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Core PPoP miss driven by spread compression

Earnings in-line on reported basis, but internals mixed

Home First’s earnings came in-line on reported basis but was supported by higher-thanusual assignment income. There was a miss of 4%/10% on NII/PPOP excluding the assignment income, as Portfolio Spread contacted by 20 bps qoq and Opex continued to grow at high rate due to tech and distribution investments. Home First’s performance was internally characterized by 1) persistence of BT pressure (higher-than-trend BT Out and back-book repricing), 2) stable disbursement yield (competitive pricing for growth), 3) steady asset quality (stable PAR buckets) and 4) sustained ramp-up of LAP and Colending. Significant increase in Balance Sheet liquidity (14% of TA v/s 10% in Q2) exerted additional pressure on NIM. Though Bounce Rates have marginally gone up, it is not causing increase in 30+ dpd and hence stable credit cost trajectory remains stable. Decline in employee base during the quarter was not on account of increased attrition but due to recruitment cycle, as per the Management.

Management remains confident about delivering 30% pa AUM growth

Home First’s aspiration to grow AUM at 30% pa stays. The plan is to grow disbursements by 25-30% pa by gaining market share in existing markets/states by increasing branches/touchpoints in more pin codes. Sharper focus would be on states like UP, MP and RJ where co. has negligible-to-low market share. The number of overall touchpoints would be increased to 500 in next three years from around 300 currently, which will include core branch addition of around 25 per annum. Co-lending adds significant growth opportunity and the share of it in originations is expected to rise from current 6% to 10%. The share of LAP in book would also increase as portfolio’s credit performance has been good. Management expects BT Out rate to moderate. The active connector base has been growing and stands at near 2900 from around 2400 as of Mar’23.

Significant spread contraction; Asset quality stable

Home First witnessed a decline in Portfolio Yield for second consecutive quarter manifesting 1) re-pricing of some back-book (BT Requests), 2) NHB drawdowns (goes towards origination of lower-yielding loans) and 3) increasing share of co-lending. CoB moved up on expected lines reflecting impact of MCLR increases on bank loans. Management expects CoB to increase by another 10 bps in Q4 FY24 and has maintained its medium-term spread guidance of 5-5.25%. The co. intends to pass on the benefits of future CoB reduction to the customers. 1+ dpd/30+ dpd/Stage-3 loans were stable at 4.5%/3%/1.7% and write-offs continue to be marginal. Credit cost was steady at <40 bps. ECL coverage on Stage-2 assets further came down to 7.8% (8.6% in Q2 FY24 and 10.2% in Q1 FY24).

Retain BUY, but watchful of BT pressure and employee dynamics

We are largely maintaining estimates but would closely monitor any emerging risks to current high growth rate and RoE progression. BT and employee management could become key challenges if they evolve further. However, management is confident about these matters not becoming challenges in the future and hence has retained growth and RoE improvement outlook. By maintaining estimates and BUY recommendation, we back management’s expectations since they have delivered on guidance in the past.

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