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Exuding execution leadership in affordable housing

We met with the senior management of Home First Finance, represented by Mr. Manoj Viswanathan, MD & CEO, and Ms. Nutan Gaba Patwari, CFO, to gain insights into the current industry dynamics in affordable housing finance and the way forward for the company. Following are the key takeaways: 1) Home First is not seeing any spillover of stress from microfinance or short-term personal loans (STPL), and its asset quality remains largely stable; 2) demand continues to remain strong in the affordable segment, particularly in self-construction; 3) the ability to penetrate deeper into its existing states and improve the proportion of LAP in the loan mix are strategies that the company can leverage to achieve its desired spreads; and 4) within the next 12-24 months, Home First could potentially become the first new-age affordable housing company without a promoter and become a purely professionally managed company.

* Healthy growth potential in affordable housing: Home First is strategically positioned in the underpenetrated affordable housing segment, leveraging technology for faster loan processing and granular risk management. Its focus on both self-construction and apartment financing, a well-diversified geographical presence, and centralized underwriting (leveraging digital resources and account aggregators) give it a significant competitive edge.

* Operational efficiency driving profitability: The company’s disciplined approach to cost leadership (combined with technology-driven productivity gains) and its nimbleness in sourcing business from connectors enable it to deliver among the lowest opex ratios within its peer set today. The company's lean operations and robust credit quality further enhance its profitability and scalability.

* Tech platform characterized by its nimbleness and agility: The company has created a strong technology bedrock and a robust risk management framework, which will enable the company to keep scaling up with the same pristine asset quality that it demonstrated in the past.

* Robust capital management and low-risk portfolio: Home First has started focusing on three emerging states, Rajasthan, UP, and MP, which will act as its growth drivers over the next 3-5 years. With prudent underwriting (risk capped at <5% per project) and a DA/co-lending mix strategy, the company maintains a balanced risk-weighted portfolio. Home First is also among the few in its peer set, which is primed to deliver an RoE of ~17% by exit quarter FY25. We estimate ~29%/24% AUM/PAT CAGR over FY24-27.

* Home First’s asset quality is expected to remain strong, and credit costs are likely to remain benign. With an RoA/RoE of 3.4%/18% by FY27, we believe that Home First will continue to command premium valuations over its HFC peers. We reiterate our BUY rating with a TP of INR1,250 (premised on 3.5x Sep’26E BVPS). Sustained contraction in spreads due to high competitive intensity in the affordable housing segment remains a key downside risk.

Growth engine equipped to double AUM by FY27

* Home First has a diversified sourcing mix, which extensively leverages its connector network for sourcing home loans and other mortgage products. Its model of origination through connectors facilitates a grass-root connect with potential customers. This is the best origination model for the company.

Primed for strong growth potential in affordable housing

* Home First operates in a rapidly growing affordable housing market, driven by increasing urbanization and government initiatives to boost homeownership. The company has strategically pivoted away from developer-driven projects to urban self-construction loans. By adopting a well-diversified approach geographically, Home First avoids concentration risk, expanding its presence into high-growth areas with more housing activity.

* The company’s adoption of advanced technologies, such as cloud-based platforms and machine-learning models, ensures faster loan approvals, efficient property underwriting, and a superior customer experience. This unique positioning will enable Home First to capitalize on the untapped opportunities in the affordable housing segment.

Operational efficiency and profitability leadership

* Home First's operational model is built on cost leadership and technology-driven efficiencies, critical for profitability in the relatively low-margin affordable housing finance business.

* The company employs a lean structure with 1,600 employees and has effectively integrated account aggregator (AA) systems, achieving a 50-60% adoption rate. Home First's focus on maintaining low bounce rates (≤10% in the first 12 months) and improving productivity metrics will allow it to achieve a RoE of ~18% (without factoring in any capital raise). Additionally, its reliance on connectors for origination adds granularity and reduces operational risks.

Prudent risk management and capital optimization

* Home First maintains a conservative risk profile through disciplined underwriting and a diversified portfolio. The company limits single-project exposure to < 5%, ensuring minimal concentration risk. Its co-lending partnerships and direct assignment (DA) strategies help optimize the funding mix.

* The company is on track to scale its AUM to >INR200b by FY27. Management shared in its Sep’24 quarter earnings call that with a debt-equity ratio of 3.7x and strong capital adequacy of ~36.4%, it remains well capitalized, and it has about 12-18 months before it needs to look at a capital raise.

Valuation and view

* Home First's strategic positioning, coupled with its focus on cost efficiencies and robust capital management, supports a strong loan growth trajectory. Given the company's strong fundamentals, steady RoE improvement, and stronger loan growth (relative to its peers), Home First remains an attractive investment opportunity in the affordable housing finance segment.

* From a technical perspective, Home First now has a free-float market capitalization of ~74%. Private Equity (PE) investor exits in Home First have been among the most well-managed, wherein these investors have guided the markets well, instead of keeping investors guessing about the potential supply. We believe that the current valuation of 2.6x FY27E P/BV is reasonable for a franchise that is very well governed, has a healthy AUM growth trajectory, and best-in-class asset quality. We reiterate our BUY rating with a TP of INR1,250 (premised on 3.5x Sep’26E BVPS).

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