Buy Home First Finance Ltd For Target Rs.1,280 by Motilal Oswal Financial Services Ltd
Staying the course despite a relatively tough macro environment
Earnings in line; enabling resolution for equity raise through QIP
*Home First Finance (HOMEFIRST)’s 3QFY25 PAT grew 24% YoY to INR974m (in line). NII grew 21% YoY to INR1.6b (in line). Other income grew 42% YoY to INR517m (10% above MOFSLe), fueled by higher insurance commission income. The company initiated insurance partnerships in mid of 2QFY25 and expects a quarterly run-rate of ~INR150-180m in insurance commissions, going forward.
*Opex grew 23% YoY to INR752m (in line). PPoP rose ~27% YoY to INR1.4b (7% beat). Credit costs stood at INR98m (vs. MOFSLe of INR55m) and translated into annualized credit cost of ~35bp (PQ: ~20bp and PY: ~30bp).
*The Board of the company has passed an enabling resolution to raise equity capital of up to INR12.5b through QIP. This capital will support the company in achieving its medium-term AUM goal of ~INR200b by Mar’27 and reflects strong confidence in HOMEFIRST’s ability to gain market share in the affordable housing finance segment.
*Management noted that the slight weakness in asset quality (1+dpd and 30+dpd rising ~30bp QoQ) was driven by the macroeconomic environment. However, it appears to be transient, and the company anticipates a strong recovery in asset quality in 4QFY25.
*Management mentioned that disbursements in the quarter were slightly below expectations, partly due to the impact of e-Khata issues in Karnataka and tighter credit filters in select products. HOMEFIRST’s execution has been consistently better than its peers, and the company is well-positioned to capitalize on significant opportunities in the affordable housing segment. We estimate a CAGR of ~28%/~23% in AUM/PAT over FY24-FY27. Asset quality is expected to remain range-bound at current levels and credit costs are likely to remain benign at ~25-30bp over the near-to-medium-term. Reiterate BUY with a TP of INR1,280 (based on 3.6x Sep’26E BV).
Healthy AUM growth of ~33% YoY; BT-out rate inches up slightly
*Disbursements grew 18% YoY to ~INR11.9b (+1.4% QoQ), leading to AUM growth of 33% YoY to ~INR119b.
*Management highlighted that the company faced a disbursement shortfall of ~INR250-300m due to issues in Karnataka and the company’s tighter credit filters. However, it remains confident about making up for this loss in disbursements from other states and delivering a stronger performance in the coming quarters. ? The BT-out rate (annualized) in 3QFY25 rose to 7.3% (PQ: ~6.7% and PY ~7.5%). The rise in the BT-out rate was influenced by the competitive landscape and the company’s effectiveness in retaining customers.
Reported NIMs contract ~30bp QoQ; CoF rise ~10bp QoQ
*Reported yield was stable QoQ at 13.6% and reported CoF rose ~10bp QoQ to 8.4%. Reported spreads (excl. co-lending) declined ~10bp QoQ to 5.2%.
*Incremental CoF and origination yield in 3QFY25 stood at 8.5% and 13.4%, respectively. ? Reported NIM contracted ~30bp QoQ to ~4.9%, driven by an increase in the cost of funds, higher liquidity, and lower realized yield during the quarter. We model an NIM of 5.6%/5.5% in FY26/FY27 (FY25E: 5.7%).
Minor increase in 1+dpd and 30+dpd; bounce rates up QoQ
*GS3 and NS3 remained stable QoQ at 1.7% and 1.3%, respectively. PCR declined ~125bp QoQ to ~25.5%.
*1+dpd rose ~30bp QoQ to 4.8%. Bounce rates increased ~80bp QoQ to ~16% in 3QFY25 (vs ~15.2% in 2QFY25). In Jan’25, bounce rates were stable at 16%.
Enabling resolution to raise equity capital for the next leg of growth
*Capital adequacy stood at ~33% (Tier 1: 32.7%). Leverage stood at ~5x and the company is internally comfortable up to a leverage of 6x.
*Management shared that it expects the equity capital raise and discussions with credit rating agencies for a credit rating upgrade to be completed within the next 6-9 months. We have not yet factored in the equity capital raise into our estimates and will incorporate it closer to the completion of this capital raise.
Highlights from the management commentary
*Management highlighted that ~30bp increase in 1+dpd was driven by 600 customers who did not make payments at the end of the quarter. However, there has been no negative feedback from the teams on the ground, and the company has not observed any difficulties in collections or stress among customers.
*HOMEFIRST has guided for AUM growth of ~27-30% over the next two years. In FY26, the company expects disbursements to average INR5b/month (vs ~INR4b per month in FY25).
* The company expects to add ~30-40 branches next year. It aims to penetrate deeper into the emerging geographies of UP, MP, and Rajasthan.
Valuation and view
*HOMEFIRST has invested in building a franchise, positioning itself well to capitalize on the significant 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 clock a ~28% AUM CAGR over FY24-FY27, along with an NIM (as a % of average AUM) of 5.6%/5.5% in FY26/FY27.
*Asset quality is expected to remain range-bound at current levels and credit costs are likely to remain benign at ~25-30bp over the near-to-medium-term. Reiterate our BUY rating on the stock with a TP of INR1,280 (premised on 3.6x Sep’26E BVPS).
*Key downside risks: a) a sharp contraction in spreads and margins to sustain the business momentum; b) higher BT-outs, leading to lower AUM growth; and c) deterioration in asset quality in its LAP product and self-employed customer segments, resulting in higher credit costs.
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