Home First Finance (HomeFirst), an affordable housing financier (AHF) with AUM of `39 billion and focus on salaried housing loans, has several value propositions that differentiate it from peers in high-growth, high-yielding, hugely untapped AHF segment: 75% customers in EWS/LIC category and 32% being new to credit; technology at its core — right from sourcing to collections; well-trained/educated team to appropriately assess need and right size loans; paperless loan processing with quick TAT of <48 hours; and omni-channel lead generation driving sourcing. Few risks include sourcing as well as collections managed by front-end team; borrowing profile not fully explored yet; apartment home loans showing some stress (in pockets).
With >30% AUM growth, funding cost benefit, improved cost to income and contained credit cost, we expect earnings to compound at >40% over FY21-23E. However due to excessive capitalisation (Tier-1 at 51%), despite 3% plus RoAs, RoEs will be modest at ~12%. Using Gordan Growth model, we arrive at target price of `625 — an upside of >30% from CMP. We initiate coverage on HomeFirst with a ‘buy’ rating.
Appropriately positioned in high- yield, high-growth affordable housing space, HomeFirst has dominant presence in four states that constitute more than 40% of the overall affordable housing market less than 1% market share in most markets, except Gujarat, and contiguous branch expansion approach will deepen its presence in the existing markets and open up growth potential.
Over 75% of its customers belong to EWS/LIG category and ~32% are new to credit customer – not actively served by banks…with technology at its core — right from sourcing to collections, HomeFirst is a technology-driven AHF reflected in Rs 50-75million of software and technology spend every year (almost 7% of opex). It has established technology framework with customised systems and tools, integrated customer relationship management and loan management system, proprietary machine learning customer-scoring models, and centralised data science backed underwriting process.
This expedites scale with speed (quick turnaround time of <48 hours), uniformity in operations, convenience and cost efficiency …and other differentiated value proposition: Training and development of well-educated staff helps HomeFirst achieve superior employee productivity with an average disbursement of Rs 30-45 mn per sales employee. Omni-channel lead generation drives sourcing at effective cost – it utilises diverse range of channels including connectors (~65%), affordable housing developer ecosystem (20%), branch (7%) marketing (5%) etc.
Triggers that will enhance its operating performance Upscaling of branches, deeper distribution and technology prowess, will further enhance efficiencies – triggering improvement in opex/AUM to 260bps (from 340bps in FY20); Normalisation of collection efficiency, 1+ DPD, stage-3 print and credit cost (50-60bps) will further strengthen confidence on the underwriting/credit standards of HomeFirst and growth retracement path contrary to perception, yield premium (12.8-13.0%) can sustain on the back of few USPs and value-added services that HomeFirst offers; iv) rising scale, consistency in operating performance, excess capital and liquidity buffer will increase the visibility on rating upgrade and close the gap with peers on borrowing cost (7.7-8.0%).