Home First Finance is trading at attractive valuations. Buy for target price of Rs 900 (34% upside): Motilal Oswal

Narrative and thesis intact; reiterate our conviction BUY

Valuations now attractive to invest in an otherwise quality franchise

► Home First Finance (HomeFirst), in our view, 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.

► Arguably, the company did slow down its disbursements during the two COVID waves and report 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.

► We had initiated on HomeFirst in Sep’22. Since our initiation, the stock price has corrected ~22%. Further, the price correction since it reported its 1HFY23 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.

► HomeFirst is an affordable housing franchise that has consistently exceled 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.

► We model an AUM/PAT CAGR of ~30%/~23%, 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. With an RoA/RoE profile of 3.8%/15.6% by FY25E, we believe that the current valuation of 2.9x FY24E P/BV presents an attractive entry point to a quality franchise. Reiterate BUY with a TP of INR900 premised on 3.5x (earlier: 4.0x) Sep’24E BVPS. Key downside risk is a sharp contraction in spreads/margins due to its inability to pass on higher borrowing costs to sustain business momentum and avoid higher delinquencies.

Leveraging its core strengths; tech platform cutting across business functions

► HomeFirst was one of the earliest adopters of the cloud-based SalesForce platform. The company applies its robust technology infrastructure across its business functions – aggregator app for efficient sourcing of leads, RM app for entering all details with respect to potential opportunities into the system, an integrated customer CRM and LMS on a cloud-based platform and a dedicated portal for legal and technical vendors.

► Connectors form the backbone of originations for HomeFirst. Despite nonexclusivity, connectors pass on the leads to HomeFirst because of the company’s fairness and transparency as well as the quick turnaround, which is appreciated by both the connectors and the customers alike.