Home First Finance IPO: Strong growth prospects justify higher valuations

Home First Finance is an affordable housing finance company which targets homebuyers in the low- and middle-income group. Nearly three-fourths of its employees are in the salaried category; self-employed people account for the rest. While the company has a presence in 11 states and a network of 70 branches, it has the biggest exposure to Gujarat, Maharashtra and Tamil Nadu. 

Most analysts believe the company has a long growth runway given its small size and the niche market it caters to. In addition to this, analysts at IIFL Secu­ri­ties believe its strong parentage, low non-performing assets (NPA), and a tier-1 capital adequacy ratio of 50.4 per cent (with additional capital to be added through the IPO) mean that the company will not find funding to be a constraint. Further given its underserved customer base, its pricing power is strong; its home loan yield at 12.9 per cent was the highest across listed peers, they add. 

It has also posted strong growth in recent years, while maintaining its asset quality. The company’s gross loan assets have increased at a compound annual growth rate of 63.4 per cent over FY18-20 — from Rs 1,355.9 crore as of March 31, 2018, to 3,618 crore at the end of FY20. Despite the Covid-19 crisis, the co­m­pany’s asset quality has remained largely stable with gross NPA and net NPA at 0.7 per cent and 0.5 per cent, respectively, at the end of H1FY21, say analysts at Nirmal Bang Research.

What has helped the company maintain asset quality is its financing of completed homes, which is at 89 per cent of the portfolio, and focus on customers with existing credit history. Share of these customers rose to 67 per cent in the first half of FY21. Further, its investments in technology and analytics enable effective underwriting and improve efficiencies across customer acquisition, processing and approval stages. While the pricing of the issue at 3.4x post issue, net worth is slightly expensive, its track record and growth prospects justify the same.