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|Wednesday, 20 January 2021||
Among fastest growing affordable housing finance company
The company has delivered strong growth in loan growth and profitability with healthy asset quality
Home First Finance Company is a technology driven affordable housing finance company (HFC) focused on first-time home buyers in low and middle-income groups. The company was founded by Jaithirth Rao, P. S. Jayakumar and Manoj Viswanathan and commenced operations in August 2010. It primarily offers housing loans for the purchase or construction of homes, which comprised 92.1% of its Gross Loan Assets end September 2020. The new to credit customers account for 32.8% of loan book.
The company also offers other types of loans comprising loans against property (5.1% of loans), developer finance loans (1.9%) and loans for purchase of commercial property (0.9%) together account for balance portion of loan book.
The average ticket size of housing loans was Rs 10.1 lakh, with an average loan-to-value on gross loan assets of 48.8%. The stage 3 loan assets of the company stand at 0.74% end September 2020.
Manoj Viswanathan is CEO and founder of the company with over 24 years of experience in the consumer lending industry.
The company has posted a strong CAGR of 63.4% in the loan book between FY2018 and FY2020 with loan book at Rs 3730.01 crore end September 2020. The company serves salaried and self-employed customers with salaried customers accounting for 73.1% and self-employed customers at 25.0% of loan book end September 2020. It services 44,796 active loan accounts end September 2020.
The company has a network of 70 branches covering over 60 districts in 11 states and a union territory in India, with a significant presence in urbanized regions in the states of Gujarat, Maharashtra, Karnataka and Tamil Nadu. It has increased the scale of operations and grown branches by adopting a strategy of contiguous expansion across regions and has strategically expanded to geographies where there is substantial demand for housing finance.
The company utilizes a diverse range of lead sourcing channels such as connectors, architects, contractors, affordable housing developers, in addition to conducting loan camps and micro marketing activities, and utilizing employee and customer referrals and branch walk-in customers. Connectors are generally individuals such as insurance agents, tax practitioners and local shopkeepers and company has 800 active connectors end September 2020.
The company leverages technology in various facets of its business such as processing loan applications, managing customer experience and risk management. It has developed a paperless process to onboard customers efficiently, while mobility solutions through dedicated mobile applications for customers enables quick and transparent loan related transactions. The proprietary machine learning customer scoring models is utilized to assist centralized credit underwriting process, which has led to consistent and accurate credit evaluation with quick turnaround times.
The company has posted 44% growth in the net profit to Rs 52.95 crore in H1FY2021 with 29% growth in revenues to Rs 237.15 crore. The cost to income ratio of the company has improved sharply to 31.3% in H1FY2021 from 43.6% in H1FY2020.
The total borrowings (including debt securities) were Rs 2636.58 crore, which typically is long-term funding from a variety of sources including private and public sector banks, the NHB and through assignment transactions. The company has improved its credit ratings from CARE A- end March 2017 to CARE A+ end September 2020.
Objects of the Offer
The initial public offer (IPO) consists of fresh issue to raise Rs 265 crore issuing 51,25,725 shares at lower price band of Rs 517 per share and 51,15,830 shares at the upper band of Rs 518 per share.
Further, the offer of sale (OFS) comprises to raise Rs 888.72 crore by issuing 1,71,89,923 shares at lower price band and 1,71,56,737 shares at upper price band. Among the promoters, True North Fund V Llp is offering shares worth Rs 435.62 crore and Aether (Mauritius) is also offloading share worth Rs 291.28 crore. Among investors shareholders, Bessemer India Capital Holdings Ii is selling shares worth Rs 120.46 crore, P. S. Jayakumar Rs 28.435 crore and Manoj Viswanathan Rs 12.925 crore through OFS.
The issue is to be made through the book-building process and will open on 21 January 2021 and will close on 25 January 2021.
The company proposes to utilize the net proceeds from the offer for augmenting equity capital base to meet future capital requirements arising out of growth in business.
In addition, the company expects to achieve the benefits of listing of Equity Shares on the Stock Exchanges and enhancement of the companys brand name and creation of a public market for Equity Shares in India.
The company has built a scalable operating model with a differentiated technology framework, which enables to expand operations and drive growth in revenue with lower incremental costs.
The customer centric approach has been a key driver of growth and helped to differentiate from competition and achieve superior net promoter scores. The company has set up an easy and customer friendly process right from the loan application stage to disbursement of the loan.
With the strategy of contiguous expansion, the company has strategically expanded to relevant geographies by evaluating areas with high economic growth and substantial demand for affordable housing finance.
The company utilizes a diverse range of lead sourcing channels.
The company has set up a centralized data science backed underwriting process. A centralized team of underwriters ensures consistency in implementing underwriting principles.
The company has set up a robust collections management system wherein approximately 93% of collections for FY2020 were non-cash based, which eases stress on monitoring financial transactions and reduces cash management risk.
The company has maintained healthy asset quality with Stage 3 Loan Assets at 0.74% and net stage 3 loan assets at 0.51%, while 30 days past due was at 1.1% end September 2020.
The company has been able to access long term borrowings through diverse sources at a competitive cost. The effective tenure of loan assets was 97.00 months, while the closing tenure of outstanding borrowings and assignment was 96.45 months.
The company continues to benefit from strong capital sponsorship and professional expertise of marquee shareholders with promoters True North Fund V LLP and Aether (Mauritius), while other major investors are Bessemer, Orange Clove Investments B.V. (an affiliate of Warburg Pincus, a global private equity investor).
The liquidity and profitability of business depend on timely access to and the costs associated with, raising funds.
The company has posted strong growth in the recent years and a significant portion of loan portfolio is relatively new and was disbursed during the last 36 months and risk of delinquency in housing loans typically emerges 18 to 36 months from disbursement.
The company relies significantly on its information technology systems for business and operations and any failure, inadequacy or security breach in such systems could adversely affect business.
The state of Gujarat contributed 39.0% and Maharashtra 21.0% of gross loan assets end September 2020. Out of 70 branches, 35 branches were in Gujarat and Maharashtra. Any significant social, political or economic disruption in these regions or policies changes in these states may disrupt business.
The Indian housing finance industry is extensively regulated and any changes in laws and regulations applicable to HFCs could have an adverse effect on business.
Significant changes by the Government, the RBI or the NHB in their policy initiatives regarding benefits to housing, housing finance and HFC may have an adverse effect on business.
The Indian housing finance industry is highly competitive with strong competition from banks, other HFCs, small finance banks and NBFCs. Established players have more resources, a wider branch and distribution network, access to cheaper funding, superior technology and better understanding of and relationships with customers.
The annualized EPS on post-issue equity works out to Rs 12.1 (annualized) for H1FY2021. At the price band of Rs 517 to Rs 518, P/E works out to 42.7x of H1FY2021 EPS.
Post-issue, the book value (BV) will be Rs 153.4 at upper price band, while the adjusted BV (ABV) stands at Rs 151.3 net of non-performing assets.
The scrip is being offered at price to Adj BV multiple of 3.4x at the upper price band.
Among peers housing finance companies with focus on affordable housing segment, Aavas Financiers is trading P/Adj BV multiple of 6.8x, Repco Home Finance is trading at P/Adj BV of 1.0x and Can Fin Homes is trading at P/Adj BV multiple of 3.1x.
In terms of P/E, Home First Finance is offered at 42.7x, while Aavas Financiers is trading at PE of 64.2x, Repco Home Finance at 5.6x and Can Fin Homes at 15.6x.
Home First Finance has posted loan growth of 20% end September 2020 over September 2019. Among peers, the loan growth of Aavas Financiers is strong at 24%, while that of Repco Home Finance is slow at 5% and Can Fin Homes at 6%.
On margins front, the net interest margins for Home First Finance is higher at 4.8% compared with Can Fin Homes at 4.1% and Repco Home Finance at 4.5%, while the net interest margin of Aavas Financiers is sharply higher at 6.8% for H1FY21.
On asset quality front, net NPA ratio of Home First Finance stands at 0.51%, while that of Can Fin Homes is at 0.46%, Aavas Financers at 0.32% and Repco Home Finance at 2.0% end September 2020.
The company, being in the affordable housing finance segment, the focus is on customers in the low and middle-income groups which are prone to various risk such as loss of employment, insolvency, lack of liquidity or personal emergencies such as the death of an income generating family member, including on account of events such as the COVID-19 pandemic. Further, the self-employed customers are often considered to be higher credit risk customers due to their increased exposure to fluctuations in cash flows and to adverse economic conditions.
The company needs to sustain strong loan growth and maintain stable asset quality and profitability to support premium valuation.