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Managing the trade-offs between spreads and loan growth well

* HomeFirst’s 4QFY23 PAT grew 6% YoY/9% QoQ to INR640m. Adjusted PAT (after excluding the benefit of tax rate change in 4QFY22) grew 33% YOY. FY23 PAT rose 21% YoY to ~INR2.9b (PY: ~INR1.9b in FY22).

* Annualized credit costs stood at 48bp (PQ: 44bp). NII grew 31% YoY to INR1.12b. Non-interest income grew 55% YoY, driven primarily by higher assignment income and advertisement income.

* 4QFY23 opex grew 30% YoY, led by investments in new branches and resultant higher employee expenses. PPoP grew 38% YoY to INR910m.

* 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 it target right customers in these markets. A strong and steady execution positions the company well to capture the significant opportunity in the affordable housing segment.

* We model an AUM/PAT CAGR of ~31%/~27% over FY23-FY25E. HomeFirst’s asset quality should strengthen and credit costs are likely to remain benign over FY24-FY25E. We increase our FY24/25 EPS estimates by 4%/3% to factor in higher loan growth and other income. Reiterate BUY with a TP of INR900 (premised on 3.3x FY25E BVPS).

* The key downside risk is a sharp contraction in spreads and margins due to the company’s inability to pass on higher borrowing cos

Business momentum remained strong; BT-OUTs at normalized levels

* Disbursements grew 36% YoY to ~INR8.7b, leading to AUM growth of 34% YoY to ~INR72b. Disbursements jumped 48% YoY to ~INR30b in FY23.

* AUM growth was marginally impacted by CLSS disbursements (of ~INR1.4b in 4QFY23) received under the PMAY scheme. Excluding PMAY, AUM would have grown 37% YoY.

* BT-OUT in 4QFY23 moderated to an annualized rate of 6.1% (PY: 6.5%).

Improvement in asset quality; bounce rates decline sequentially

* Gross Stage 3 (including the RBI NPA circular) improved ~20bp QoQ to 1.6%. PCR improved ~5pp QoQ to 34% (v/s 29% in 3QFY23), leading to a decline in NS3 to 1.1% (PQ: 1.3%).

* The 1+dpd improved 40bp QoQ to 4.0%. Bounce rates declined to ~13.6% in 4QFY23 and saw a seasonal increase to 14.6% in Apr’23 (v/s 14.9% in 3Q).

* The company’s capital adequacy ratio was strong at 49.4% (Tier 1: ~49%).

NIM and spreads to recover in next quarter after QoQ contraction

* Reported yields increased 30bp QoQ to 13.4%, while the CoB rose 50bp QoQ to 7.9%. Reported spreads contracted ~20bp sequentially to 5.5% and the company continues to guide for spreads of 5.25% (at the lower end of the guidance). Reported NIM declined ~35bp QoQ to 6.1%.

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