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Earnings in line despite NIM compression; BT-outs moderate

Bounce rates rose QoQ but remain within a range

-      Home First Finance’s 3QFY24 PAT grew 35% YoY to INR788m (in line), while its 9MFY24 PAT rose ~35% YoY to INR2.2b. NII rose ~21% YoY to INR1.34b (in line). Non-interest income (25% beat) jumped 140% YoY, led primarily by higher assignment income and treasury income.

-      Opex (in line) grew 38% YoY to INR611m while PPoP grew ~35% YoY to INR1.1b. Credit costs of INR70m (in line) translated into annualized credit costs of ~30bp (PQ: ~40bp).

-      HomeFirst continued to build its distribution by taking steps to strengthen its presence in UP and MP. It has also been investing in technology and analytics to improve its underwriting and credit assessment capabilities. Steady execution has positioned HomeFirst well to capture the significant opportunity in the affordable housing segment.

-      We model an AUM/PAT CAGR of ~31%/~28% over FY23-FY26E. Asset quality should strengthen, and credit costs are likely to remain benign over FY25-FY26E. Reiterate BUY with a TP of INR1,180 (based on 3.6x FY26E BV).

Business momentum strong with sequential decline in BT-out rate

-      Disbursements grew 29% YoY to ~INR10b, resulting in 34% YoY AUM growth to ~INR90.1b. Management targets to scale up its AUM to ~INR200b by Mar’27, through the expansion of touchpoints/branches and market share gains by leveraging its technological prowess.

-      In 3QFY24, the company undertook direct assignments of INR1.3b (up ~102% YoY) and co-lending transactions of ~INR610m (up 127% YoY). It expects the share of co-lending to rise to ~10% (3QFY24: ~6%) of the disbursement mix.

-      BT-out rate (annualized) declined sequentially but remained elevated at ~7.5% (PQ: ~8.6% and PY: ~4.8%). Management attributed this improvement to customer retention efforts, and anticipates its decline to historical levels.

Spreads and NIM contract due to a moderation in yields and rise in CoF

-      Reported yields moderated ~10bp QoQ to 13.5%, while the CoB rose ~10bp QoQ to 8.2%. Reported spreads contracted ~20bp QoQ to 5.3%. Portfolio yields declined due to: a) lower yields on NHB borrowings deployed for lending, and b) lower interest rates under co-lending.

-      Reported NIM contracted ~35bp QoQ to 5.7%. Incremental CoF (excl. NHB borrowings) stood at 8.7%. Overall marginal CoF (incl. NHB borrowings) stood at 8.4% in 3QFY24. We model a NIM of 6.3%/6.0%/5.9% in FY24/FY25/FY26.

Marginal improvement in asset quality; bounce rate rises in 3QFY24/Jan’24

-      GS3 improved ~5bp to 1.7%, and NS3 remained stable at 1.2% as of Dec’23. PCR declined ~40bp QoQ to ~30% in 3QFY24.

-      1+dpd remained stable at 4.5% while bounce rates inched up to ~15% in 3QFY24 and ~15.3% in Jan’24 (vs. ~14.2% in 2QFY24). Management shared that it has already recovered ~11% out of the ~15% customers who bounced in Jan’24.

-      We model credit costs of ~35bp/30bp in FY25/FY26E.

Highlights from the management commentary

-      Management guided for spreads between 5.0% and 5.25%. The business model works best from a growth perspective with this range of spreads.

-      The company guided for CoB to increase by ~10bp and it expects the CoB to stabilize at ~8.3% in the next quarter.

-      Bounce rates rose QoQ but remained within a ~100-150bp range, and the increase in bounce rates is not specific to any particular region.

Valuation and view

-      HomeFirst has invested in building a franchise, which positions the company well to capitalize on the strong growth opportunity in affordable housing finance. The company continues to expand its distribution network in a contiguous manner, covering Tier I and II cities within its existing states.

-      We estimate HomeFirst to deliver a ~31% AUM CAGR over FY23-FY26, along with NIM (as a % of average AUM) of 6.3%/6.0%/5.9% in FY24/FY25/FY26. We expect cost efficiencies to kick in and drive a sustained improvement in its operating cost ratios.

-      HomeFirst’s asset quality is likely to strengthen and credit costs are expected to remain low over FY24-FY26, as the company prioritizes early bucket collections, thus driving improvement in asset quality. We reiterate our BUY rating on the stock with a TP of INR1,180 (premised on 3.6x Mar’26E BVPS).

-      Key downside risks: a) a sharp contraction in spreads and margins in order to sustain the business momentum, and b) higher BT-outs leading to lower AUM growth.

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