Branch Expansion And Co-lending Will Strengthen Position In Affordable Housing

Key Takeaways

• Extensive branch expansion and strong asset quality could drive revenue and earnings growth by improving distribution and managing credit risk.
  
• Focus on technology and co-lending partnerships is set to boost operational efficiency, profitability, and new revenue streams.
  
• Increased borrowing costs and competitive pressures could compress margins, while potential equity dilution may affect return on equity amid asset quality risks.

Catalysts

Operates as a housing finance company in India.

• The company's extensive branch expansion strategy, with a near doubling of branches in three years, is likely to improve distribution reach and support strong AUM growth, which can drive future revenue.
  
• The focus on technology and a significant improvement in account aggregator adoption, along with customer app registrations, should enhance operational efficiency, potentially improving net margins.
  
• Asset quality remains strong, and with a conservative approach to credit costs, Home First Finance is managing risk prudently, which could positively affect future earnings by limiting provisions for bad debts.
  
• The decision to raise ₹1,250 crores in equity capital suggests confidence in future growth and market share gains in the affordable housing segment, which could provide a foundation for increased earnings.
  
• Co-lending partnerships are expected to scale, with a target of 10% of disbursements in the medium term, offering a potential new revenue stream that can support both revenue growth and profitability.

Home First Finance Company India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Home First Finance Company India's revenue will grow by 28.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 49.5% today to 44.9% in 3 years time.
• Analysts expect earnings to reach ₹7.0 billion (and earnings per share of ₹78.78) by about February 2028, up from ₹3.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹5.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.7x on those 2028 earnings, up from 23.7x today. This future PE is greater than the current PE for the IN Diversified Financial industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.6%, as per the Simply Wall St company report.

Home First Finance Company India Future Earnings Per Share Growth

Risks

• The impact of the Karnataka [e-khatas] issue and the tighter credit filters resulted in disbursals being ₹20 to ₹25 crores lower than expected, which could limit revenue growth.
  
• The increase in borrowing costs was noted, with the ex co-lending cost reaching 8.4%, potentially compressing net interest margins and affecting profitability.
  
• The Stage 3 NPA ratio remained at 1.7%, with early-stage delinquencies showing a minor seasonal uptick due to the macro environment, which could risk asset quality and earnings stability.
  
• The company's plan to raise equity capital up to ₹1,250 crores could lead to equity dilution and impact return on equity (ROE) until the capital is effectively deployed to drive growth.
  
• The competitive pressure from larger housing finance companies entering the affordable and near-prime segments could compress yields and impact future revenues in these markets.

Valuation

• The analysts have a consensus price target of ₹1239.75 for Home First Finance Company India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1482.0, and the most bearish reporting a price target of just ₹829.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹15.5 billion, earnings will come to ₹7.0 billion, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹954.75, the analyst price target of ₹1239.75 is 23.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.