Home First Finance (HomeFirst), an affordable housing financier (AHF) with AUM of Rs39bn and focus on salaried housing loans, has several value propositions that differentiate it from peers in high growth, high yielding, hugely untapped AHF segment: i) 75% customers in EWS/LIC category and 32% being new to credit; ii) technology at its core - right from sourcing to collections; iii) well-trained/educated team to appropriately assess need and right size loans; iv) paperless loan processing with quick TAT of <48 hours; and v) omni-channel lead generation driving sourcing. Few risks include: i) Sourcing as well as collections managed by front-end team; ii) borrowing profile not fully explored yet; iii) 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 Rs625 - 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 i) dominant presence in four states that constitute more than 40% of the overall affordable housing market. ii) 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. iii) 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 Rs50-75mn 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: i) Upscaling of branches, deeper distribution and technology prowess, will further enhance efficiencies - triggering improvement in opex/AUM to 260bps (from 340bps in FY20); ii) 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 iii) 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%).