Home First Finance is a technology driven affordable housing finance company that targets first time home buyers in low and middle-income groups. They primarily offer customers housing loans for the purchase or construction of homes, which comprised 92.1% of their Gross Loan Assets, as of September 30, 2020. They also offer other types of loans comprising loans against property, developer finance loans, and loans for the purchase of commercial property, which comprised 5.1%, 1.9%, and 0.9% of its Gross Loan Assets.
Gross Loan Assets have grown at a CAGR of 63.4% between the financial year 2018 and the financial year 2020. As of September 30, 2020, 73.1% of Gross Loan Assets were from salaried customers, while 25.0% were from self-employed customers.
They serviced 44,796 active loan accounts, as of September 30, 2020. For the six months ended September 30, 2020, they sanctioned 2,591 loans on account of leads generated through 887 connectors.
They utilize the services of third parties from time to time in various aspects of their operations such as sourcing of customers, valuation of collateral, and legal services. They have a diverse range of lead sourcing channels such as connectors, architects, contractors, accountants, affordable housing developers, in addition to conducting loan camps and micro marketing activities, and utilizing employee and customer referrals and branch walk-in customers.
As of September 30, 2020, it had 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.
Dates – January 21 to January 23, 2021
Price – Rs 517 to Rs 518
Issue Size – 1153.72 Cr (265 Cr Fresh issue + 888.72 Cr Offer for Sale)
Issue Objectives – (i) To augment the company’s capital base to meet future capital requirements. (ii) To achieve share listing benefits on the exchange.
Lot – 28 shares
Lot Value – Rs 14504 (At upper price band)
Market cap post listing – Rs 4527 Cr (8.22 shares paid up + 0.5115 cr fresh issue of shares multiplied by 518)
Shareholding (as of the RHP Date i.e January 16, 2021)
They witnessed an increase in their bounce rate from 10.5% during the last quarter of the financial year 2020 to 28.3% during the second quarter of the financial year 2021
There is an outstanding criminal proceeding against one of their Directors, Maninder Singh Juneja as on the date of this Red Herring Prospectus. Lakshmi Vilas Bank filed a first information report against National Bulk Handling Corporation Private Limited (“NBHC”) and others including Maninder Singh Juneja, then managing director and chief executive officer of NBHC, before the Central Bureau of Investigation, in relation to the service provided by NBHC as a collateral management service provider to LVB. The FIR alleges inter alia a shortage of commodities stored in certain godowns, which were pledged in favor of the bank.
Their operations are concentrated in the states of Gujarat and Maharashtra and as of September 30, 2020, 39.0%, of their Gross Loan Assets was from Gujarat, while 21.0% was from Maharashtra. As of September 30, 2020, of their 70 branches, 35 branches were located in the states of Gujarat and Maharashtra.
They offer housing loans and other loans to customers, where the primary collateral is real estate. The value of the collateral, however, may decline during the term of the loan for a variety of reasons, including due to adverse market conditions prevalent in the real estate sector.
During the six months ended September 30, 2020, and the financial years 2020, 2019, and 2018, the attrition rate of their total employees was 5.5%, 36.2%, 36.1%, and 27.1%, respectively. (Attrition rate is high, for 6MFY21 attrition was less due to covid period it seems)
They have improved credit ratings from ‘CARE A-’ as of March 31, 2017, to ‘CARE A+’ as of September 30, 2020, and also currently have an A+ (stable) rating from ICRA Limited.
All credit ratings –
Financials & Other Metrics
Balance Sheet Metrics – CTI ratio decreasing, NIM stable, CAR increasing. Avg cost of borrowing has increased.
P&L Metrics –NII, Net profit increasing. GNPA and NNPA stable but the real picture will come on Dec 31, 2020 quarter or the subsequent quarters once the restructured book or morat book starts to become NPAs or stressed.
Collection Efficiency has improved a lot from Q1FY21.
The expensive valuations are clearly visible.
Valuation & Conclusion
At the upper price band of Rs 518, the issue is priced at a 4.1x P/BV ratio. The country’s best housing finance company trades at 3.2x being a 100x bigger company than Home first finance.
The NBFC regulation is very lax as seen with DHFL and many other NBFCs, and therefore it is hard to really judge the numbers. On top of this due to COVID-19, the real extent of the moratorium book and the restructured assets is unknown; therefore one must tread cautiously while investing in NBFCs.
The expensive valuations and the market froth make us wary of this IPO.
For the short term, it seems that the company will list at a premium given its grey market premium of Rs 110-115 (21% premium) as of 19th January afternoon.
On the JST IPO scorecard system, we rate this IPO a 4 out of 10.
Indian Housing Finance Market
The Indian housing finance market experienced healthy growth in housing loan outstanding of approximately 16% over Fiscals 2015 to 2020 on account of a rise in disposable income, healthy demand, and a greater number of players entering the segment.
The following graphs set forth growth in housing loan disbursement and credit outstanding over periods indicated below:
CRISIL Research estimates the total housing loan outstanding of ₹ 20.4 trillion in Fiscal 2020. Growth in the total housing loan outstanding declined in Fiscals 2019 and 2020 due to slow growth of the HFCs post the IL&FS default and the economic slowdown.
Market Share of Various Players in Housing Finance
The following graphs set forth market share of various players based on housing loan outstanding and housing loan disbursement:
Market Share Growth of HFCs Loses Momentum due to Liquidity Crisis
With tightened liquidity post the Infrastructure Leasing and Financial Services (“IL&FS”) default in September 2018, HFCs have encountered structural challenges in the form of increased refinancing risk and asset-liability mismatch, which slowed down disbursements in Fiscal 2019. HFCs’ access to funds from the debt capital markets has also declined considerably, especially for those companies with high negative asset-liability management (“ALM”) mismatches.
The Housing Shortage in India
Despite the constant focus on the housing segment, housing in India is far from adequate. The GoI, in its Twelfth Five Year Plan (2012 to 2017), accorded this issue utmost importance and focused on increasing the number of housing units available both in the urban as well as the rural sector. As per the estimates of the Twelfth Five Year Plan, the shortage of housing in the urban segment stood at 18.78 million. The economically weaker section (“EWS”) accounts for three-fourths of the shortage and the lower-income group (“LIG”) approximately accounts for a quarter of the housing shortage.
India’s Mortgage Penetration Lower than Other Economies
As of March 2019, the total outstanding retail housing loans in India were ₹ 18.7 trillion, translating into a mortgage-to-GDP ratio of 12.4%. While the ratio has improved over the last few years, it is still lower than several other emerging and developed economies. CRISIL Research analysis indicates the mortgage penetration in India is 9 to 11 years behind other regional emerging markets such as China. Going forward, CRISIL Research expects a steady and gradual increase in mortgage penetration due to various structural drivers, such as a young population, smaller family sizes, increased urbanization, and rising income levels.
The following graph sets forth the trend in the Mortgage-to-GDP ratio in India (2005-2025P):
- World’s second-largest population
- Favorable demographics
- Increasing per capita GDP
- Increasing financial penetration
Key Structural Reforms: Long-Term Positives for Indian Economy
- Financial Inclusion.
- Implementation of GST.
- Thrust on Affordable Housing.
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