Buy Home First Finance Ltd For Target Rs. 1,500 by Motilal Oswal Financial Services Ltd
Well capitalized and ready to scale
Equity capital raise of INR12.5b via QIP strengthens the balance sheet
* Home First Finance (HomeFirst) in Apr’25 raised INR12.5b through a qualified institutional placement (QIP) at INR970 per share. This capital will help the company scale up its business for the next 3-4 years, accelerate growth, execute its strategic initiatives, and solidify its leadership in the affordable housing finance (AHF) segment.
* HomeFirst has been strengthening its presence in the AHF segment by leveraging its technology-focused underwriting approach. The company has delivered a strong AUM CAGR of ~33% over FY22-25E. Backed by its customer-centric approach and solid risk management framework, HomeFirst is well positioned to deliver an AUM CAGR of 26%+ over FY25-27E.
* The recent equity raise has reduced HomeFirst's leverage (assets to net worth ratio) from ~4.9x as of Dec’24 to ~3.3x (proforma) as of Apr’25 and increased its CRAR (capital to risk-weighted assets ratio) from ~33% as of Dec’24 to ~50% (proforma) as of Apr’25. The strong balance sheet will enable the company to engage with credit rating agencies for a potential rating upgrade, which could subsequently lead to an improvement in its cost of funds.
* HomeFirst aims to accelerate its growth through a combination of branch network expansion and deeper market penetration. It plans to open 30-40 branches in FY26 and aims to penetrate deeper in states like UP, MP and Rajasthan to tap into rising housing demand in tier 2 and tier 3 cities.
* While there was a marginal rise in early delinquencies in the previous quarter, primarily due to a weak macroeconomic environment, the company remains confident that this does not indicate any underlying stress. HomeFirst maintains a conservative risk profile through disciplined underwriting and robust risk management, which will enable it to maintain its healthy asset quality.
* We have incorporated the recent equity raise of ~INR12.5b in our estimates. HomeFirst trades at ~2.8x FY27E (post money), which is attractive for an AUM/PAT CAGR of ~26%/31% over FY25-27E with RoA/RoE of 3.8%/14.4% in FY27E. HomeFirst is our preferred pick in the AHF segment and we reiterate our BUY rating on the stock with a TP of INR1,500 (based on 3.2x Mar’27E P/BV).
Capital-rich, growth-ready
* A strong balance sheet (bolstered by the recent equity raise) positions HomeFirst well to capitalize on the long-term growth opportunities in India’s affordable housing finance sector. HomeFirst’s focus on technological innovation continues to drive greater a customer outreach and operational efficiency, reinforcing its competitive edge in the market.
* The company has a diversified sourcing mix, which extensively leverages its connector network for sourcing home loans and other mortgage products.
* HomeFirst has pivoted away from predominantly developer-driven projects to self-construction loans. It adopts a well-diversified approach and avoids concentration risk by defining clear risk guardrails and restricting its appetite in each of the developers/projects. It will continue to expand its distribution through its foray into underserved segments with significant housing activity and high demand. We estimate an AUM CAGR of ~26%+ over FY25-27E.
NIM expansion to be driven by decline in leverage and potential CoB benefit
* HomeFirst reported a decline in NIMs over the past few quarters, primarily due to a pressure on yields (from heightened competition), a rise in the company's cost of funds and high liquidity on the balance sheet. Consequently, reported NIMs dropped from ~6.1% in 4QFY23 to ~4.9% as of 3QFY25.
* However, with the recent capital infusion, HomeFirst is expected to report an improvement in its NIMs, supported by a reduction in leverage and a potential decline in its CoB. Having surpassed INR100b in AUM and following this capital raise, the company will likely re-engage with credit rating agencies for a potential credit rating upgrade. An improved credit rating would further help lower its cost of borrowings (CoB). We project NIMs (calc.) of ~6.1% each in FY26/FY27. (vs. ~5.7% in FY25E).
Efficient digital model to help sustain its cost leadership
* HomeFirst’s cost ratios are expected to remain largely stable (and high at the current levels) because of its focus on growth and branch network expansion. Nevertheless, its cost metrics remain significantly better than those of most peers, underscoring the company’s strong operational efficiency.
* In FY25E, the company's opex-to-AUM ratio stood at ~2.6%, positioning it favorably compared to peers, whose ratio ranged between ~2.5%-4.3%. This highlights the strength of its operating model, technology-led efficiencies, and prudent resource allocation. For HomeFirst, we model an opex-to-AUM ratio of 2.6%/2.5% in FY26/FY27.
Prudent risk management offers insulation from asset quality shocks
* HomeFirst has consistently upheld strong asset quality by concentrating on lowrisk salaried customers, who constitute ~68% of its total AUM.
* The company’s GNPA has improved from ~2.3% in Mar’22 to ~1.7% as of Dec’24. Moreover, its GNPA has remained largely stable over the past six quarters, reflecting the company's resilience and strong asset quality even amid tough macroeconomic conditions.
* The company recently tightened its underwriting norms by introducing additional screening measures. This move led to a minor slowdown in disbursements in the prior quarter but has notably enhanced the quality of its loan portfolio, reinforcing the company's commitment to prudent lending practices and long-term financial stability.
* HomeFirst utilizes a centralized underwriting system supported by data sciencedriven customer scoring models. This enables standardized credit assessments across all branches and geographies, ensuring consistent, efficient, and reliable underwriting of loans.
* We expect GNPA to improve to ~1.5%/1.4% in FY26/FY27 and credit costs to remain benign at ~25bp in each of FY26/FY27.
Accelerating digital adoption through a tech-first approach
* HomeFirst is committed to enhancing digital adoption as a cornerstone of its growth strategy. The company has made significant strides in integrating technology into its operations, aimed at providing a seamless and frictionless experience for its customers. Its strong technology infrastructure enables a turnaround time of just 48 hours, significantly faster than industry peers.
* As of Dec’24, ~96% of the company's customers were registered on its mobile app, and ~97% of collections are conducted through non-cash modes. The adoption of digital tools extends beyond customer interactions. Account aggregator adoption has improved to ~61% within new approvals and digital fulfillment has reached ~80% with the use of digital agreements and e-NACH mandates.
* These technological advancements are not only enhancing the customer experience but also contributing to the company's strong asset quality and operational performance.
Valuation and view
* HomeFirst’s disciplined cost management and a strong capital base should drive stable growth in the loan book. The company’s robust fundamentals, healthy return ratios (even as RoE might decline in the near term because of lower leverage) and superior execution relative to peers reinforce its position as a high-quality franchise in the AHF segment. We believe HomeFirst has potential for scalable growth with strong risk-adjusted returns.
* HomeFirst currently trades at 2.8x FY27E BVPS (post money), which is at a slight discount to some of its peers in the AHF segment. HomeFirst has a strong governance framework, a validated business model led by a seasoned and transparent management team, a robust AUM growth outlook (2-year CAGR of ~26%) and superior asset quality. For a PAT CAGR of ~31% over FY25-27E and RoA/RoE of 3.8%/14.4% (post money), we reiterate our BUY rating with a TP of INR1,500 (premised on 3.2x Mar’27E P/BV).
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