Update On Home First Finance Company Ltd By Emkay Global
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Structural tailwinds
We met management of Home First Finance (HFF) to get insight into the company’s growth plans, competitive landscape, and differentiation strategy. Here are the highlights of our discussions:
* Focus on increasing presence in very competitive urban market: HFF is focused on increasing penetration in an extremely competitive urban housing market. Gujarat, Maharashtra and Tamil Nadu, which are well-serviced states, form 70% of HFF’s loan book. The company’s existing book clearly demonstrates the opportunities available in the urban mortgage market and the variation in the risk-taking appetite of mortgage lenders. New-to-credit customers account for ~40% of HFF’s loan book, with ~75% of them being salaried customers (Exhibit 4).
* Low-ticket salaried home loan remains key product; spreads remain healthy: The current loan book profile carries ~92% home loans, ~6% LAP and ~2% developer loans (Exhibit 3). The company also provides top-up loans to existing customers once the credit record with HFF is established. The company plans to largely maintain this mix going forth, with a heavy tilt toward home loans. The average yield for HFF is ~13% and the average cost of funds is ~8%.
* Operational flexibility and quicker TAT are key features: In the highly competitive home loan market (especially in urban India), HFF differentiates itself by demanding relatively fewer documents, identifying the undocumented/informal sources of income as well as family income, and offering loans in short TAT (~48 hours). On account of this, HFF’s overall customer base expands within the same geography and within similar credit profile customers.
* Healthy capital adequacy to ensure consistency in growth without need for nearterm dilution: HFF directly sources its customers and does not rely on DSAs. HFF banks on its 70+ branches across states to source loans. The company also has tie-ups with builders, masons, contractors, furniture retailers, etc. to incrementally source loans. With a CAR of ~63% and leverage of 2.5x, HFF believes that it has adequate capital to grow at a rate of ~30% per annum for the next 3-4 years.
* Promoters and valuation: HFF is promoted by True North and Aether, holding 20.3% and 13.4%, respectively. HFF is also backed by Warburg Pincus (28.8%) and Bessemer (7.8%) (Exhibit 9). Strong ownership provides the required comfort in the company’s ability to achieve its mid- to long-term goals. HFF trades at 4.2x FY20 P/B, whereas peers Can Fin Homes trades at 3.2x FY20 P/B, LICHF at 1.1x FY20 P/B and HDFC at 2x FY20 P/Standalone book. We remain structurally positive on the housing landscape in the wake of all-time low interest rates, high affordability, favorable demographics and support from the government in terms of lower stamp duty.
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