Home First Finance IPO review (May apply)

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Review By Dilip Davda on January 19, 2021

•    Original plans for IPO by February/March 2020 delayed due to pandemic.
•    HFFC is a niche player and tapping first home buyers for its lending.
•    The company has performed well with the growing top and bottom lines.
•    Issue appears fully priced, may be considered for long term investment.

PREFACE:
HFFC originally planned its maiden float around February/March 2020 and at that time it was pegged at Rs. 1500 cr. as overall size. While it geared for the plans, pandemic strike and lockdown began from March 22, 2020, and that derailed its plan. However, it managed to garner immediate fund needs with two pre-IPO placements worth Rs. 79.08 cr. (@ Rs. 334.73 per share) with Warburg Pincus in October / November 2020. With these two placements, it is now gearing for an IPO of approx. Rs. 1154 cr. However, market men are surprised for a higher price band of Rs. 517-Rs. 518 per share compared to a placement price just about two months before. Explaining this, Merchant Bankers gave the reason for the pink mood of the secondary market with all-time high record-making benchmarks. Details of the IPO are given here below:


ABOUT COMPANY:
Home First Finance Co. Ltd. (HFFC) is a technology-driven affordable housing finance company that targets first time home buyers in low and middle-income groups. It primarily offers customers housing loans for the purchase or construction of homes, which comprised 92.1% of its Gross Loan Assets, as of September 30, 2020. HFFC's Gross Loan Assets have grown at a CAGR of 63.4% between the financial year 2018 and the financial year 2020 and increased from Rs. 1355.93 cr. as of March 31, 2018, to Rs.  3730.01 cr., as of September 30, 2020.

The company serves salaried and self-employed customers. Salaried customers account for 73.1% of Gross Loan Assets and self-employed customers account for 25.0% of Gross Loan Assets, as of September 30, 2020. It serviced 44,796 active loan accounts, as of September 30, 2020. According to the CRISIL Report, HFFC had the highest share of NHB refinance (26%) among its peers in borrowing mix as of March 31, 2020.

HFFC also offers 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, as of September 30, 2020, respectively. As of the same date, 32.8% of Gross Loan Assets were from customers who were new to credit. The average ticket size of housing loans was Rs. 0.1 cr., with an average loan-to-value on Gross Loan Assets of 48.8%, as of September 30, 2020. As of September 30, 2020, and March 31, 2020, its Stage 3 Loan Assets expressed as a percentage of Gross Loan Assets were 0.74% and 0.87%, respectively.

As of September 30, 2020, HFFC 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. 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. According to the CRISIL Report, the 11 states and union territory in which the company present accounted for approximately 79% of the affordable housing finance market in India during the financial year 2019. It 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. Its network of connectors has increased from over 470 connectors as of March 31, 2018, to over 800 connectors as of September 30, 2020, and it manages their leads effectively through connector mobile application. For the six months ended September 30, 2020, and the financial year 2020, the company sanctioned 2,591 and 15,591 loans on account of leads generated through 887 and 2,553 connectors, respectively.


ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for augmenting capital base as well as listing benefits and unlocking the brand value,  HFFC is coming out with a maiden IPO of Rs.1153.72 cr. ( approx 22272590 shares) consisting fresh equity issue of approx 5115830 equity shares (Rs. 265 cr.) and offer for sale of 17156760 shares (Rs. 888.72 cr.) (Based on the upper price band). The company has fixed the price band of Rs. 517 - Rs. 518 per share against face value of Rs. 2 per share. Minimum application is to be made for 28 shares and in multiples thereon, thereafter. The issue opens for subscription on January 21, 2021, and will close on January 25, 2021. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.49% of the post issue paid-up capital of the company.

The company raised Rs. 79.08 cr. by way of pre-IPO placements at Rs. 334.73 per share (FV Rs. 2) to Warburg Pincus in the month of October and November 2020. Hence the fresh equity issue size is reduced to that extent. (Refer page 62of RHP).

The issue is jointly lead managed by Axis Capital Ltd., Credit Suisse Securities (India) Pvt. Ltd., ICICI Securities Ltd. and Kotak Mahindra Capital Co. Ltd., while K Fin Technologies Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 47.83 to Rs. 334.73 (based on the face value of Rs. 2 per share) between January 2011 and November 2020. The average cost of acquisition of shares by the promoters and selling stakeholders is Rs. 55.28, Rs. 95.67, Rs. 149.10, Rs. 149.73 and Rs. 152.82 per share.

Post issue, HFFC's current paid-up equity capital of Rs. 16.45 cr. will stand enhanced to Rs. 17.48 cr. At the upper price of the IPO, the company is looking for a market cap of Rs. 4526.64 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, HFFC has posted total income/net profits of Rs. 134.24 cr. / Rs. 16.00 cr. (FY18), Rs. 270.92 cr. / Rs. 45.20 cr. (FY19) and Rs. 419.66 cr. / Rs. 79.25 cr. (FY20). For the first six months ended on September 30, 2020, it has earned a net profit of Rs. 52.95 cr. on a total income of Rs. 243.19 cr. For the said periods, its cost to income has declined from 61.0 in March 2018 to 34.9 in September 2020. As on September 30, 2020, the company's net NPA stood at 0.54%.

For the last three fiscals, HFFC has posted an average EPS of Rs. 8.32 and an average RoNW of 9.8%. The issue is priced at a P/BV of 4.11 based on its NAV of Rs. 126.06 as on September 30, 2020, and at a P/BV of 3.45 based on post issue NAV of Rs. 150.07. The company has not paid any dividend in the last three and a half financial years.

If we annualize latest earnings and attribute it to post IPO fully diluted equity, then asking price is at a P/E of around 42.75.

COMPARISION WITH LISTED PEERS:
As per offer documents, HFFC has shown Aavas Financiers as its listed peer which is trading at a P/E of around 61.8 (as on January 19, 2021 closing). Based on this, HFFC IPO appears fully priced.

BRLM'S TRACK RECORDS:
The four Book Running Lead Managers associated with the offer have handled 29 public issues in the past three years out of which 9 closed below the issue price on listing date.

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