Equity Research: Home First Finance Company

Home First Finance Company looks strong for an upmove of 18% from its CMP along with growth in CAGR and PAT by 25% and 16% by FY23.

Incorporated in 2010, Home First Finance Company (HFFC) is a technology driven small ticket housing loan provider which focuses on niche customer segment and had recorded strong AUM growth of 45% CAGR over FY18-22. HFFC was founded by Jaithirth Rao, PS Jayakumar and Manoj Viswanathan. It has an AUM of INR 4,617 cr as on FY22 with ~92% portfolio share in home loans. On customer segment wise, it has high share of salaried customer (~74% of AUM) with strong presence in top markets like Gujarat and Maharashtra (~57% share in AUM). HFFC has tech led business model with focused branch operations and centralized underwriting process. We expect, HFFC to achieve AUM growth of ~29% CAGR over FY21-23E, driven by high tech usage which ensures optimization of operating cost, stable asset quality, normalizing credit cost and high capital ratios. With government’s thrust on affordable housing like ‘Housing for all’ scheme, favorable demographic, Rising urbanization & nuclearisation, low housing penetration, Indian affordable housing finance market (HFC) is well- positioned to witness strong growth. Overall housing market is expected to deliver a AUM growth of ~9-11% CAGR over FY21-23E. HFFC being the focused lender in retail home loans in urban/semi urban area is in sweet spot to grab the opportunity and gain market share.

With the use of technology, company has built a scalable operating model. It uses technology across the value chain right from lead generation (via connectors app) to data validation to disbursements and collections. It uses data analytics, application scorecard, mobile application for monitoring leads and geotagging of properties to mitigate the risks and improve the efficiency. With the effective use of technology, HFFC has industry leading productivity ratios and TAT (turnaround time) of 48 hours against the industry average of 8 to 10 working days. As per the rating agency CRISIL, Indian Housing Finance market size is at INR 22.8 tn as on FY21 (Banks market share at 67% and HFCs & NBFCs market share at 33%) which is expected to grow with CAGR of ~9-10% by FY25E at INR 32.1 tn. Housing finance market had clocked a healthy ~13% CAGR growth in loan outstanding over FY18-20. India has low mortgage penetration at 11% (as of 2020) as compared to other countries such as USA at ~52% and UK at ~68%. While mortgage penetration ratio has improved over the last few years, it is still lower than several other emerging and developed economies, leaving huge scope for growth in demand for housing loans. India’s mortgage penetration is expected to increase to 15.3% by 2025 as per CRISIL estimates.

India’s mortgage market can broadly be divided into two segments by ATS (average ticket size) of the housing loan at the time of disbursement – i) loans with ATS of > INR 1.5 mn ii) loans with equal/less then ATS of INR 1.5 mn. Affordable housing comes under the equal/low ticket size of INR 1.5 mn where the focus is on niche customer segment. The overall size of the affordable housing finance market in India was around INR 4 tn as of March 2020, constituting a tad under one-fifth of the housing finance industry.

In India housing shortage estimated at 100mn units by 2022:

As per the report of a RBI appointed committee on the development of housing finance securitization market (Sept’19), the housing shortage in India is estimated to increase to 100 mn units by 2022. This will result into incremental loan demand of INR 50-60 tn. This is as compared to overall housing market outstanding of ~22.8 tn for FY21 implying immense potential for the housing finance market. 95% of household shortage is from Lower income group (LIG) and Economic weaker section (EWS) with the remaining 5% of the shortage coming from Middle income group (MIG) or above.

Leveraging Technology to build a scalable model:

Technology is the key differentiator for HFFC. Company has Omni channel lead generation from where the sourcing is done through the connectors app, builder, ecosystem and through digitally. Majority, ~70% leads has been sourced through connectors app. ~94.5% connectors are registered on the Connector application. Connectors are generally individuals such as insurance agents, tax practitioners and local shopkeepers. While sourcing is through diversified channels, the role of these channel partners is limited to passing on the lead to the company’s respective branch/employee for which they charge a commission of nearly 30-50bps. After generating the lead respective HFFC’s RM do the field visit and upload all the necessary information in the salesforce platform. The company has also entered into arrangements with certain digital lead aggregators and other digital companies in the housing and real estate ecosystem such as Homelane, Paisa Bazaar, Quikr India, Credit Mantri and Aapka Painter.All financed properties are geo-tagged and it uses a machine learning backed property price predictor, which help to reduce the turnaround time for approving loans, as well as achieve a higher accuracy in determining the LTV. With the use of technology, company have built a scalable operating model. It uses technology across the value chain right from lead generation to data validation to disbursements and collections. It use data analytics, application scorecard, mobile application for monitoring leads and geotagging of properties to mitigate the risks and improve efficiency. With the effective use of technology, it has industry leading productivity ratios and TAT(turnaround time) of 48 hours vs industry average of 8 to 10 working days (Collecting information to Sanction).

Its technology platforms enable the company to digitally capture over 100 data points of a customer such as photographs, videos, scanned collateral documents, taxation documents and vehicle ownership details. All the documents are stored digitally and saved on cloud. This integrated customer relationship management and loan management system provides a holistic view of its customers and ensures connectivity and uniformity across its branches. HFFC has centralized underwriting team assisted by data science backed customer-scoring model to evaluate a customer’s ability to repay the loan and maintain consistency in underwriting procedures across branches and regions. It has integrated customer relationship management and loan management system, which serves as a single platform for all internal and external customer related interactions and allow underwriters to conduct the credit appraisal process in a quick and efficient manner. It uses a proprietary machine learning credit scoring models for credit assessment process and evaluate the customers into different categories based on the level of risk, to take a final call.

Diversified geographical presence:

HFFC has a strong network of 76 branches in India, spread across 92 districts in 12 states/UTs with a significant presence in urbanized regions in the states of Gujarat, Maharashtra, Karnataka and Tamil Nadu. It has commenced business in 4 new physical branches and 7 new branch locations with digital presence in 15 more locations during FY22. The total number of touchpoints currently stands at 187 with the company targeting 80+ physical branches by end of FY22 and ~140 branches by FY24.

HFFC has the maximum number of branches (20) in Gujarat, contributing nearly 37% of the total gross loan assets as of December 2021. Maharashtra is the second largest contributor (16.7%) after Gujarat with 17 branches. The company has a decent presence in the four southern states of Andhra Pradesh, Telangana, Tamil Nadu and Karnataka as it plans to cover all the large towns in these states. Apart from the above six states, HFFC is also present in Madhya Pradesh, Chhattisgarh, Rajasthan and Uttar Pradesh. The company has increased the scale of its operations and grown branches by adopting a strategy of contiguous expansion across regions and have strategically expanded to geographies where there is substantial demand for housing finance. According to a CRISIL report, the 11 states and the UT in which HFFC has presence accounted for approximately 79% of the affordable housing finance market in India during FY19. HFFC utilizes a diverse range of lead-sourcing channels such as connectors, architects, contractors and affordable housing developers, in addition to conducting loan camps and micro-marketing activities, and utilizing employee and customer referrals and branch walk-in customers. Connectors are third-parties supplying customer leads on a commission basis are paid only when a loan is disbursed and they do not assist in the loan application process. Connectors are individuals such as insurance agents, tax practitioners and local shopkeepers.

Stable spreads and improvement in credit costs to drive RoA expansion:

HFFC has managed to maintain yields near 13% (in line with peers) despite having higher proportion of salaried customers and higher mix of home loans (v/s peers). Further, HFFC is planning to increase its LAP mix from current 6% of AUM to 15% of AUM over the medium term which is likely to support yields. Cost of Funds (CoF) for the company has been declining due to rating upgrades (from BBB- in 2013 to A+ currently), which should ensure spreads between 4.8-5%. We expect RoA to expand to 3.4% in FY24 (v/s 2.5% in FY21) owing to moderation in credit costs on the back of improvement in scale/asset quality, respectively.

Robust financials and high growth to sustain: 

The disbursements have shown healthy numbers expanding at a 28.5% CAGR from ₹ 746 Cr to ₹ 2,031 Cr (FY18-FY22), and is expected to show a CAGR of 40% (FY22-FY23E). HFFC has the highest organic growth among its peers with an all-time high record of 41% CAGR in the past 4 years and with an increase in AUM from ₹ 1,356 Cr in FY18 to ₹ 5,380 Cr in FY22. This is expected to grow steadily at 27% CAGR going forward (FY22-FY23E).  HFFC’s AUM has exhibited a strong development in the last 5 years, we further expect the growth rate to sustain on the back of expansion in Tier-2 & 3 cities (doubling its branches) from the current 80 to 160. The management has guided that the company will now focus more on the untapped and small rural touch points for future growth as there is not much difference in the behaviours of the customers. he Profit after Tax has seen a sharp upward trend from ₹ 252 Mn in FY18 to ₹ 1,861 Mn in FY22 (CAGR 65%), and is further expected to grow at a CAGR of 18% (FY22-FY25E). The company has maintained a good liquidity buffer (₹ 10,625 Mn in FY22) in their books considering the volatile environment during Covid with the help of its excellent ALM profile. Strong growth in AUM with 41.1% CAGR (FY18-FY22) as HFFC works on the expansion.

HFFC has bought down the Cost of Borrowings at a sustainable level from 8.4% in FY19 to 7.2% in FY22, where the portfolio yield remains consistent at 12.3% - 12.8% during the same period. This has aided in an incremental expansion in the Spreads which now stands at 5.6% in FY22 up from 3.9% in FY19. Affordable HFCs generate higher ROAs than other HFCs. They have higher operating expenses given the low ticket size of loans and informal operating segment which entail higher underwriting and collection cost. At the same time, they have higher spreads and margins which more than compensate for higher operating expenses. HFFC portrays a similar story with ROA having a growth of 3.6% in FY22 from 2.1% in FY18, and the ROE at an astounding 11.8% growth up from 7.9% during the same period. ROE at staggering 11.8% while ROA shows strong growth at 3.6% in FY22. 

Historical Financials:

Estimated Financials:

Valuation:

It is currently trading at 3.9x/3.4x of FY23E/ABVPS. HFFC is valued at 4.4x P/ABV FY23E (₹ 201) (Average of Aptus, Aavas & Home First) to arrive at a target price of ₹ 987 with a potential upside of 18%. We expect its AUM and PAT to clock 25% and 16% CAGR over FY22-FY23E, while the ROA and ROE expected to reach at 3.3%/12.6% by FY23E.

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