Verdict: Exorbitant Pricing
Home First Finance is launching a Rs. 1,154 crore IPO between Thur 21st Jan to Mon 25th Jan 2021, 77% of which is OFS by promoters True North Fund and GIC Singapore and PE investor Bessemer, while balance 23% fresh issue worth Rs. 265 crore, in the price band of Rs. 517-518 per share. Issue represents 25% of post issue capital and is expected to list by 3rd Feb 2021.
Rs. 3,730 crore AUM of Affordable Home Loans
Home First Finance is a 10 year old affordable housing finance company, with average ticket size of Rs.10 lakh, yielding ~13% p.a. against its own cost of funds of 8.6%, which is the highest among all listed housing finance companies, and by a substantial margin: HDFC (7.2%), LIC Housing (7.6%), Aavas (7.9%), PNB Housing (8.1%), and even Can Fin (7.3%), GIC Housing (7.4%) and Repco (7.9%). Between FY19 to H1FY21, company’s cost of funds moved up from 8.5% to 8.6%, when repo rates actually fell 160 bps! Company’s credit rating has also not improved since FY17, stagnat at A+. For any lender, raising low cost funds is the biggest strength, whereas company’s liability side fails to invoke confidence.
Growth on a Low Base
While H1FY21 NII grew 40% YoY to Rs. 96 crore and PAT 44% to Rs. 53 crore, on a small scale, disbursement were impacted due to the pandemic. Not only H1FY21 disbursements decline to mere Rs. 300 crore from Rs. 886 crore YoY, FY20 growth also slowed to 3% against 110% in FY19. 4.8% NIMs and 0.51% net NPAs are healthy, but RoE of 11% is the lowest among peers, which average ~17%.
No Justification for Sky-High Valuation Multiples
Company’s market cap of Rs. 4,525 crore discounts FY22E book value by a multiple of 2.9x, which is way higher than home loan giant HDFC’s PBV (excluding investments) of 1.9x, Can Fin’s 2.2x, which has 5x larger AUM and better asset quality, as also pure play individual home loan provider Repco Home’s 1.1x. Don’t know how fair is comparison with Aavas’ PBV of 5.7x, which has 5% retail free float of 5% (against 13% for Home First, post listing) and thin trading volumes. Just for mention, LIC Housing, GIC Housing and PNB Housing are ruling below book value, despite surging home purchase demand across the country.
55% Premium to Last Transacted Price 3 Months ago
PE Warburg Pincus will be the single largest shareholder post listing, with 28% holding, majority, which was acquired at Rs. 335 per share, via primary and secondary deals, just three months ago. Since financials for Oct-Dec 2020 period are not disclosed, it is difficult for any analyst to justify current IPO price of Rs. 518 per share, a 55% premium to the last transacted price of Oct 2020. Even if discussions for that last transaction were on since pre-pandemic times, no housing finance share has risen 55% since Feb 20 levels, making this pricing completely irrational, though not uncommon in bull markets frenzy.
We are unable to find any justification for such exorbitant pricing and hence recommend an ‘avoid’ for such bull-market induced high-priced stories.
Grey Market Premium (GMP) of Home First: Grey Market Premium of Home First is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.