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Earnings in line despite NIM compression; BT-outs elevated

NIM contracted ~40bp QoQ but offset by lower credit costs

* Home First Finance’s 4QFY24 PAT grew 30% YoY to INR835m (in line), while its FY24 PAT grew 34% YoY to INR3.1b.

* NII grew 22% YoY to INR1.37b (in line). Other income grew 32% YoY to INR351m (in line). Home First obtained its corporate agency license in Feb'24 and expects to sign a partnership with one insurer in 1QFY25. The management guided for a quarterly run rate of ~INR50-60m in commission income from 3QFY25 onward.

*Opex grew 23% YoY but declined 4% QoQ to INR584m due to the reversal of some excess provisions, which were built up earlier. PPoP grew ~25% YoY to INR1.14b (in line). Credit costs at INR27m (annualized: ~10bp) were lower because of recoveries of ~INR25m from written-off accounts.

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

* We model a CAGR of ~30%/~23% in AUM/PAT over FY24-26E. Asset quality should strengthen, and credit costs are likely to remain benign over FY25-26E. Reiterate BUY with a TP of INR1,070 (based on 3.3x FY26E BV).

Business momentum healthy; BT-outs remained elevated

* Disbursements grew 27% YoY to ~INR11b, leading to AUM growth of 35% YoY to ~INR97b.

* In 4QFY24, the company undertook direct assignments of ~INR1b (up ~28% YoY) and co-lending transactions of ~INR675m (up 94% YoY). It expects the share of co-lending in the total AUM to rise to ~10% (FY24: ~3%) over the next 12-24 months.

* BT-out rate (annualized) increased sequentially to ~8.3% (~7.5% in 3QFY24 and ~6.1% in 4QFY23). The management attributed the increase in BT-Outs to interest rate repricing of home loans over the past two years. Home First's higher pricing of home loans compared to peers makes it susceptible to BT-OUTs, even as the total (annualized) run-off of its AUM is comparable to that of its peers.

Highlights from the management commentary

* The company guided for spreads of 5.0-5.25%, NIM of 5.5%, other income of 2.0-2.5%, opex of ~3% and credit costs of ~30bp. This will result in RoA of 3.5% and RoE of 16%+ with a significant contribution from the core business.

* Over the next three years (by FY27), the company expects to take the proportion of LAP to ~20% from ~13% now.

Valuation and view

* Home First 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 Home First to deliver a ~30% AUM CAGR over FY24-26, along with NIM (as a % of average AUM) of 5.6%/5.4% in FY25/FY26 (vs. FY24: ~6.2%).

* Home First’s asset quality is likely to strengthen and credit costs are expected to remain benign over FY25-26, 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 INR1,070 (premised on 3.3x 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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