News Analysis

Use listing gains to exit Home First Finance

Keerthi Sanagasetti BL Research Bureau | Updated on February 03, 2021

Intense competition and poorer financial metrics compared to peers are dampeners

The stock of Home First Finance (HFFC) made a good debut today, at ₹612.15 — up 18.2 per cent over the issue price of ₹518. The stock further inched up 4 per cent in the initial 1-hour of trade, to a high of ₹639.5 apiece. However, with those allotted shares in the IPO making a beeline to book profits, the stock tumbled to a low of 565 (down 8 per cent from listing price).

At CMP (₹589), HFFC — a relatively smaller player in the much-fragmented affordable housing finance segment, trades at a valuation of 3.95 times its adjusted book value. The stock in our view is overpriced and allottees are advised to book profits on the stock at current levels.

While its direct listed peer, Aavas Financier trades a premium (price to adjusted book value of 7 times), its valuations are commensurate with the size of its loan book and superior performance metrics, when compared to that of HFFC.

Home First IPO subscribed 27 times

The listing gains on the shares of HFFC though better than IRFC, were quite tepid when compared to other recent IPOs, including the stellar listing of Indigo Paints earlier this week. Despite the huge untapped potential in the affordable housing finance space, the IPO of HFFC saw relatively lower demand from retail investors- category was subscribed by 7 times (compared to other stellar IPOs in 2020 that saw a subscription of over 35 times in the retail category).

While many retail investors continued to join the game of luck on listing day, the demand was relatively lower for HFFC, given the intense competition in the affordable housing finance space. The company already demonstrated lower performance metrics (net interest margins and return ratios) than peers (listed and unlisted), in the past. Besides, the intense competition in its target market also poses risks to scalability of its loan book and sustainability of the quality of its credit profile, from hereon.

Peers fare better

With an outstanding loan book of just above ₹3,600 crore, the company’s net interest margin (NIM) was at 5.4 per cent and return on assets (RoA) of about 2.7 per cent, in FY20. The company has also contained its gross NPA ratio to less than 1 per cent. These metrics, however, are lower when compared to its direct listed peer, Aavas Financier.

With an AUM of ₹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 ₹3,200 crore (based on the RHP).

Sourcing model

Besides the intensifying competitive landscape, the small cap nature of the stock (current market capitalisation is at ₹5,147 crore), and relatively new model of client sourcing are other risks for the company.

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.

Published on February 03, 2021

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