IGI Logo

Leveraging tech effectively for next leg of growth

Well positioned for AUM CAGR of 30% over FY24-26 and RoE of ~17% in FY26

* Home First in May’24 crossed the AUM milestone of ~INR100b, delivering an AUM CAGR of ~28% over FY20-24. The company has identified Uttar Pradesh (UP), Madhya Pradesh (MP) and Rajasthan as its emerging states, which will help Home First sustain AUM growth.

* The company has created a strong technology bedrock and a robust risk management framework, which will enable the company to keep scaling up with the same pristine asset quality that it demonstrated in the past.

* Mortgage products, particularly small-ticket housing, are a structural opportunity in India. Home First, through its nimble approach and best-inclass processes and practices, is well placed to deliver industry-leading profitable growth.

* Home First has also managed its human capital well and has one of the best productivity metrics in the industry. The company hires the majority of its employees through a comprehensive campus recruitment program. It offers a well chalked out career trajectory to its employees, which helps keep attrition within manageable levels.

* In FY24, Home First reported a compression in spreads due to the rising cost of borrowings (CoB) and limited ability of passing on higher CoB to borrowers. This led to a decline in (calc.) spreads from 5.9% in FY23 to 5.5% in FY24. To offset some of the NIM compression due to high CoB and higher financial leverage, Home First can increase the proportion of LAP in its AUM mix to ~20% by FY27 (FY24: ~13%).

* Home First has consistently exceled in technology adoption, leading to healthy underwriting and a faster turnaround. It has expanded aggressively and continues to strengthen its risk and compliance monitoring practices as it grows. We estimate a CAGR of ~30%/~23% in AUM/PAT over FY24-26E.

* Home First’s asset quality is expected to stay strong and credit cost is likely to remain benign. With RoA/RoE of 3.8%/15.6% by FY26, we believe that Home First will continue to command premium valuations over its listed affordable HFC peers. We reiterate our BUY rating with a TP of INR1,080 (premised on 3.3x FY26E BVPS). A key downside risk is a sharp contraction in spreads/margins due to its inability to pass on higher CoB to sustain business momentum.

Growth engine equipped to double AUM by FY27

* Home First has a diversified sourcing mix, which extensively leverages its connector network for sourcing home loans and other mortgage products. Its model of origination through connectors facilitates a grass-root connect with potential customers. This is the best origination model for Home First.

* We believe that robust technology platform, competitive pricing and a well laidout initiatives to delight customers have positioned the company’s growth engine favorably to double its current AUM of >INR100b to ~INR200b by FY27. We estimate ~30% AUM CAGR over FY24-26.

Levers in place to partly offset NIM compression

* Home First’s NIM (as % of avg. assets) compressed ~55bp YoY to ~6.5% in FY24 due to higher CoB and financial leverage. The company expects a further increase of ~15-20bp in CoB, with the weighted average CoB likely to stabilize at ~8.5%. It plans to absorb this increase in CoB rather than passing it on to customers through an increase in its retail PLR.

* To offset some of the NIM compression due to high CoB and higher financial leverage, Home First can increase the proportion of LAP in its AUM mix to ~20% by FY27 (FY24: ~13%). We expect NIMs to moderate to 5.9%/5.8% in FY25/FY26 (vs. ~6.5% in FY24).

Focus on emerging states as growth drivers

* Home First has started focusing on three emerging states, Rajasthan, UP, and MP, whose combined population exceeded 400m and showed significant economic improvements. The law and order and public infrastructure in these states have also improved substantially. All of these developments are catalysts for rapid urbanization and industrial growth, which, in turn, spur demand for affordable housing.

* There is a strong correlation of per capita income with Home First's business growth over the years. Home First’s emerging states have two key growth drivers: increasing per capita income and large population.

Technology heft still the biggest strength of the company

* India's digital public infrastructure has helped Home First enhance its efficiency in customer sourcing, KYC verification, and collections. Home visits, combined with its digital approach to evaluating the customer, has enabled it to set an industry-leading TAT benchmark of 48 hours for loan approval.

* The account aggregator system has become mainstream and achieved a ~47% penetration rate in 4QFY24. Productivity enhancement tools like e-Sign and eStamps reached penetration levels of ~67% and ~64%, respectively, in FY24.

Operating ratios elevated in near term but benefits to accrue in medium term

* Notably, cost ratios have remained elevated for Home First because of investments in branches, people and technology. The company’s opex-toaverage assets ratio stood at ~2.8% in FY24.

* Given its lean physical distribution network and ability to effectively utilize its connector and builder channels, Home First enjoys the best productivity metrics (AUM/disbursement per branch or per employee) among its peers. This will increase cost efficiencies for the company.

* To enable sustainable AUM growth, Home First plans to expand its branch network by adding 20-25 branches every year and deepen its presence in key affordable housing markets. While we expect cost ratios to remain elevated in the near term, we expect significant operating leverage from scale benefits over the medium term. We model opex to average assets of 2.8%/2.7% in FY25/FY26.

Valuation and view

* Home First has consistently demonstrated healthy asset quality and we expect credit costs to remain benign at ~30bp over FY25-26. We estimate a CAGR of 30%/23% in AUM/PAT over FY24-26 and RoA/RoE of 3.4%/17% in FY26.

* Barring technical considerations such as a supply overhang from existing private equity promoters, we believe that the current valuation of 2.9x FY26E P/BV is reasonable for a franchise with high AUM growth and good asset quality. We reiterate BUY with a TP of INR1,080 (premised on 3.3x FY26E BVPS).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412