Buy Home First Finance Company Ltd For Target Rs. 1,360 By JM Financial Services
Strong and in-line
Home-First Finance Company (HFFC) reported yet another strong quarter with PAT beat of +3% on our estimates at INR 1bn (+25%/+8% YoY/QoQ) leading to healthy RoA/RoE of 3.5%/17%. AUM growth was healthy at +31%/+6% YoY/QoQ supported by strong disbursements growth of +16%/+7% YoY/QoQ. Margins moved up +20bps QoQ leading to strong NII growth of +26%/+6% YoY/QoQ. Steady opex and other income led to in-line operating profit of INR 1.46bn (+28%/+4% QoQ YoY/QoQ). GS3/NS3 was marginally down at 1.7%/1.3% (-6bps/-4bps QoQ). Management guidance for FY26E remains strong: i) ~26- 30% AUM growth with aim to reach INR 200bn in FY27E, ii) margins improvement led by recent fund raise and ratings upgrade with spreads of 5%+, iii) Opex/assets at 2.7-2.8% (vs 2.7% in FY25) and iv) credit costs of 30-40bps. We believe that the guidance laid out by the management coupled with its history of consistently delivering exactly in-line performance, is sufficient to justify its premium valuations. We expect HFFC to outperform its peers during a favourable rate-cuts scenario and expect the company to deliver avg. RoA/RoE of 3.5%/14.2% over FY26E/FY27E (lower RoEs are on account of recent capital raise from QIP). Maintain BUY with a revised TP of INR 1,360 (valuing HFFC at 2.9x FY27E BVPS) against our previous TP of INR 1,200 based on 2.6x FY27E BVPS.
* Sustained growth momentum: AUM demonstrated healthy growth, reaching INR 127bn (+31% YoY, +6% QoQ) supported by strong disbursements of INR 12.7bn (+16% YoY, +7% QoQ). Growth was led by LAP (+50% YoY, +10% QoQ), followed by HL (+28% YoY, +6% QoQ). Shop loans were up +19% YoY, +7% QoQ. Mgmt. guided for 26-30% growth in FY26E led by disbursements growth of 20-25% and run-off rate of 17-18%. The growth will be largely supported by new branch expansion for which guidance was revised from earlier 25-30 branches per year to 30-35 branches. Management highlighted that 25% of the growth will be contributed by new branch additions and remaining to come from existing branches. Company remains confident to reach INR 200bn AUM by FY27E and INR 350bn by FY30E. We build in AUM CAGR of ~27% over FY25-27E.
* In-line operating performance: PAT stood healthy at INR 1bn (+25% YoY, +8% QoQ) which was +3% above our estimates. This was driven by strong NII growth of +26% YoY, +6% QoQ as NIMs moved up +20bps QoQ. Spreads were down -10bps QoQ led by - 10bps decline in yield while CoFs were sequentially steady at 8.4% (vs its guidance of 8.5%). Steady opex and other income led to in-line operating profit of INR 1.46bn (+28% YoY, +4% QoQ) while continued lower credit costs of 25bps (vs 34bps QoQ) led to largely in-line PAT. Mgmt. remains confident in their ability to sustain spreads within 5- 5.25% on a steady state and guided for NIMs to expand in the near-term due to its recent QIP fund raise. 60% of the borrowings of the company are bank borrowings (Pvt+PSU) out of which 18-19% is repo linked where company has started benefiting while T-bill rate cuts will start flowing in going forward. Company also expects credit rating upgrade from AA- to AA in next 6 months leading to further cost tailwinds. We expect EPS CAGR of ~28% over FY25-27E.
* Marginal improvement in asset quality: Asset quality improved marginally GS3/NS3 at 1.7%/1.3% (-6bps/-4bps QoQ) with PCR at 25.2 (-29bps QoQ). Early delinquencies improved sequentially with 1+ DPD at 4.5% (-38bps QoQ) and 30+ DPD at 3% (-9bps QoQ) as Q3 was affected due to seasonality. However, given the product segment that HFFC operates in, we do not foresee any major asset quality headwinds in the near term. We build avg. credit costs of ~30bps over FY26-27E in line with management guidance.
* Valuation and view: We believe that the guidance laid out by the management coupled with its history of consistently delivering exactly in-line performance, is sufficient to justify its premium valuations. We expect HFFC to outperform its peers during a favourable ratecuts scenario and expect the company to deliver avg. RoA/RoE of 3.5%/14.2% over FY26E/FY27E (lower RoEs are on account of recent capital raise from QIP). Maintain BUY with a revised TP of INR 1,360 (valuing HFFC at 2.9x FY27E BVPS) against our previous TP of INR 1,200 based on 2.6x FY27E BVPS.
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SEBI Registration Number is INM000010361
