Add Home First Finance Company Ltd For Target Rs.1,500 By InCred Equities
Management meet highlights
* HFFC indicated that it’s premature to conclude the direction of insurance products, though it highlighted alternates are available for a cover and income.
* Affordable housing demand remains strong with the rise of GCC-led jobs offsetting IT sector dampness and ample untapped scope in top cities.
* We believe the concerns are overdone and maintain our high-conviction ADD rating on the stock with a TP of Rs1,500 for the strong execution track record.
Insurance disruption manageable, but credit costs could rise
We hosted Home First Finance Company (HFFC) where we interacted with Mr. Ajay Khetan, deputy CEO & CBO and his team who indicated that it’s premature to conclude the impact and the direction of Insurance Regulatory and Development Authority of India or IRDAI’s draft circular. The base case assumption is that a solution will be worked out for all stakeholders. Any major disruption or reduction in the issuance of insurance policies to the customers may possibly nudge credit costs higher, while there are alternate options to secure the property via mortgage guarantee and the likes. Further, most of the loans included a life cover, with the premiums estimated to be a low single-digit proportion of the loan book
Pricing and demand outlook intact; top 200 cities in focus
HFFC observed no major disruption in pricing and demand while recognising that looming clouds on IT services-related jobs have been partially offset by rising employment in Global Capability Centres or GCCs. Its management highlighted that top-6 cities accounted for a low double-digit proportion of Assets Under Management (AUM) with ample untapped potential, subject to sharp loan ticket size expansion on account of bigger homes. The midterm strategy involves scaling up co-lending to absorb rising ticket sizes. The broader focus remains on top-200 cities aided by new market growth coming from select locations in Madhya Pradesh, Uttar Pradesh and Andhra Pradesh. AUM growth is reiterated to be around 25% YoY in FY27F, with newer markets growing at a higher pace. Competition from banks is indicated to remain at FY25/FY26 levels.
Further room to improve branch efficiency; spread guidance stable
Spread is reiterated at 5-5.25% despite the likelihood of a policy rate hike, given the fully floating loan book which allows a relatively quicker transmission of the higher cost of funds. Furthermore, despite enjoying high branch productivity vs. most peers, HFFC gave guidance of a further scope to improve branch productivity from current levels. The company continues to demonstrate leadership in banking on pockets of growth, specifically in the builder space, despite the rise in competition. We expect its RoE to be ~16% in FY28F and believe that its valuation remains attractive due to calibrated growth and proven track record. We maintain our high-conviction ADD rating on HFFC with a stable target price of Rs1,500, valuing it at 2.9x FY28F BV and 19x FY28F EPS. Downside risks: Slowdown in AUM growth, NIM & asset quality stress.
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