Home First Finance Company (HomeFirst) exited FY21 on expected lines with: 1) stage-3 assets at 1.8%, credit cost at 100bps, 1+ dpd pool at 6.2%, and zero restructuring; 2) disbursements regaining traction in Q4FY21 or H2FY21 (to be precise) supported AUM growth of 14% YoY / 5% QoQ; 3) after a pause, securitisation of Rs1.2bn of asset pool yielded income of Rs181mn (securitisation income in FY21 being at par with FY20 at 1.1% of assets); 4) Portfolio spreads drawing support of lower borrowing cost (down to 7.4% in Q4FY21) settled >5%. With >30% AUM growth, funding cost benefit, improved cost to income ratio, and contained credit cost, we expect earnings to compound at ~40% over FY21-FY23E. However due to excessive capitalisation (tier-1 at 55%) and despite >3% RoAs, RoEs will be modest at ~12%. Maintain BUY. Key risks: i) sourcing as well as collections managed by front-end team; ii) apartment home loans showing some stress (in pockets).
- Earnings buoyed by securitised income besides growth uptick, stable credit cost and borrowing cost benefit: HomeFirst reported PAT of Rs313mn for the quarter, up 96% QoQ and 150% YoY. Overall, for FY21, PAT stood at Rs1.0bn, very much in line with our estimate of Rs0.97bn. For FY21, RoA was 2.5%, down 20bps vs 2.7% in FY20. Core PAT was supported by growth uptick, decline in borrowing cost and stable credit cost; reported PAT was buoyed by securitised income.
- Portfolio quality - stage-3 assets inch up 20bps to 1.8%; 1+ dpd at 6.2%: Despite the covid-led disruption, the company ended FY21 with 100bps credit cost (as a % of on-book advances). Compared to 0.8-1.0% stage-3 assets over past few years (1.0% in FY20), it increased in these challenging times to 1.8% (up 20bps QoQ) in line with expectations.
The above has to be read in conjunction with zero restructuring for FY21 and the high-yield nature of portfolio (>13%). Collection efficiency has improved to 98.5% as at Mar'21 vs 97.6% in Dec'20. With improved collection efficiency, bounce rates are steadily improving MoM to 17.3% in Q4FY21 from 20.1% in Q3FY21 and 16.3% in Apr'21
1+ dpd however settled at higher than the normalised level of 6.2% (after rising to 7.5% in Q3FY21). With normalisation kicking in for the company in terms of collections and business momentum, 1+ dpd print should gradually approach its normalised range of 3-4% in the medium term. This will further strengthen confidence in underwriting and credit assessment standards of the company.
30+ dpd remained sticky at 4.1% (higher than past average 1.4-1.8%). On an average 50% of 30+ dpd is generally reflected in stage-3 assets. With some further flow-through from the early delinquency buckets into stage-3, we expect stage-3 to inch up to 1.9% for FY22E and then moderate to sub-1.5% by FY23E. We therefore build-in credit cost of 55-60bps for FY22E/FY23E respectively.
- Credit cost at 100bps for FY21: Credit cost too came in line with expectations at Rs84mn for Q4FY21 taking cumulative credit cost for FY21 to 100bps (on 1-year lagged on-book AUM). No additional provision has been made towards covid resurgence. Nonetheless, the company carries 36% provisioning on stage-3, 14% on stage-2 and 0.4% on stage-1 assets. We are building-in 55-60bps credit cost for FY22E/FY23E.
- Disbursements pick momentum: Disbursement momentum had derailed in 9MFY21 (down 50% YoY) in the wake of the pandemic as Home First adopted stricter interim credit guidelines for the new business. However, with improved MoM collection efficiency and normalisation of economic activities, it started pursuing upcoming opportunities and disbursements picked up the lost momentum. Disbursements gained the lost traction being up 30% YoY as well as QoQ at Rs4.52bn. However, for the full year, it was down 32% -- on expected lines. AUM growth thereby grew 5% QoQ / 14% YoY to Rs41.4bn. Disbursement growth is expected to further accelerate to >60% over FY21-FY23E, thereby driving AUM growth by >30%. Key driving factors: i) digital adoption in reaching out to customers and channel partners; ii) leveraging technology and rising productivity at existing locations; and iii) increasing market share in Karnataka, Andhra Pradesh, Telangana, and Rajasthan.
- Securtisation and other income buoyed earnings: In line with its strategy, after a pause for past two quarters, it securitised assets worth Rs1.16bn and booked securitisation income of Rs181mn for the quarter - in line with our estimates. Company will continue to actively explore this source of borrowing to optimise capital usage, reduce leverage, and improve the cost of funds. We expect 30% of disbursements to be assigned / securitised over FY22E/FY23E, which will generate income to the tune of Rs650mn-950mn (12-13% of revenues and one-third of operating profit). Beside, other non-interest income of Rs143mn (compared to Rs90mn in Q3FY21) further supported earnings.
- Sharp decline in borrowing cost: Core NII was up 3% QoQ / 11% YoY to Rs496mn and for full year FY21 it was up 23% to Rs1.86bn. Cost of borrowings declined 60bps QoQ and 120bps YoY to 7.4%. This aided spreads increase of 40bps QoQ and 90bps YoY to 5.4%. More levers at work will get borrowing cost down further, sustained yields further buoyed by assignment income can help endure NIMs upward of 6.5% over FY22E-FY23E.
- Improved productivity to drive cost efficiencies: With growing productivity of existing branches through deeper and innovative distribution and leveraging technology to optimise operations, HomeFirst does not have very aggressive plan on branch expansion in the forthcoming years. Company did not add any branch in Q4FY21 as well. All this makes HomeFirst cost efficient with opex to assets ratio at 3.4-3.7% (compared to peers in 3.0-6.5% range). With the upscaling of branches and optimal utilisation, we expect opex to assets ratio to further improve by 90bps by FY23 (moving towards typical range of opex/AUM at 2.0-2.5% for large branches), which can act a trigger for RoE improvement.
- Earnings growth robust, excess capitalisation to suppress RoEs: With >30% AUM growth, funding cost benefit, improved cost to income ratio and contained credit cost, we expect earnings to compound at 40% over FY21-FY23E. However due to excessive capitalisation (tier-1 at 55%) and despite >3% RoAs, RoEs will be modest at ~12%.