International brokerage firm Jefferies has initiated coverage on Home First Finance,a housing finance company, with a buy rating. The New York-based firm's buy call has a target price of Rs 900 per share, indicating an upside of 34 per cent from Thursday's closing price. The brokerage has turned bullish on the country's housing finance companies (HFCs) that are targeting affordable housing sector.
"Reasonable affordability, preference for home-ownership post Covid and low mortgage penetration (11 per cent of GDP) should drive housing demand. Penetration is even lower in affordable housing segment, where shortage can widen to 9 crore plus units by 2030," Jefferies said about their decision to turn positive on affordable home financiers.
As part of their coverage, Jefferies says that it expects the company’s loan book to grow at compounded annual growth rate (CAGR) of 30 per cent over FY22-25 by expanding distribution by 60 per cent and leveraging superior productivity.
Jefferies says that this will drive 28 per cent net interest income (NII) CAGR over FY22-25, despite some net interest margin (NIM) pressure. Asset quality should improve further, driving lower credit costs. The brokerage expects earnings per share (EPS) to grow at a CAGR of 24 per cent and return on equity (ROE) to increase to 15 per cent.
The brokerage firm believes that housing credit demand will stay strong, and loans at affordable HFCs will grow at 17-18 per cent CAGR over FY22-25.
"Strong demand and 60 per cent network expansion by FY25 (from 2QFY23) should support 30 per cent loan CAGR over FY22-25. Ramp-up in new states in south should also diversify exposure. Risk of loan balance transfers is higher versus peers given its presence near tier 1 and 2 locations. Scalable model and better branch productivity can mitigate this," they said.
Jefferies added that asset quality trends are improving for the company as its borrower profile is less risky than their competitors. This is attributed to their higher mix of housing loans and salaried borrowers and lower mix of new-to-credit borrowers.
The company mainly lends to first time home buyers in the salaried segment with income below Rs 50,000 per month in the outskirts of metros and tier 1-2 cities. This is in contrast to other affordable HFCs like Aavas and Aptus which lend to non-salaried borrowers in deeper geographies. The company effectively offers a higher loan value compared to larger lenders that lend to salaried segment and this is likely to drive growth for the company, Jefferies said.
Home First's core growth strategy is to focus on states that account for larger proportion of affordable housing markets and capture share by expanding distribution through a mix of physical and virtual branches.
“Strong demand in affordable housing and expansion in distribution has driven strong disbursements and 30 per cent+ AUM growth in the last few quarters. While Gujarat, Maharashtra and Tamil Nadu are its core markets (64 per cent of loans), Home First's shares in these markets are still low, thus offering headroom for further growth. Home First is also seeing strong growth in other key southern states like Andhra Pradesh, Telangana and Karnataka albeit off a low base,” Jefferies said.
The company also plans to deepen distribution and capture share in these 6 key states (60 per cent of affordable housing loans) by expanding its distribution to 150 branches across 120 cities/towns and 400 touch points through a mix of physical and virtual branches in the next 3 years.
