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Our Take:

Home First Finance Company India Ltd (HFFC) is a technology driven affordable housing finance company that targets first time home buyers in low and middle-income groups. Majority of the customers are salaried class (74%) and housing loan contributes 92% of total AUM. It is one of the fastest growing housing finance company.

The management has put its conscious efforts to reduce concentration from key four states and establish its presence in newer areas/states. The expansion strategy includes pan India distribution driven by strategic market selection & contiguous expansion. Going forward, its future growth is likely to be driven by expansion of its successful credit delivery model into new markets and deeper penetration in the existing ones.

The core technology focus and implementation across the process cycle has resulted in reduced TAT (Turn Around Time), efficient collection methods and higher productivity (highest employee as well as branch productivity among the peers). Revival in demand for housing especially in the affordable housing segment due to conducive environment has improved the sentiments for the housing finance segment. The company is well capitalized to fund the higher growth. We believe that due to lower penetration and favorable demographics there is a good visibility of a decadal growth story for the HFCs. Prolonged economic slowdown poses risk to the pace of collections and business growth.

Any news on exit of PE players could bring volatility in the stock. High competition from large banks which have access to low cost funds could hurt the company in long term. We had issued Initiating Report on HFFC on 25th May, 2021 and recommended Buy at LTP and add more on Rs.461, for base case target of Rs.565 and bull case target of Rs.611.5 over the next two quarters. The bull case target of Rs.611.5 was achieved on 9th July, 2021 yielding return of 19.4%.

Valuation & Recommendation:

HFFC has a track record of delivering industry leading growth. With branches maturing, the operating leverage will start kicking in. We have envisaged 25% CAGR for Net Interest Income and 29% CAGR for net profit over FY21-FY23E. Further, we have estimated that the AUM would grow at 24% CAGR (home loans at 24% and other loans at 21% CAGR).

NIMs are estimated to improve gradually with enhanced liquidity management. The company is planning to increase its LAP mix from current 6% of AUM to 15% of AUM over the medium term which is likely to support yields. The cost of funds is on a declining trend with improved borrowing mix. Management has guided to reduce GNPA by 10 bps every month for the next 2 to 3 quarters.

With gradual economic pickup and improved sentiments, we believe that H2FY22 will post better overall performance compared to the first half. The stock at LTP is trading at 3.2x FY23 ABV. We believe that investors can buy HFFC at LTP of Rs. 593.5(3.2xFY23E ABV) and add more at Rs.528 (2.85xFY23E ABV) for the base case fair value of Rs.630 (3.4xFY23E ABV) and for the bull case fair value of Rs.677 (3.65xFY23E ABV) over the next two quarters.

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