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MOSL : HOME FIRST FINANCE COMPANY: Earnings in-line with sustained improvement in asset quality

HOME FIRST FINANCE COMPANY: Earnings in-line with sustained improvement in asset quality

(HOMEFIRS IN, Mkt Cap USD0.9b, CMP INR802, TP INR1025, 28% Upside, Buy)

• HomeFirst’s 2QFY23 PAT grew 21% YoY/6% QoQ to INR543m (in-line). Credit costs grew 37% QoQ to INR50m (MOFSLe: INR31m). Underlying this, the NII grew 58% YoY to ~INR1b (in-line). ‘Other income’ grew 13% QoQ, driven primarily by higher treasury gains and investment income.
• Opex was 7% higher than estimated and grew 47% YoY and 14% QoQ, led by investments in new branches and resultant higher employee expenses.
• Disbursements grew 36% YoY to ~INR7b, leading to AUM growth of 36% YoY to ~INR62.8b. AUM growth was marginally impacted by subsidy received by the company under the PMAY scheme.

Asset quality improved even as bounce rates increased sequentially

• Gross Stage 3 (including RBI NPA circular) improved ~20bp QoQ to 1.9%.
• PCR increased ~4pp QoQ to ~26% (v/s ~22% in 1QFY23), leading to a decline in NS3 to 1.4% (v/s 1.7% QoQ).
• BT-OUT moderated to annualized rate of 5.5% (down 10bp QoQ).
• 1+dpd declined ~30bp QoQ to 4.7%, while bounce rates increased to 15.6% in 2QFY23 and 15.1% in Oct’22 (v/s 14% in 1QFY23).
• The company attributed the increase in bounce rates to the changing preference or payment behavior of customers to make repayments through UPI. About 2% of the total customers whose NACH mandate bounced made their repayments using UPI within three days of the mandate bounce.

Portfolio spreads/NIM stable; moderation in incremental spreads

• Reported yield improved ~30bp QoQ to 13%, while the CoB grew ~20bp QoQ to 7.1%. Reported spreads were stable sequentially at 5.8%, while reported NIM grew 10bp QoQ to 6.5%.
• Incremental spreads in 2QFY23 declined ~20bp QoQ to 5.4%. The company suggested that the moderation in spreads will continue for the next few quarters since it will transmit only a part of the increase in borrowing costs and absorb the rest.

Highlights from the management commentary

• Guided for Opex to AUM ratio of 3.0-3.2% and expect to maintain spreads at ~5.5% as the interest rates rise. The company expects the proportion of LAP to increase to ~15% within the next few years.
• Attrition at 40% at the RM level was slightly higher than prior quarters
• Plans to gradually increase its branch network to 150 over the next two years (from its current ~100 branches).