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BT and Marginal Yields reflect competitive pressure

Strong growth but yield remains under pressure; asset quality improves

Excluding DA income (declined qoq on lower assignments), HFF’s NII was 1% below estimate while PPOP was 10% above expectations. Reported PAT was 7% higher than our estimate as credit cost was lower (~10 bps v/s usual 30-40 bps) due to asset quality improvement and material bad debts recovery. In Q4 FY24, the treasury income stood much higher due to increased balance sheet liquidity and there was significant sequential decline in opex owing to certain one-time reversals. RoA/RoE stood at 3.6%/16.1% Disbursement momentum remained strong (up 9.4% qoq/27% yoy) and underpinning sustained robust AUM growth (up 7.6% qoq/34.7% yoy). While the product mix and occupation mix of AUM was stable, the contribution of >Rs1.5mn loans rose to 44% v/s 41% in Q3 FY24 (risen by ~10 ppt over past six quarters). Growth in the largest market of Gujarat slowed to ~4.9% qoq (~6.7% qoq in Q3 FY24) despite 20% augmentation of branches in past three quarters; growth remained solid in RJ, MP, UP, TL, AP & TN. Portfolio Yield (excl. Co-lending) declined 10 bps qoq with Origination Yield (excl. Colending) declining by 30 bps. Margin CoB (ex-NHB) remained stable at 8.7% but overall CoB increased by 10 bps. Portfolio Spread came-off by 10 bps to 5.2%. Asset quality improved with sequential reduction of 30 bps/20 bps in 1+ dpd/30+ dpd. Bounce Rates were 14.7% versus 15.1% in Q3 FY24; loan write-offs were negligible. Lower credit cost was additionally supported by marginal decline in Stage-1 ECL coverage.

Growth could remain around 30% pa; product mix (incl. co-lending share) can be a lever for RoA protection

Notwithstanding the increase in BT Out and competition, Home First can deliver 27- 30% AUM CAGR over FY24-27 on the back of 1) large and growing low-ticket affordable housing market and demonstrated execution rigor by the Management, 2) persistent Branch/RO addition driven by market potential, deeper penetration, and regional diversification, 3) continuous expansion of connector network with active engagement, 4) improved throughput from other sourcing channels with growing recognition of HFF brand, 5) further headroom to increase the share of LAP and 6) calibrated scaling-up of co-lending AUM. From the perspective of funding, underwriting and tech capability, scaling the book to Rs200bn is unlikely to be an issue for HFF. Key monitorable would be employee management/attrition. Management expects to maintain portfolio spread in the band of 5-5.25%; however, the incremental spread has been trending below 5% due to increase in CoB and limited ability to fully transmit it due to competition. The three lending rate hikes in this cycle (cumulating 125 bps) has already increased BT Out. Further, the origination yield has been maintained in a narrow band to drive growth. Any further increase in CoB could incrementally hit the portfolio spread. Hence, driving up the share of LAP and colending would be critical for HFF to protect structural RoA.

Retain BUY, but would closely watch BT, incremental Spread and employee metrics

We expect continuance of strong growth with RoE breaching the 17% mark in FY26 assuming a calibrated pass-through of funding cost decline. The stock trades at 16x PE and 2.7x PABV on FY26 for an estimated earnings CAGR of 24% over FY24-26. We retain BUY but have trimmed the 12m PT to Rs1080 (earlier Rs1140). Key monitorables for growth and profitability would be a) branch/connector additions, b) employee attrition/cost, c) product mix evolution, d) BT Out, e) origination yields & incremental spreads, and f) 30+ dpd & write-offs.

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