Buy this NBFC small cap stock listed in 2021, shares may jump, gave 54.07% in 1 year: Motilal Oswal

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Stock market outlook

On NSE, the current share price of HomeFirst is Rs 891.40 apiece, trading 0.48% above the previous close. The 52-week low of the stock is Rs 535.30 recorded on September 21, 2021 and the 52-week high is Rs 1,004.55 recorded on August 16, 2022.

Returns on investment

Returns on investment

Over the past week the stock has returned negative 4.44% and over the past month a positive return of 10.15%. Over 3 months, the stock posted a positive return of 12.52%. While over 1 year, the title jumped 54.07%. It has generated a massive return of 69.03% since its listing on the stock exchange. It was listed on the stock exchange in February 2021.

Play on the multi-year affordable housing funding opportunity!

Play on the multi-year affordable housing funding opportunity!

Home First Finance (HomeFirst) is an affordable housing retail financier (ATS: INR 1.1 million), which operates mainly in the outskirts of urban centres/Tier1/Tier2 cities. It is present in 13 states (the 5 main ones contributing around 77% of its assets under management) with a lean distribution network of around 93 branches. The company primarily targets the informal wage earner segment, which is underserved by banks and large HFCs. The company is aggressively leveraging its core competencies to take advantage of the multi-year growth opportunity that affordable housing presents. HomeFirst’s technology advantage as a pioneer, along with its strategic digital partnerships, has resulted in strong underwriting, faster turnover and superior asset quality. Backed by True North and GIC (combined ownership of c.34%) and Warburg Pincus (~29%), HomeFirst delivered growth in assets under management of c.45% as well as robust asset quality over the during the 2017-22 financial year. Its raw NPA (

Consistently excel in technology adoption

Consistently excel in technology adoption

HomeFirst was an early adopter of the cloud-based Salesforce platform. The company applies its robust technology infrastructure to all of its business functions to drive healthy underwriting and faster turnover. HomeFirst also makes extensive use of its technology platform and data analytics, resulting in higher asset quality and better underwriting. Its proprietary real estate price predictor is an excellent collateral valuation tool, while the predictive analytics tool effectively predicts the propensity to default. Some of the company’s most recent technology interventions, such as eNACH, e-Sign and e-Stamp Paper, have shown improved adoption and further improved the onboarding journey for its customers.

Multiple supply channels focused on improving throughput

Multiple supply channels focused on improving throughput

In addition to connectors and development channels (combined ~80% of supply mix), the company also leverages the build community, branch marketing, digital platforms, and forges strategic alliances. HomeFirst recently entered into a co-lending partnership with Union Bank of India and is also exploring other such partnerships. It has also partnered with multiple platforms/aggregators including payment banks, credit bureaus, and fintechs for digital lending.

Building blocks in place for an expected three-year lending CAGR of around 29%

Building blocks in place for an expected three-year lending CAGR of around 29%

The company’s senior management team, infrastructure and processes in place can ensure healthy growth in assets under management as well as low risk-adjusted credit costs. “We expect HomeFirst to deliver a loan CAGR of 29% in FY22-25 (although execution should be monitored over the period),” the brokerage said.

Levers to mitigate margin compression with lower cost ratios

Levers to mitigate margin compression with lower cost ratios

Despite aggressive competition, HomeFirst can avoid a major yield squeeze by penetrating deeper into its existing states and increasing the proportion of LAP in its AUM to around 12-13% by FY25E. In addition, despite expectations of an increase of around 140 to 160 basis points in policy rates, we expect an increase of around 120 basis points in its cost of borrowing in fiscal years 22 to 25e. While investments in brick-and-mortar branches and employee onboarding will keep opex high in FY23E, we expect a sustained decline of 10-20 basis points in cost ratios each year and expect stable opex /average assets under management from 2.2 to 2.3% by FY27.

Restructured loans lower than those of peers;  expect a benign cost of credit of around 30 basis points

Restructured loans lower than those of peers; expect a benign cost of credit of around 30 basis points

HomeFirst constantly strives to improve its TAT ​​and effectively manage risk. Supported by improving recoveries and a further decline in bounce rates, we expect continued improvement in asset quality and model benign credit costs of around 30 basis points in fiscal 23-25E.

Multiple growth levers in place;  initiate coverage with a BUY rating

Multiple growth levers in place; initiate coverage with BUY odds

The brokerage said, “We estimate that HomeFirst will deliver an AUM CAGR of 29% over FY22-FY25E and an NIM of 6.1% to 6.4% over the same cost ratios. The asset quality of HomeFirst is expected to be strong and borrowing costs will likely remain subdued in FY23E through FY25E as there are no persistent NPAs from the past of around 16% in FY25E due to its high capital adequacy.We attribute a target multiple of 4.0x P/BV of September 24 to HomeFirst (valuation discount of approximately 5% compared to Aavas having a target multiple of 4.2x ) to arrive at our TP of INR 1020. We are launching a hedge on HomeFirst with a BUY rating.”

Disclaimer

Disclaimer

The stock was selected in Motilal Oswal’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

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