Home First Finance Company

[Sidharth_Chandraseka]

Company Background:

• The company was started by 3 ex-Citi bank employees Jaithirth Rao, PS Jayakumar, Manoj Viswanathan
• Manoj Vishwanathan is the MD and CEO of the firm
• Board has some well-experienced people like Chairman-Deepak(ex-MD HDFC and ex-MD and CEO HDFC Life), Sakthi prasad Ghosh(ex-ED NHB), Sujatha Venkatraman(Current Global head of credit bureau management, HSBC)
• The company focus on the affordable housing market with an average loan size of 10 Lakhs
• Predominantly an urban-focused and salaried class-focused company. (Company focuses on bigger markets where bigger HFCs and banks actively operate and do not focus on rural side unlike their affordable space peers like Aavas, Aptus…)
• Company highly focused on digital and has a good rating for their apps in play store
• The company has a very good TAT for loan disbursal.

Company products:

• The company majorly do home loans(92%) and LAP(6%) and have less exposure to shop loans(1%) and developer finance(1%)
• Customers are salaried class(74%) and self employers(25%) and corporate(1%)
• Company finance both under construction and purchase home loans. Under-construction project loans will be dispatched in tranches and purchase home loans are disbursed at one go
• They provide pre-payment without any penalty. There might be some conditions to it, but they are providing this to customers to pay some small prepayment

Market Area:

• The company market area is highly serviced areas, unlike their peers. The company selects states and districts where market size is high and does not focus on areas where market size is less even though that area is untapped. This is evident, as 3/4th of the company’s loan book is concentrated in 4 highly penetrated states - Gujarat, Maharashtra, Karnataka, Tamilnadu

• Even districts covered in the above states are concentrated around the bigger cities of the respective states

• In Quarterly Investor call also highlighted, they will choose high market size areas and will serve nearby areas by having digital branches(yellow dots on the map)

Key Metrics

• The company has a CRAR ratio of around 50% and the company wishes to maintain this in near future, as this will have positive effects on credit ratings.
• Debt to equity is maintained around 2x.
• Spread is currently at 5.5%(Q1 FY22), Elevated spread is because of lower borrowing cost but this is not sustainable, once we see a rise in bank repo rates, the spread will reduce and management is confident of maintaining it around 4.75%

• All the operational metrics ROE, ROCE, Opex, cost to income are low but are consistently improving
• Opex to Asset will be around 3%, current lower opex of 2.5% may not be sustainable, since due to covid restrictions opex is less, this will move higher in normal days

• Cost to income ratio consistently improving

Digital and Loan TAT:

• All their apps for Customers, RMs, Connectors in the play store have very good ratings.
• The company has a very diversified lead generation.
• 93.7% of connectors are registered in the connector app
• 67% of customers are registered in the customer app
• The company digitized loan approval processes and having more focus on reducing the TAT.
• 91% of loans disbursed in Q1 FY22 are having less the 48 hours of TAT.
• The company makes sure a customer will interact with only one RM for counseling, loan approval, disbursement, collection. Other firms, they maintain separate people for these(Evident if you see employee reviews in AmbitionBox, that they don’t like being asked to handle all those). But by keeping a single point of contact, their TAT is significantly improved.
• All the customers will have e-NACH debit to their bank account for EMI, But the company making effort to make sure all their customers are enrolled in their app and do prepayment or even EMI payment in their app and handling queries of the customers.

Asset and Liability:

• ALM has no mismatch and the company is confident of maintaining a 4.75% spread.
• No commercial paper borrowings
• Consistently able to raise money from securitization route and constitutes for 20% of funds.
• Having a low debt to equity ratio of around 2x enables the company to raise debt efficiently
• The company takes credit life insurance plans for the customers which will pay the company outstanding loan amount in case of death of the customer. And this is a non-commission product and the company will not earn any income from it.

Key Questions:

• Can they sustain competition from banks and bigger HFCs with a difference in the interest rate of 5%
• How do these affordable home loans go without PMAY benefits?

Key Flags/Risks:

• The cost of borrowing might increase with a slight impact on asset quality, but management keeping liquidity of 1000 Crores, gives the confidence to credit rating/banks to service at a lower rate.
• Asset quality, as of Q1 FY22, impacted with 30+ dpd is at 5.8% compared to 4.1%. Being a lock-down quarter, there are some slippages to bucket 2, but bucket 3 is stable. Q2 might give a clear picture in this part.
• Since 75% of their loans are provided to salaried class and the company being urban-focused and 70% of their customers have an average credit score of 736, there is a real risk in sourcing these customers in the future.
• Balance Transfer is another risk, as customers having upgraded their credit history after series of consistent payments, they don’t have a real reason to keep their loan at a higher interest rate. For FY20 it’s been around 4% of AUM and the same is dropped to around 2% in FY21, But being a covid period, need to check if this is sustainable or this is getting increased.
• The company has a legacy NPA of 26 Crores in the NCR region and management highlighted the sale and recovery of the loan are not moving in a satisfactory manner, the company is taking additional provisions.
• The company has a 4/5 rating in AmbitionBox and the most common concerns of employees are work-life imbalance and they are asked to handle the entire lifecycle of the loan themselves, as against the common practice of multiple teams involving. On contrary, this might improves the customer experience.
• When comes to the promoter, anyway promoters are PEs and somewhere they will sell part/full shareholding and management salary is reasonable. One of the founders, Manoj has 1% of the shareholding and the annual report does not have any shareholding info of the other two founders.

Disclosure: Invested

[Disco]

@Sidharth_Chandraseka

On your first question on whether competition can be sustained - my view here is that the market opportunity is still quite large with home ownership still being quite low. So HFCs with reasonable governance with an eye on asset quality should be able to survive and even grow their market share provided they don’t get creative with their liability profile.

With respect to Home First, my view is that the customer profile they are targeting is very specific and some of them could be outside the target market of HDFCs and others. For example, they seem to be providing loans to informal salaried people wherein they do on-the ground checks before they disburse loans. Also, they provide housing loans to self-employed people - whilst, these two segments enable them to have a higher spread on their loans, they could also result in a decrease in asset quality.

I tend to think of schemes such as PMAY as catalysts to enable a behaviour of availing finance - they don’t necessarily make people decide if they want to own a home. Over the long run, home ownership will remain an aspiration for the large majority of population and as you rightly said HFCs are well positioned for this opportunity.

With regards to valuation, Warburg Pincus invested in the company at a share price of ~334 in Oct-20. Given the presence of other institutional investors prior - I think this is a reasonable estimate of market price. In the subsequent 9 months, we have seen the IPO, 2nd wave etc - I don’t think there has been a significant value creation/ change of status since the WP investment to build a bridge from then to the current price of ~600.

Disclaimer: This is not recommendation to Buy or Sell

Disclosure: Not invested. The above views are personal and are on the basis of reading publicly disclosed information by the company.

[Deven]

Thanks, @Sidharth_Chandraseka for creating the post.
Am holding since post IPO. What I like most is the overall HF industry, Management, Tech usages and growth.

Particularly stock has not performed much since ipo despite reasonable Q 2 Q performance.

I compared HF with Aavas F sometime ago, as AF is famous with some PMS and investors. Comparision is self-explanatory. Said so I welcome other views.

Disc: Invested immediately post IPO; not added or sold in last 3+ months.

[nagireddy1991]

@Sidharth_Chandraseka @Deven

Why is company’s debt to equity ratio so low, is management not confident on their loan book, its hard to generate ROE without leverage in HFCs, if management wants to D/E ration to be low it has to dilute the equity quite often to address the growth, is their any management guidance for ROE in long term ?

[Sidharth_Chandraseka]

D/E is low because, in the last two years they raised two tranches of equity, one from Warburg Pincus and another in IPO. They are growing their book at a very healthy rate, so D/E will rise gradually in the coming years. This is evident if you see previous years

	FY11	FY12	FY13	FY14	FY15	FY16	FY17	FY18	FY19	FY20	FY21
Debt	0	5	44	96	216	365	554	870	1926	2494	3054
Equity	15	28	50	99	102	154	308	333	523	933	1381
D/E	0.0	0.2	0.9	1.0	2.1	2.4	1.8	2.6	3.7	2.7	2.2

But I don’t think they take D/E beyond 4 any time sooner. As Business is still in an early growth phase, higher D/E will have a rating impact, since they are not backed by finance-related parentage like Canara-Canfin. PE funds can do wonders on the Equity side, but not on the debt-rising side.

[Sidharth_Chandraseka]

Recent monarch concall update October-2021

• Company always focus highly developed states(west and south states) and in North region only look for highly developed cities( approach highly different from aavas)
• ROE hovering around 10, but except to be around 12 in 6-9 months once they reduce higher liquidity and expect to be around 15-16 in 2-3 years. Long term Target to move it above 20.
• Has higher cash as equity, because they don’t want to go to market for capital raise for next 4-5 years
• No inorganic growth plans
• Balance Transfer is around 4%, company does not make higher effort to reduce this, since cost of doing so is higher and 4% is low

Disc: Invested

[Deven]

Thanks @Sidharth_Chandraseka
Below is the link of conf call.

Management Call: Home First Finance

Sidharth could elaborate last point, balance transfer. I believe it’s transfer of loan from home first to other HFC, is this so? Didn’t get 4% wala part?

[Sidharth_Chandraseka]

Yes. This 4% forms a percentage of loan book transferring their loan to other banks/HFC.

We can consider this also as a prepayment, since some other bank/HFC will pay entire amount to HFFC and transfer their loan. They get prepayments from customer prepayments and also subsidies for PMAY.

The company tried to fetch cibil activity of all customers to check if they are any loan inquiry for any home loans in another company to check the possibility of a potential balance transfer account. But the cost of doing so is higher and even they identified the potential account, they can’t do much to stop them.

But I am not sure whether this 4% is per year or per quarter. I get different BT with Aavas

Aavas Q2, FY21 concall:

HFFC Q4, FY21 Concall:

[aashu4uiit]

Very intresting thread and a lot of useful information here. Can someone share if they have done any valuatio n of this business and what will be the best way to do valuations for HF businesses. I assume DCF is not the way for lending businesses

[Sidharth_Chandraseka]

No @aashu4uiit, I haven’t done any traditional valuation here.

I used a combination of CRAR, loan growth rate, spread, AUM to arrive at my valuation

[Sidharth_Chandraseka]

HFFC entering co-lending space with Union bank. Details of co-lending is not yet made public. Deal could be similiar to Indiabulls.

Co-lending is the future, as NBFC’s cannot compete with bank, when banks enter into tieup with fintech.

[Sidharth_Chandraseka]

One interesting data we could see from Q3 Concall, the recoverablity of the NPA assets from sale of assets is taking a hit. If we listen to the management commentry of other HFC, they are also started selling their NPA assets.

But the fact they are taking additional writeoffs over the provision amount is not a great sign. if we look into the PCR of stage 3 (Without the RBI notification impact), its approx 30% and still they are taking writeoffs.

Not sure on if there is any overstating of LTVs in the assets.

Disc: Invested

[sujay85]

Dalal & Broacha initiated coverage

Affordable%20Housing%20Finance%20Thematic%20Report.pdf

[babuchit]

FYI - Marcellus added this stock in their Little champs PMS as per recent newsletter.
https://marcellus.in/newsletter/little-champs/how-do-we-know-which-promoters-to-back/

[sougataG]

I would not take their views very seriously. The churn in their portfolio is high and is inconsistent with their theme of holding good companies for longterm. One name that immediately comes to mind is ITC. They exited ITC despite all the good qualities it had when the stock was not doing well price wise. On the other hand PPFAS entered the stock with a big bet on peak pessimism. That to my mind is the hallmark of a good value investor. Just an observation. Discl. Invested with PPFAS.

[bhavveshh]

Why is the stock falling sharply after its Q2FY23 results (which were okayish). Other NBFCs havent fallen as much as Home First. Can anyone throw light please?

[jothi_basu]

How the co-lending is working?? Any idea??

[Deven]

In last call they indicated they pass 80% to partner bank. Done 20 cr this qtr and it will increase. Co-lending mostly done in higher ticket size; typically 20 to 35 Lakhs. I believe interest margin etc may be confidential. Check last concall.