BL Research Bureau
Investors can avoid the initial public offer of Home First Finance opening today. The company is an affordable housing financier that has been in business for more than a decade now. While there’s huge untapped potential in the affordable housing market, we feel that the intense competition in the space poses risks to scalability of its loan book and sustainability of the quality of its credit profile, from hereon. Investors can hence wait and watch out the company’s performance over the next few quarters before they enter the stock.
Through the IPO, its promoters and private equity firms (True North Fund, Aether (Mauritius), and Bessemer India Holdings), are looking to collectively divest 21 per cent stake in the company. The offer also comprises a fresh issue worth Rs 265 crore.
At a price band of ₹517-518 apiece, the company is valued at about 3.5 times its adjusted book value (post issue). While the valuation is relatively lower than its direct listed peer-- Aavas Financiers (which currently trades at 6.7 times its book value), it isn’t too cheap either. This is considering the relatively small size of the company and better performance metrics of peers (listed and unlisted).
In October 2020, Warbug Pincus acquired a 29.15 per cent stake in the company at 2.7 times its then book value, with a capital infusion of about ₹75 crore. The ask price in the IPO is at a 25 per cent premium to this valuation at a time when the uncertainty around the impact of the pandemic on its book remains.
Besides, the intensifying competitive landscape and small cap nature of the stock (market capitalization at the price band works out to about Rs 4,500 crore), are key risks for the company.
So far so good
With the Centre’s thrust on affordable housing segment, the introduction of credit linked subsidy scheme and various tax sops on affordable housing finance, small HFCs and niche players in the affordable space have been growing at a faster clip than larger HFCs, over the last couple of years. With its focus on first time home buyers within the low and middle income segments, the AUM of Home First Finance saw a robust growth of 63 per cent CAGR (compounded annual growth rate) over FY18-20, to Rs 3,618 crore. Its average loan ticket size stands at Rs 10 lakhs.
The company’s net interest margin (NIM) were in the range of 5.1 to 5.4 per cent and return on assets (RoA) of about 2.5-2.7 per cent, in the last two years. The company has also contained its gross NPA ratio to less than 1 per cent. The company’s earnings quintupled from ₹16 crore in FY18 to ₹79 crore in FY20 and the company’s return on equity inched up to 10.9 per cent in FY20.
These metrics, however, are lower when compared to its direct listed peer, Aavas Financier. With an AUM of Rs 7,800 crore, the NIMs of Aavas were at 6.4 per cent in FY20 and the RoA was at about 3.8 per cent. The gross NPAs of Aavas too were lower, at 0.5 per cent. Besides there are other privately held entities in the affordable housing finance industry, that demonstrated better metrics than Home First Finance. Examples include Aptus Value Housing finance, that reported an RoA of 6.3 per cent and NIMs of 8.2 per cent in FY20, with AUM of Rs 3,200 crore (based on the RHP).
The company took a hit in the first half of FY21, due to the pandemic. Disbursements dropped by 67 per cent YoY in the first half of the year. Besides, the company also saw a spike in its 30 days past due (DPD) book, to about 3.1 per cent in October 2020, from 1.6 per cent in FY20. The 30 DPD book was at 1.1 per cent in 1HFY21, owing to about 28 per cent of the company’s customers opting for moratorium as of September 2020. Collection efficiency though recouped to 96.1 per cent in October 2020, from the lows of April and May 2020 (about 63 per cent).
Scalability needs watch
With a capital adequacy ratio (CRAR) of over 50 per cent (pre-issue) and borrowings of less than 3 times of its net owned funds (HFCs are permitted to raise up to 12-14 times their net owned funds), the company is well funded for growth.
But its ability to retain the earnings growth momentum needs to be watched. This is because while the affordable housing market on one hand offers huge untapped potential for financiers, the highly fragmented market-- with more than 30 players, also lowers the scope for increase in margins. A CRISIL study on the retail housing credit industry reveals that housing finance companies (HFCs) account for only about 40 per cent of the market share as of FY19, with the rest coming from banks. Within this 40 per cent share, the share of affordable HFCs is at 11 per cent, with large HFCs (such as HDFC, LIC Housing Finance and Indiabulls Housing Finance) enjoying the lion’s share. The study classifies HFCs with higher share of lower ticket sized loans (less than ₹15 lakh) as affordable HFCs.
Besides, the company relies heavily on a network of builders, architects, local shopkeepers, tax practitioners and insurance agents to solicit customers. These sources collectively procured about 70 per cent of the loan book in FY20. Its existing network of 70 branches spread across 60 districts in 11 States, currently source only 9.3 per cent of the loan book and another 2.3 per cent comes from its digital tie ups (with Credit Mantri, Airtel Payments bank). Since the model of sourcing is relatively new, we need to wait and watch on the scalability of the same.