BL Analysis Bureau
Traders can keep away from the preliminary public supply of Dwelling First Finance opening right this moment. The corporate is an inexpensive housing financier that has been in enterprise for greater than a decade now. Whereas there’s big untapped potential within the inexpensive housing market, we really feel that the extraordinary competitors within the house poses dangers to scalability of its mortgage e-book and sustainability of the standard of its credit score profile, from hereon. Traders can therefore wait and be careful the corporate’s efficiency over the subsequent few quarters earlier than they enter the inventory.
By the IPO, its promoters and personal fairness companies (True North Fund, Aether (Mauritius), and Bessemer India Holdings), wish to collectively divest 21 per cent stake within the firm. The supply additionally contains a recent problem value Rs 265 crore.
At a worth band of ₹517-518 apiece, the corporate is valued at about three.5 occasions its adjusted e-book worth (put up problem). Whereas the valuation is comparatively decrease than its direct listed peer– Aavas Financiers (which presently trades at 6.7 occasions its e-book worth), it isn’t too low-cost both. That is contemplating the comparatively small measurement of the corporate and higher efficiency metrics of friends (listed and unlisted).
In October 2020, Warbug Pincus acquired a 29.15 per cent stake within the firm at 2.7 occasions its then e-book worth, with a capital infusion of about ₹75 crore. The ask worth within the IPO is at a 25 per cent premium to this valuation at a time when the uncertainty across the impression of the pandemic on its e-book stays.
Moreover, the intensifying aggressive panorama and small cap nature of the inventory (market capitalization on the worth band works out to about Rs four,500 crore), are key dangers for the corporate.
Up to now so good
With the Centre’s thrust on inexpensive housing section, the introduction of credit score linked subsidy scheme and numerous tax sops on inexpensive housing finance, small HFCs and area of interest gamers within the inexpensive house have been rising at a quicker clip than bigger HFCs, over the past couple of years. With its concentrate on first time residence patrons inside the low and center revenue segments, the AUM of Dwelling First Finance noticed a strong progress of 63 per cent CAGR (compounded annual progress price) over FY18-20, to Rs three,618 crore. Its common mortgage ticket measurement stands at Rs 10 lakhs.
The corporate’s internet curiosity margin (NIM) have been within the vary of 5.1 to five.four per cent and return on property (RoA) of about 2.5-2.7 per cent, within the final two years. The corporate has additionally contained its gross NPA ratio to lower than 1 per cent. The corporate’s earnings quintupled from ₹16 crore in FY18 to ₹79 crore in FY20 and the corporate’s return on fairness inched as much as 10.9 per cent in FY20.
These metrics, nonetheless, are decrease when in comparison with its direct listed peer, Aavas Financier. With an AUM of Rs 7,800 crore, the NIMs of Aavas have been at 6.four per cent in FY20 and the RoA was at about three.eight per cent. The gross NPAs of Aavas too have been decrease, at zero.5 per cent. Moreover there are different privately held entities within the inexpensive housing finance trade, that demonstrated higher metrics than Dwelling First Finance. Examples embody Aptus Worth Housing finance, that reported an RoA of 6.three per cent and NIMs of eight.2 per cent in FY20, with AUM of Rs three,200 crore (based mostly on the RHP).
The corporate took successful within the first half of FY21, because of the pandemic. Disbursements dropped by 67 per cent YoY within the first half of the yr. Moreover, the corporate additionally noticed a spike in its 30 days late (DPD) e-book, to about three.1 per cent in October 2020, from 1.6 per cent in FY20. The 30 DPD e-book was at 1.1 per cent in 1HFY21, owing to about 28 per cent of the corporate’s clients choosing moratorium as of September 2020. Assortment effectivity although recouped to 96.1 per cent in October 2020, from the lows of April and Could 2020 (about 63 per cent).
Scalability wants watch
With a capital adequacy ratio (CRAR) of over 50 per cent (pre-issue) and borrowings of lower than three occasions of its internet owned funds (HFCs are permitted to lift as much as 12-14 occasions their internet owned funds), the corporate is nicely funded for progress.
However its means to retain the earnings progress momentum must be watched. It’s because whereas the inexpensive housing market on one hand presents big untapped potential for financiers, the extremely fragmented market– with greater than 30 gamers, additionally lowers the scope for enhance in margins. A CRISIL examine on the retail housing credit score trade reveals that housing finance firms (HFCs) account for under about 40 per cent of the market share as of FY19, with the remainder coming from banks. Inside this 40 per cent share, the share of inexpensive HFCs is at 11 per cent, with giant HFCs (equivalent to HDFC, LIC Housing Finance and Indiabulls Housing Finance) having fun with the lion’s share. The examine classifies HFCs with greater share of decrease ticket sized loans (lower than ₹15 lakh) as inexpensive HFCs.
Moreover, the corporate depends closely on a community of builders, architects, native shopkeepers, tax practitioners and insurance coverage brokers to solicit clients. These sources collectively procured about 70 per cent of the mortgage e-book in FY20. Its present community of 70 branches unfold throughout 60 districts in 11 States, presently supply solely 9.three per cent of the mortgage e-book and one other 2.three per cent comes from its digital tie ups (with Credit score Mantri, Airtel Funds financial institution). Because the mannequin of sourcing is comparatively new, we have to wait and watch on the scalability of the identical.