Domestic brokerage firm Motilal Oswal Financial Services has initiated coverage on Home First Finance (HomeFirst) stock with a 'buy' rating, fixing a target price of ₹1,020, implying an upside of about 19% from the stock's current market price.
"We initiate coverage on HomeFirst with a buy rating. We ascribe a target multiple of 4 times September 2024E P/BV (price to book value) for HomeFirst (valuation discount of about 5% to Aavas having a target multiple of 4.2 times) to arrive at our target price of ₹1,020," Motilal Oswal said.
HomeFirst is a retail affordable housing financier which operates mainly in the peripheries of urban centres, tier-1, tier-2 cities. It has a presence across 13 states (top 5 contributing nearly 77% of its assets under management) with a lean distribution network of about 93 branches.
Here are the six key points highlighted by the brokerage:
1. Consistently excelling in technology adoption
HomeFirst was one of the earliest adopters of the cloud-based Salesforce platform. The company applies its robust technology infrastructure across its business functions to drive healthy underwriting and faster turnaround, said the brokerage firm.
Motilal underscored that HomeFirst also extensively utilizes its technology platform and data analytics, resulting in superior asset quality and better underwriting. Its proprietary property price predictor serves as an excellent tool for the valuation of collateral, while the predictive analytics tool effectively forecasts the propensity to default.
Some of the company’s more recent technology interventions such as e-NACH, e-Sign and e-Stamp Paper have exhibited an improving adoption and further enhanced the onboarding journey for its customers, Motilal said.
2. Multiple sourcing channels with a focus on improving throughput
In addition to the connectors and developer channels (combined about 80% of the sourcing mix), the company also taps the construction community, branch marketing, and digital platforms and forges strategic alliances, said Motilal Oswal.
HomeFirst recently entered into a co-lending partnership with the Union Bank of India and is also exploring more such partnerships. It has also tied up with multiple platforms and aggregators including payments banks, credit bureaus and fintech for digital loan origination, the brokerage firm added.
3. Building blocks in place for an expected nearly 29% three-year loan CAGR
The company’s core management team, infrastructure and processes in place can ensure healthy AUM growth as well as low risk-adjusted credit costs.
"We expect HomeFirst to deliver a 29% loan CAGR during FY22-FY25 (although its execution needs to be monitored over the period)," said Motilal Oswal.
4. Levers to mitigate margin compression with lower cost ratios
Motilal Oswal believes despite the aggressive competition, HomeFirst can avoid a major yield compression by penetrating deeper into its existing states and increasing the proportion of LAP in its AUM to about 12-13% by FY25E.
"Further, despite expectations of a nearly 140-160bp increase in the policy rates, we are building in a nearly 120bp increase in its cost of borrowings over FY22-FY25E," said the brokerage firm.
"While investments in physical branches and employee onboarding will keep opex elevated in FY23E, we build a sustainable decline of 10-20bp in cost ratios every year and expect steady state opex/average AUM of 2.2-2.3% by FY27," the brokerage firm said.
5. Restructured loans lower than peers
"HomeFirst is constantly striving hard to improve its TAT and manage risks efficiently. Underpinned by improving collections and a further decline in bounce rates, we expect a continued improvement in asset quality and model benign credit costs of about 30bp over FY23-FY25E," the brokerage firm said.
6. Multiple growth levers in place
The brokerage firm said it estimates HomeFirst to deliver an AUM CAGR of 29% over FY22-FY25E and a NIM of 6.1%-6.4% over the same period. It expects cost efficiencies to kick in and drive a sustained improvement in its operating cost ratios.
"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. Even with an RoA (return on asset) of about 3.8-3.9% over FY23E-FY25E, we estimate an RoE (return on equity) of nearly 16% in FY25E due to its high capital adequacy," said Motilal Oswal.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
