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Healthy operational performance; NIM compression of ~10bp

Earnings in line; BT-OUT rates elevated relative to historical levels

* In 2QFY24, Home First Finance (HomeFirst) demonstrated healthy performance with 37% YoY growth in PAT to INR743m (in line). Additionally, NII rose 30% YoY to INR1.32b (in line). Non-interest income grew 73% YoY, driven primarily by higher assignment income.

* Opex grew 28% YoY to INR565m. PPoP grew ~40% YoY to INR1.04b (6% beat). Credit costs at INR80m translated into annualized credit costs of ~45bp (PQ: ~50bp and PY: ~40bp).

* HomeFirst has been opening new branches and expanding its distribution network in the peripheries of urban centers and Tier 2 cities. It has also been investing in technology and analytics to improve its underwriting and credit assessment capabilities, which will help the company target right customers in these markets. A strong and steady execution positions HomeFirst well to capture the significant opportunity in the affordable housing segment.

* We model an AUM/PAT CAGR of ~31%/~28% over FY23-FY26E. HomeFirst’s asset quality should strengthen and credit costs are likely to remain benign over FY24-FY26E. We increase our FY24 estimates by 3% to factor in higher other income. We reiterate our BUY rating on the stock with a revised TP of INR1,100 (premised on 3.7x Sep’25E BVPS).

* Key downside risks: a) sharp contraction in spreads and margins due to higher competitive intensity or because of measures taken to sustain business momentum and b) higher BT-OUTs leading to lower AUM growth.

Business momentum strong despite relatively higher BT-OUTs

* Disbursements grew 37% YoY to ~INR9.6b, leading to AUM growth of 33% YoY to ~INR83.6b.

* In 2QFY24, the company undertook direct assignments of INR970m (up 40% YoY) and co-lending transactions of ~INR500m (up 3x YoY).

* BT-OUTs rate (annualized) stood at 8.6% and rose ~3pp YoY. BT-OUTs were significantly elevated and the management shared that it has sensitized its team and trained them for customer retention. Management shared that it expects the BT-OUT to moderate in the subsequent quarters.

Marginal deterioration in asset quality; bounce rates rose in Oct’23

* GS3 (including the RBI NPA circular) and NS3 increased ~10bp/8bp QoQ 1.74%/1.22% as on Sep’23. PCR declined ~70bp QoQ to 30.3% (vs. 31% as on Jun’23).

* The 1+dpd deteriorated ~20bp QoQ to 4.5%, while bounce rates declined to 14.2% in 2QFY24, but inched up to 15.7% in Oct’23 (vs. 15% in 1QFY24).

* The company’s capital adequacy remains strong at 45.5% (Tier 1: 45.0%)

Spreads contract driven by moderation in yields and rise in CoF

* Reported yield moderated ~10bp QoQ to 13.6%, while the CoB rose ~10bp QoQ to 8.1%. Reported spreads contracted 20bp QoQ to 5.5%.

* Reported NIM declined ~10bp QoQ to 6.0%. Incremental CoF (excl. NHB borrowings) in 2QFY24 stood at 8.7%. Overall marginal CoF (incl. NHB borrowings) stood at 8.1%.

Highlights from the management commentary

* The normalization of bounce rates to pre-COVID levels will require time. HFFC is working toward addressing the behavior changes that occurred post COVID, with the goal of improving this metric.

* Management has communicated that there will be no further PLR hikes unless there is a corresponding increase in the Repo rate.

Valuation and View

* HomeFirst has invested in building a franchise, which positions the company well to capitalize on the strong growth opportunity in affordable housing finance. The company continues to expand its distribution network in a contiguous manner, covering Tier I and II cities within its existing states.

* We estimate HomeFirst to deliver a ~31% AUM CAGR over FY23-FY26E, along with NIM (as % of average AUM) of 6.4%/6.1%/6.0% in FY24/FY25/FY26. We expect cost efficiencies to kick in and drive a sustained improvement in its operating cost ratios until FY26.

* HomeFirst’s asset quality is likely to strengthen and credit costs are expected to remain low over FY24-FY26 as the company prioritizes early bucket collections, thus driving improvement in asset quality. We reiterate our BUY rating on the stock with a TP of INR1,100 (premised on 3.7x Sep’25E BVPS).

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