Buy Home First Finance Company Ltd For Target Rs. 1,265 By Yes Securities Ltd
Misses disbursements and asset quality expectations
Soft disbursements, expected decline in spread and increase in delinquent pool
For second successive quarter, the sequential increase in HFF’s disbursements was modest; decelerating the disbursement growth for 9m FY25 to 23% yoy (31.5% yoy in FY24). The originations in Q3 FY25 were impacted to the extent of Rs250-300mn due to slowed registration in Karnataka and tightening of underwriting (nuanced, not overall). There was an increase in BT Out rate too, from 6.7% in the preceding quarter to 7.3%. Notwithstanding some shortfall in business and a higher BT rate, HFF’s AUM grew by 6.4% qoq/32.6% yoy. The product mix further shifted towards LAP which continues to grow much faster on a lower base aided by distribution penetration and sharp focus. Fee income jumped sequentially with full-quarter impact of insurance distribution commissions.
Portfolio Spread (excl. Co-lending) contracted 10 bps qoq to 5.2% owing to similar increase in funding cost. The marginal CoF continues to be slightly higher than stock CoF. Portfolio Yield was stable in the quarter with unchanged Origination Yield (remains below the former). Opex growth has been largely running in-line with the franchise growth. HFF’s 1+ dpd/30+ dpd increased by 30 bps each to 4.8%/3.1% owing to increase in Bounce Rate and decline in collection efficiency during the quarter. Management attributed these trends to usual seasonality and soft macro environment causing income volatility for some customers. Credit cost rose to 34 bps, also inflated by higher quantum of write-off. Higher fee and other income enabled HFF to remain on the trajectory of RoE improvement.
Management expects pick-up in disbursements and correction in delinquent pool in Q4 FY25
HFF expects the usual acceleration in disbursements over the coming quarters driven by significant branch/resource addition in past 15-18 months and the planned further augmentation. Registration situation in Karnataka is expected to ease out and adjustment to tightened underwriting would be behind in next couple of quarters. The new markets which would likely lead AUM growth would be Rajasthan, MP, UP and Telangana. The management is focused on taking the share of LAP to near 20% of AUM over next 2-3 years. The witnessed increase in the delinquent pool is largely expected to be pulled-back in Q4 FY25 as collection efficiency has improved in January. Guidance on credit cost remains at 30-40 bps. Portfolio Spread is expected to remain under pressure till funding cost starts to move down. Within bank borrowings, about 20% is linked to T-Bill/Repo and remaining is linked to MCLRs (nearly equally split between 3m, 6m and 12m MCLRs).
Announces Rs12.5bn capital raise; remain constructive on HFF
To fund 25-30% pa AUM growth in the long term, HFF plans to raise Rs12.5bn equity capital over the next 3-6 months. A successful capital raise would also enable the co. to receive a credit rating upgrade in 6-12 months. We have assumed the aforesaid capital raise in Q4 FY25 and estimate 27-28% AUM CAGR and 30% PAT CAGR over FY25-27 with RoE delivery of 15%+ in FY27. Stock trades at 14x P/E and 2x P/ABV on FY27 estimates. Retain BUY with a revised 12m TP of Rs1265. HFF is one of our preferred picks in the affordable housing space.
Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632
