scorecardresearchHome First Finance: Here's why Motilal Oswal sees 34% upside despite a

Home First Finance: Here's why Motilal Oswal sees 34% upside despite a 31% fall since September

Updated: 16 Nov 2022, 03:02 PM IST
TL;DR.

Home First Finance: The brokerage believes that the current valuation of 2.9x FY24E P/BV has made risk-reward highly favorable for a high-growth good asset quality franchise.

Most banks have reduced their home loan rates to below 7 percent per annum

Most banks have reduced their home loan rates to below 7 percent per annum

Despite a 31 percent decline in Home First Finance in the last 3 months (September-November), domestic brokerage house Motilal Oswal retained its positive stance on the stock. It has a 'buy' call on Hoem First with a target price of 900, indicating a potential upside of 34 percent in the next 12 months. Its current market price is 671, as of November 15.

As per the brokerage, Home First Finance is among the few high-quality and transparent franchises in the listed Affordable Housing Finance (AHFC) sector. Particularly, the company has demonstrated consistent execution on its guided metrics, across AUM growth, margins/spreads, asset quality, and credit costs, it said.

The brokerage believes that the current valuation of 2.9x FY24E P/BV has made risk-reward highly favorable for a high-growth good asset quality franchise.

MOSL noted that it had initiated coverage on HomeFirst in September 2022 and since then, the stock price has already corrected 22 percent. Further, the price correction since it reported its H1FY23 result has also broadly been the same.

"While there could be other extraneous reasons that could have led to this sharp correction in stock price, we strongly believe that our thesis on HomeFirst and confidence in its ability to demonstrate healthy AUM growth, offset margin compression with a sustainable improvement in cost ratios complemented with benign credit costs still remain intact," opined the brokerage.

The stock has lost nearly 6 percent in November so far following a 17 and 10 percent decline in October and September, respectively. It has shed over 8 percent in the last 1 year and 13 percent in 2022 YTD.

Article
Home First Finance stock price trend

The brokerage pointed out that HomeFirst is an affordable housing franchise that has consistently excelled in technology adoption aiding healthy underwriting and faster turnaround. The company has successfully cracked the connectors and developer channels for its loan originations. It has the core management team, infrastructure and processes in place to ensure healthy AUM growth and low risk-adjusted credit costs, it explained.

Another positive as per the brokerage is that the company did slow down its disbursements during the two COVID waves and reported asset quality deterioration (as did the rest of the sector). However, it has shown remarkable resilience to exhibit consistent business momentum and asset quality improvement over the last four quarters, noted the brokerage.

Turnaround time, in our view, is also one of the surrogates for cost, stated the brokerage. Higher efficiency/productivity of existing branches and employees by deploying automation, technological interventions and digital tools can lead to a steady improvement in cost ratios. HomeFirst, with its lean physical branch network, effectively utilizes its virtual branches and connector network, it revealed.

"The company has adopted technological innovations such as e-NACH, e-Sign, eVault and e-Stamp Paper and has also introduced various apps/web portals for connectors, RMs and customers to make the customer onboarding journey extremely seamless as well as further improve on turnaround times. It has exhibited a consistent improvement in the proportion of loans approved within 48 hours (from the time of login by the RM). In 2QFY23, the company reported that 89 percent of its loans were approved within 48 hours," it informed.

The company has also reduced its exposure to under-construction properties, and the proportion of pre-EMI in its gross loan assets has declined steadily over the last five years. The objective of all these measures is to benefit from its robust underwriting framework in order to demonstrate superior asset quality and low risk-adjusted credit costs across cycles, it added.

In the September quarter, Home First Finance reported a 20.97 percent growth in its net profit at 54.27 crore as against net profit of 44.86 crore in the year-ago period. Its total income came in at 189 crore in the quarter under review, up 29.6 percent from 146 crores during the corresponding period last year.

In the first half of the financial year FY23 (H1FY23), the company posted a net profit of 105 crore, up 32 percent from 80 crore for the 6 Months period ended September 30, 2021. Its total income for H1FY23 rose 24.6 percent to 359 crore as compared to 288 crore in the same period last year.

Motilal Oswal expects an AUM/PAT CAGR of 30 percent/23 percent, respectively, over FY22-FY25E. HomeFirst’s asset quality should exhibit strength and credit costs are likely to remain benign over FY23E-FY25E as there are no sticky NPAs from the past, it predicted.

With an RoA/RoE profile of 3.8 percent/15.6 percent by FY25E, MOSL believes that the current valuation of 2.9x FY24E P/BV presents an attractive entry point to a quality franchise.

Key downside risks are a sharp contraction in spreads/margins due to its inability to pass on higher borrowing costs to sustain business momentum and avoid higher delinquencies, it added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

Article
What is stock market correction?
First Published: 16 Nov 2022, 03:02 PM IST