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Sustained high growth, expected decline in spread and resilient asset quality

HFF expectedly delivered strong AUM growth and continued contraction of Spread in Q1 FY25, while Asset Quality performance was resilient in a slightly challenging backdrop. PAT was 6% above our estimate, largely on higher DA income and a more moderate credit cost. 1+ dpd/30+ dpd increased by 30 bps/10 bps and Gross Stage-3 was stable on sequential basis. Controlled flows and marginal write-offs drove lower credit cost of 20 bps (usual 40 bps).

Disbursements stood at Rs11.63bn (up 5.5% qoq/30% yoy), reflecting only marginal impact of RBI’s April-end circular due to small proportion of disbursements through DD. Portfolio run-off was moderate with sequential reduction in BT Out from 8.3% to 6.3%, which aided AUM growth performance (up 8% qoq/35% yoy). Overall growth was well-spread between vintage markets (GJ, MH & TN) and newer markets (RJ, MP & UP). The share of LAP in AUM rose to 14%, in line with strategic objective.

Portfolio Spread expectedly came-off by 10 bps qoq and stood at 5.1%, and it was mainly driven by a similar decline in Portfolio Yield. Origination Yield (excl. Co-lending) was stable at 13.4% despite higher origination share of LAP in this quarter. CoB was stable at 8.3% aided by marginal cost trimming to 8.6% (8.7% in Q4 FY24) and no significant upward re-pricing on existing borrowings. NHB borrowings share increased to 19% with HFF availing sanctions worth Rs2.5bn outstanding as of March.

Strong growth to continue; spreads to stabilize after announced PLR hike

Management in confident about growing at 30%+ pa for the next few years aided by 1) significant branch addition in existing and new markets during FY23/24, 2) distribution augmentation to continue for tapping new markets (Central & Eastern India) and new locations (going deeper) in existing states, 3) consistent growth in connector base, 4) headroom to grow LAP at a faster rate and 5) scaling-up co-lending (to 10% of Disbursements).

HFF will be taking a PLR hike of 35 bps from August, and it is estimated to improve the Portfolio Yield by 10-15 bps over the next couple of quarters. The hike would be adjusted by elongation of portfolio tenor in majority of the cases and hence it is expected to not impact BT Out/AUM growth meaningfully. Management expects Origination Yield (excl. Co-lending) to remain stable. CoB is expected to further inchup due to higher marginal rate and residual re-pricing of existing bank loans. Overall, Portfolio Spread is expected to be steady in the short term aided by the PLR hike. In the longer term, the spread can recover by some extent in the initial phase of the rate downcycle.

Upgrade estimates by 2-4% and 12m TP to Rs1215

HFF’s execution on growth and RoE has been consistent and strong. We had got concerned about elevated BT and spreads decline intensity in the preceding quarters, but now are comforted by BT reduction in Q1 FY25 and PLR hike announced. We believe these trends/initiatives will help the co. in delivering sustained RoE expansion amidst range-bound opex/assets ratio. We estimate 31% AUM and 26.5% PAT CAGR over FY24-26 with RoE reaching almost 18% in FY26. Stock trades at 19x P/E and 3.3x P/ABV on FY26 estimates. Retain BUY with an increased 12m TP of Rs1215.

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