarat amongst the vintage markets and a host of newer markets like TL & AP, TN, RJ, UP and MP where Home First has a much lower penetration.

Portfolio spread continues to improve (5.6% v/s 4.8% in Q2 FY21) with sustained decline in CoF. Incremental spread in Q2 FY22 was marginally lower though at 5.3% due to absence of NHB funding and related on-lending (which generally carries higher spreads). Buffer liquidity on the BS came down by Rs2bn, still at 19% of TA.

There was steeper-than-expected correction in overdue buckets on sequential basis - 1+ dpd decreased to 7.6% from 8.9%, 30+ dpd declined to 5.2% from 5.8% and 90+ dpd dropped to 1.7% from 1.9%. There were no significant write-offs in the quarter, thus asset quality improvement was largely driven by better collections/resolutions. Only 0.3% of the portfolio (106 customers) was restructured in Q2 FY22, with total restructuring at 0.8% (part of Stage-1, but provided @ 15%).

Even as the incremental provisioning requirement was negligible due to reduction in 30+ dpd (no meaningful write-offs), overall ECL provisions were raised to Rs0.5bn (1.3% of loan portfolio) with the co. augmenting coverage on Stage2 and Stage-3 assets. Collection efficiency is nearly back to pre-Covid level (98% in Sept) and bounce rates have improved to 15%. in Oct from 16.5% in Q2 FY22 and 18.3% in Q1 FY22.

Continuation of superior execution on growth and asset quality should inspire investors’ confidence on HomeFirst’s operations, underwriting and collections. Demonstrated consistency of strong performance will continue to re-rate the stock. We significantly raise FY22-24 earnings/ABV estimates by 5-15%/2.5-3.5% mainly on account of positive adjustments to credit cost and opex growth assumptions. Valuation of 3.2x FY24 P/ABV does not fully capture structural growth and profitability prospects. There is longevity to HomeFirst’s growth run from a sharp focus, strong processes, large addressable opportunity and low competition. We hold a high-conviction BUY and raise 12m PT to Rs850.

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