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Home First Finance Company India Ltd
Earnings Call Analysis
Q1-2025 Analysis
Home First Finance Company India Ltd
Home First Finance Company India Limited has reported a commendable performance in the first quarter of fiscal year 2025, marking significant milestones that indicate robust growth. The company surpassed INR 10,000 crores in assets under management (AUM) for the first time, coupled with a year-on-year increase in disbursements of 29.9%, amounting to INR 1,163 crores. This success reflects the company's broad-based growth across various markets, especially in Maharashtra and Karnataka, alongside successful expansions into UP, MP, and Rajasthan.
The AUM itself grew by 34.8% YoY, reaching INR 10,478 crores, representing an 8% growth quarterly. This alarming growth rate suggests a strong demand for housing finance, which the company attributes to solid operational strategies. In terms of a forward-looking view, the MD, Manoj Viswanathan, indicated that the disbursal run rate could translate to an estimated INR 4,800 crores annually, projecting a growth rate of over 30%.
Profit after tax increased to INR 88 crores, reflecting a 27% rise compared to the previous year, affirming the company's efficient cost management and operational performance. The return on assets (ROA) for the quarter stood at 3.6%, with a return on equity (ROE) of 16.3%. Operating costs as a percentage of assets were reported at 2.7% but are expected to rise slightly to between 2.8% to 2.9%, reflecting a proactive management stance amid growth.
The firm has maintained an overall cost of borrowing at a competitive 8.3%. The debt-equity ratio is 3.6x and total capital adequacy stands impressively at 36.2%. The predictive nature of financial metrics suggests a balancing act between growth and maintaining healthy financial ratios, which is crucial to sustaining investor confidence.
As part of their strategy, Home First will increase their Marginal Cost of Lending Rate (MCLR) by 35 basis points from August 1. Despite the potential for reduced benefits during this quarter due to timing, there is an expected 10-15 basis point impact on the portfolio due to adjustments for risk profiles; however, this should be managed effectively, given their robust operational structure.
The company reported strong asset quality, with the gross Non-Performing Asset (NPA) ratio stabilizing at 1.7%. The management's focus on early delinquency management continues to pay off. Additionally, technology adoption is notable; 95% of customers are registered on the mobile app, and digital processes drive efficiency, with digital fulfillment at over 70%.
Looking ahead, the company’s growth trajectory appears strong, with management confident in preserving its development momentum due to favorable economic conditions and an expanding distribution network. The focus remains on providing loans for affordable housing whilst maintaining engagement with credit rating agencies, which could yield benefits such as potential credit rating upgrades within the next year.
For the upcoming fiscal year, management targets an ROE between 16.2% to 16.5%, forecasting continued incremental improvements year on year of about 50 to 75 basis points. This stance supports a sustainable outlook for the company amidst competitive pressures and changing market conditions.
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Ladies and gentlemen, good day, and welcome to Home First Finance Company India Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Manish Kayal from Home First Finance. Thank you, and over to you, sir.
[Audio Gap] to all the participants to Home First's earnings call to discuss the results of Q1 FY '25. We hope that you had an opportunity to go through our investor deck and press release uploaded on stock exchanges and website yesterday. We have also uploaded the Excel factsheet which has the historical numbers on our website.
On today's call, Home First today is represented by our MD and CEO, Mr. Manoj Viswanathan; and CFO, Ms. Nutan Gaba Patwari. We'll start this call with an opening remarks by Manoj, then by Nutan, and then we will have a Q&A session.
With this, I will now request our MD and CEO, Mr. Manoj Viswanathan, to start today's call by sharing his thoughts on the overall performance. Over to you, Manoj.
Thank you, Manish. Good morning, and greetings to everyone. Before I get into the quarter 1 FY '25 performance, I would like to highlight that Home First has crossed the critical milestone of INR 10,000 crores AUM during the quarter. I want to thank and express my sincere gratitude to all the stakeholders for their support in this journey.
We have been sequentially increasing our disbursement every quarter. Disbursement in quarter 1 FY '25 stands at a new high of INR 1,163 crores, with a growth of 29.9% on a year-on-year basis and 5.5% on a quarter-on-quarter basis.
Growth has been broad based and coming in from all our markets. Notably, Maharashtra and Karnataka has shown better performance this year, reflecting in their share of the total AUM. Our expansion in the new markets of UP, MP and Rajasthan has also been successful. AUM grew by 34.8% year-on-year basis to INR 10,478 crores and 8% on a quarter-on-quarter basis. The spread, ex co-lending, was at 5.2%.
We will take the PLR up by 35 basis points from 1st of August. Since we are losing 1 month in the quarter, we will get a lesser benefit on the portfolio. In addition, we also have some portfolio under NHB schemes and some pools with good track record customers where we have to adjust the pricing for the customers from a risk-adjusted pricing perspective. As a result, we will get an impact of 10 to 15 basis points.
The profit after tax at INR 88 crores grew by 27.0% on a year-on-year basis, leading to an ROA of 3.6%. We are pleased to deliver an ROE of 16.3% in the first quarter FY '25.
The branch count remains at 133. We have added 22 touch points, taking the total to 343. We have about 7 branches in pipeline, which are likely to be opened at the ongoing quarter.
Our asset quality continues to be strong with a focus on early delinquencies. 1+ DPD stands at 4.5%, 30+ DPD is at 2.9%. And the gross Stage 3 NPA is at 1.7%, which is flat on a quarter-on-quarter basis. Prior to RBI classification circular of November '21, the number stands at 1.3%. Our credit cost at 20 basis points is up 10 basis points on a quarter-on-quarter basis. The BT Out rate has moderated in this quarter and stands at 6.3% as compared to 8.3% last quarter.
Technology remains central to our strategy. Account aggregator adoption has become mainstream with an adoption rate of 41% among new proposals, which was 36% in the last quarter. Digital penetration is strong with 95% of our customers registered on our app. Digital fulfillment has reached 70-plus percent with the use of digital agreements and e-NACH mandates. 90% of our service requests are raised on a mobile app.
With this, I would now like to hand over the call to Nutan to take you through the financials. Nutan, over to you.
Thank you. Good afternoon, everyone. On key financial parameters, our overall Q1 net interest margin remains at 5.3%. Operating cost to assets is at 2.7%. We expect this ratio to hover around 2.8% to 2.9% going forward. Cost to income is around 35.6% in Q1. Our balance sheet remains strong and ready to take on the new condition of the company.
Starting with borrowing. The company continues to have diversified and cost-effective long-term financing sources. This remains diversified across banks as well as NHB. Our borrowing mix is 59% combined, out of which, private sector bank is 30% and public sector banks is 29%. NHB refinance share is at 19%. 14% is from direct assignment and 3% from co-lending. We also have an NCD from IFC at 3%. We continue to have 0 borrowings through commercial paper. Our overall cost of borrowing is very competitive at 8.3%.
Coming to capital. Our total capital adequacy is at 36.2% with Tier 1 at 35.8%. Our debt to equity now is 3.6x. At June '24, net worth stands at INR 2,188 crores post dividend payout in June '24. Our book value per share stands at INR 246.
Moving to provision. We have remained conservative and continue to carry provision overlay over and above the ECL requirement. Total provision coverage ratio stands at 48%. Prior to NPL reclassification, as per RBI '21, this year stands at 66%.
On specific transactions during the quarter. We did a direct assignment of INR 152 crores during the quarter as a liquidity strategy, and our co-lending volume was INR 42 crores. Co-lending business is growing, and we expect this to contribute around 10% of disbursements in the near future.
With this, we conclude our opening remarks, and we will be happy to take your questions.
[Operator Instructions] The first question is from the line of Rajiv Mehta from Yes Securities.
Congrats on strong results. I have a few questions. Your disbursement volume was pretty strong in this quarter. It seems that you had a negligible impact from the RBI circular of April. Can you comment why was it?
And on this sequential reduction in BT Out rate, it's really commendable. But now that we are increasing PLR for the back book from August 1, how do we ensure that we are able to control BT Out in the coming quarters?
On the disbursements, as we had mentioned last time, we actually do a majority of disbursements electronically through any of the RTGS payments. So this is the reason we did not have any impact. And we have a small set of payments which we do for resale transactions through demand draft, so which did not get impacted by this guideline. So which is the reason we are -- we don't have any disturbance in the disbursements.
As far as BT Out is concerned, see, the PLR, the increase that we are contemplating is fairly small compared to what the customers have gone through over the last 2 years. So -- and most of it will get -- 90% of it will get transmitted through a tenure increase, not EMI increase. So it should not disturb the customers too much. So we don't anticipate an immediate impact from this set of increase which we are doing now.
Manoj, can you also comment on the origination in ex of co-lending that is stable at 13.4%? I believe that in this quarter, we had a higher origination share of LAP. And despite of it, the origination yield is stable at 13.4%. And now that you're taking a PLR hike, I just wanted to understand that is there scope for taking up the origination yields in the coming quarters?
Origination will largely be range-bound, 13.4%, 13.5%. And LAP ratio is also fairly range-bound, we operate in the 15% to 20% range. So LAP share as a percentage of the whole is generally in the 15% to 20% range. There may be like minor changes that's in that range, but largely, it's in that range. So as a result of it, the origination yield also will be range-bound.
Okay. And one last question is on the cost of borrowing, it was stable. So Nutan, I mean, when you just look at the numbers, and it seems that we did not have any significant upward repricing on existing borrowings. So are we negotiating on the transmissions which are coming from the banks? Are we trying to stop it or curtail it, which is why the stock of borrowings is not getting repriced in a significant manner?
That's right, Rajiv. We are doing that. As well as, as you would have seen, that our overall marginal culture borrowing also has kind of slightly improved. So that also is kind of helping us.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
Congratulations, Manoj and Nutan. I think, I mean, the way in which we kind of keep improving our disbursements, delivering healthy AUM growth without any significant impact on the margins and payouts in particular, that is really commendable. And which is where, I mean, my question revolves.
That -- I mean, while -- I mean, when we look at peers, the broader affordable housing sector, everyone talks about very high competitive intensity which is not allowing them to really pass on PLR hikes. I mean, there are players who have taken PLR hikes, but I mean, it's not really reflecting in their yields because it's not been absorbed.
So just trying to understand, you partly answered this question in the first question that was posed to you. Just trying to understand that, I mean, what is it that will help us kind of take this PLR hike, maintain these at similar levels, or like Manoj said, can improve by 10, 15 basis points from here, and yet keep our BT Outs at these good levels?
So we are seeing the, you can say, kind of worst case scenario on the BT Outs because over the last 2 years, the increase in rate was almost 1.25%. So what we are contemplating now is nowhere near to that, so very small increase. So this is why we are not overly worried on the BT Outs because BT Out over the last 2 years, it moved from about 5%, 5.5% to about 8%. So that was the range of movement in spite of such aggressive repricing of the customers. So -- and you can see that it has kind of moderated over the last quarter. So which is why a 35 basis points increase, that should -- largely passed on through a tenure increase, should not hurt us that much.
Got it. Then the last question that I had was again on the liabilities. Nutan, I just wanted to understand, I think, I mean, maybe in a couple of quarters back, we were saying that somewhere now, maybe one more quarter from now, you were expecting the cost of borrowings to start stabilizing. Now that, I mean, the spreads are very close to 5%, 5.1%. I mean, how are we looking at cost of borrowing stabilizing? And what could that translate into spreads and margins?
The cost of borrowing has stabilized now, maybe another 10 basis points. And see, still, the deposit rates of the banks are increasing. And the MCLR of banks are also continuing to pick up. We are working on it so that we don't get the full increase and many other things.
And the current spread is 5.2%, excluding co-lending, that is the kind of number that we kind of focus on. Because we have this view, we have already been proactive and done this PLR increased, and we expect an annual outer year impact of around 10, 15 basis points. So then the spread should be able to hold in this broad 5.2% region, is what we feel. There's another quarter or 2.
Got it. And sorry, one last question, one more question that I had was, I mean, now that we have crossed that critical milestone of INR 10,000 crores in AUM, have you started engaging with credit rating agencies? That somewhere down the road? If we can favorably look at a credit rating upgrade?
Yes, we have. I think the discussion is ongoing. It will, like we have always said, maybe around 9, 12 months once we cross this threshold. So it's just the first quarter. So perhaps another 12 months, hopefully, we should get that going as well. And then probably that should also help us in another 10 basis points with interest rate cycles remaining where they are. So it's all moving in the right direction. It's not a question of if, it's a question of when, I would say. So earlier, the better.
Congratulations once again. I think our execution has consistently been very good. All the very best to you.
The next question is from the line of Kunal Shah from Citigroup.
Yes. Congratulations for the set of numbers. So on this INR 10,000 crores AUM milestone, obviously, it's a great thing from your end. But generally, when we look at it in terms of commentary from most of the players, once they cross this milestone, they talk about moderating growth trajectory. At any point time or maybe anything which is happening with PLR now, do you believe, that maybe this 35 or maybe 38, that kind of AUM growth might not be stable? Or maybe more that we have delivered over the last, say, 5 years. How are seeing trajectory over next 3 years as well?
So our disbursal has been very strong in the first quarter. And if you just look at it from a run rate perspective, this should translate to at least INR 4,800 crores of disbursal for the year, which basically then translates into a 30%-plus growth.
And so we are not seeing any slowdown at this point. Demand seems to be quite strong on the ground. There seems to be enough opportunity for us to grow. At least, there are two areas where we are -- we have headroom to grow. So we have a lot of markets still to be penetrated, especially in the Central and Northern part of the country, we can go much deeper even in the other parts where we have already been present.
Plus, we don't have -- I mean, our penetration in LAP or our contribution from LAP is fairly low. That's another area where we have headroom. So we have multiple areas where we have headroom to grow. So we are not very much concerned about our ability to grow at the pace that we are growing at.
Okay. And secondly, with respect to maybe now, there will be some spread benefit which might play through. But overall, any thoughts in terms of building up some buffer given this kind of healthy growth over the last 3, 4 years? And increasing the cover rate across various [ states ]? Because it's been coming off for the past few quarters. So would we want to create any management over LAP or something, and just try to manage -- or maybe we are very comfortable with this kind of -- I mean. As well as speak to -- statement provision.
Yes. So Kunal, we have been doing that. As you would have seen, we have -- there is a certain management overlay on top of what the ECL model grows up. But the fact of the matter is the portfolio, post COVID, since -- once the normalcy has returned. So there is improvement in how the portfolio is behaving. And as a result of which, the ECL is throwing up lesser and lesser provision. So beyond a point, it will be difficult for us to overlay too much on top of that.
So which is -- but we are here taking some overlay over and above what the ECL is throwing up. But if the ECL model itself is throwing up lower and lower numbers, there will be -- it will be difficult for us to maintain that coverage which we had post-COVID. But yes, there is a regular process of reviewing it and taking overlay.
I just want to add to that, Kunal, we've also done back-testing on when we close loans to see that whether we have a significant amount which is under-recovered. And as you would see from the credit cost line, the credit cost is also reducing, and it's now settling at around 0.2%. So we've been guiding 0.3%, 0.4%. So again, that gives further comfort to say that the portfolio quality is improving. And in an eventual NPA situation also, the recoveries are not compromised. So that is also getting captured in the ECL flow.
Okay. Sure. And one last question, if can today, is on the co-lending part. So now that is getting fraction at closer to like 3-odd percent. But maybe at what level we would want to fill that to, given now there is all the work with respect to [ integration has been clearly done ]. And finally, maybe what support can it provide to the overall ROE at the level of proportion that we are looking at, yes?
So immediate milestone is to hit a 10% of disbursal. That's what we are aiming for. So 10% of disbursal is our first milestone. Maybe over a longer period, maybe 2, 3 years, that number can go up. But first milestone is to hit 10% of disbursal.
Okay. And given the lower capital requirement, the boost to ROE that it can provide?
Correct, correct. It will -- so that is something that we have mentioned that it is ROE-accretive scenario related to product. So we have less the capital allocation, and we can keep growing with this product.
The next question is from the line of Nidhesh from Investec.
First is like longer conclusion. Can you elaborate on the strategy from a 3-year perspective for the company to support how we prepare for updates around INR 10,000 crore, our book? How we prepare for the growth over the next 3 years? And how do you see return ratios panning out in that journey over the next 3 years?
Yes. Over 3 years, broadly, our strategy is to -- it's a distribution-led strategy. We -- when we started speaking about this 3 years ago, we said we are going to double down on our older markets, which is West and South, and we are going to penetrate deep in these markets, which we have done.
And then we said we will look at 3 large markets where we have a -- we had a fairly skeletal presence, which is UP, MP, and Rajasthan. And we will then start building our distribution there.
So our 3-year plan is to definitely double down on distribution on all these 9 markets and improve the penetration and try to cover as much of the state as possible. So that is primary -- our primary focus for the next 3 years.
As far as product is concerned, largely, we are going to be focused on housing loans. We want to be known in the market as a housing loan provider. So we are very focused on that. Plus also, the focus on housing loans helps us to understand the dynamics in the market better in terms of the properties and advances in various geographies, et cetera. So that is our product. From a product focus perspective, that is our strategy.
And as far as the ability to retain margins, et cetera, are concerned. As I mentioned, we have some headroom over there because we have -- as we go deeper and deeper into smaller markets, we have a greater ability to retain the margins. Plus, we also have a good amount of headroom on the loan against property product where we are still at about 15% of disbursal. So there again, we have headroom to be able to protect our margins.
So broadly, this is a strategy, fairly simple. It's very distribution-led. So granular distribution to a connector-led as well as branch and hub and spoke-led model. And product focus, keep the product focus on housing loans and kind of maintain the margins for the next 3 years. That's what we are basically looking at.
And do you expect operating leverage within cost to asset improving over the next 3 years and which may lead to ROA expansion in year 3? Or that is not what you have built?
Yes, there will be some gradual operating leverage which is flowing through. And so as you can see, we are still -- while we have guided to around 3% OpEx to AUM, we are still kind of hovering below that. So the operating leverage is flowing through gradually. And while our intention is that we want to use that in building distribution, et cetera. Still, it will -- definitely you will see some of it flowing through in the next 3 years. So our aim is to kind of get to -- eventually get to, maybe not in 3 years, but in 5 years, get to about 2.5% OpEx to AUM and closer to 30% cost to income.
Sure. Secondly is on the insurance -- corporate insurance license. So when should we start seeing yield income from the insurance in our P&L?
We should start seeing something coming in from the next quarter.
Okay. And any quantification for the full year that you have in your mind at this point in time?
It will be not appropriate to provide any figures on this because we are still in negotiations with the insurance companies. So I think we'll have to wait for that.
And lastly, keeping question on the active number of connectors for the quarter.
Active connector is about 3,500 connectors.
The next question is from the line of Nischint Chawathe from Kotak Institutional Equities.
Over the last 1 year, we have seen sort of pressure on yields despite the fact that cost of borrowing has been going up, and this is true for all the players in the industry. Now over the next 1 year, we're probably looking at interest rate sort of [ petering ] out or maybe even really coming off. What gives us comfort that yield will not come down further, or probably yield will not come down faster than the cost of borrowing, this leading to further pressure on core spread? And especially in the backdrop of some of the larger players getting into the smaller-ticket businesses.
So Nischint, generally speaking, you see the last cycle also, when the -- in a decreasing interest rate environment, when the borrowing costs are decreasing for us, generally, we have vastly been able to maintain our yield. And the spreads have actually expanded for us. But that is what has happened in the last cycle.
So you will see that across cycle, we are able to maintain our yield at around 13.5% or thereabouts. So as the borrowing cost reduces, we are anticipating that the spreads will expand.
And as I mentioned, we have some tailwinds on that. As we go into smaller markets, we have ability to retain margins. We have a higher ability to take on higher LAP. So those are both kind of cushions that we have as far as the yield is concerned. So we are -- we continue to maintaining yields at these levels. So if the borrowing cost reduces, hopefully, it will mean that our spread expands.
And over the next 4 quarters, let's say, if I look at your ticket size makeup of book. Given the fact that you're going into lower ticket, should it remain similar? Or would you kind of expect a trend where the larger tickets, INR 15 lakhs, INR 25 lakhs, grows at a faster pace than the overall company growth?
So overall, if you see, if you take a 5- to 10-year view, the ticket sizes do migrate up. So when we started out, we were focused on between INR 5 lakhs to INR 15 lakhs, but that number has moved up over time. So now you -- if you see between INR 15 crores to INR 25 lakhs or INR 15 lakhs to INR 30 lakhs is where the growth is, in India affordable segment itself.
So that's where we are likely to focus. So growth in all the segments, INR 15 lakh-plus, INR 15 lakhs to INR 20 lakhs, INR 20 lakhs to INR 25 lakhs, INR 25 lakhs to INR 30 lakhs, fairly similar for us. And that is where we will be also focusing.
The next question is from the line of Renish from ICICI.
Congrats on a good set of numbers. Sir, just two questions. One on this BT Out rate, which has been improved sharply this quarter. So any particular initiative we have took to arrest this? Or how is it, sir?
Renish, I think there are two things that have happened. One is that the recency effect has faded out for the customer because the last rate increase actually happened on 1st April, 2023. So it's been like 12 to 15 months since that time. And secondly, we had also put in place -- previous quarter, we have put in place a set of, you can say protocols, for addressing the BT Out. Some of it has started working. So I think it's both the things have contributed to the slight decrease.
Okay. So you mean you have put out a separate team for that? Or..
No, not a separate team. It's more like a set of rules or set of protocols we have rolled out for the branches, and we have given them training on that as to what needs to be done when a customer comes for a BT Out. Step 1, step 2, step 3, step 4. So that is beginning to help.
Got it. And sir, lastly, I mean sorry to be coming back to spread and yields. So now when you look at the organization really, you now stayed 7.4% wherein our margin cost of borrowing is higher at 8.6%, which is almost 30 basis point higher than the tendered cost. Which essentially means that, on the ground, competitive intensity says that, even in the origination yield side, we are not able to charge a premium to that extent.
So let's say, given the base as well, right, when we tap new markets, what is your ground experience? I mean, where do you see this yield settling in near term? And does that pose a risk on the spread on what you're guiding today?
So honestly, on the borrowing cost, when we compare, we should actually take the book borrowing cost. Because the origination borrowing costs will not reflect the correct cost of borrowing cores because there is -- in the overall borrowing cost, there is a blend of NHB also, which comes to us at a slightly lower rate. And hence, the overall borrowing cost is lower. But in a particular quarter, there may not be any NHB borrowings. So as a result, obviously, cost of borrowing for that quarter might show up higher.
So I would say we should take the origination yields and the borrowing cost for the overall book. I mean, that will give us the trend of spread. So if you take it that way, it is 13.5% minus 8.3%, so 5.2%, which is also the -- happens to be the book spread. So that is the better way to look at what will be the trend of spread in the book going forward.
Yes. But sir, if I look at our Slide #32, the share of NHB refinance, it has actually gone up this quarter. That's why I'm wondering, despite the higher NHB borrowing, why our margin cost of borrowing is significantly higher?
Yes. That's why I said it depends on the schemes which we are drawing from NHB. So there are schemes where there is no concession, there are schemes where there is a concession. So on an overall basis, if you look at it, this will be different. In this particular quarter, for example, we drew down on a particular scheme, that there is no concession in the scheme in terms of the borrowing cost. So the book borrowing -- so the cost of borrowing has not -- it is reflecting higher.
Renish, in a full year of funding, there will be many things that will be playing out. So even there will be new borrowings from banks, from NHB at different schemes, there will be repricing for other loans and a whole bunch of things. So to pick up a quarter and then anchor that to the cost of borrowing is not a good reflection of how the spreads will move forward.
The right answer should be what ultimately lands on the book at the final -- on an average quarterly basis. And also the other way to look at it is the interest expense, what's actually getting charged to the P&L. Those will be two more appropriate methods when you look at the cost of borrowing.
Okay. And anything on origination yield side in terms of competitive pressure?
Origination yield, probably, we have been able to maintain at 13.5%. So we will continue to do that. 13.4%, 13.5% is what we have been targeting, and we are able to maintain that.
Okay. And sir, lastly, we have seen that the two largest affordable housing finance players are now getting into the smaller ticket size loans to sort of sustain the yields. Where in this call, we are mentioning that incremental growth or the larger opportunities in between INR 15 lakhs to INR 30 lakhs ticket size segments. So does that segment provide that price advantage for us? Or how is it?
So it is -- in terms of customer profile, it is the same. It is the ticket prices have gradually moved up over time because terms have moved up. So the profile of the customer would be the same. I mean, so 10 years ago, a person who was earning probably INR 25,000, is today earning INR 40,000 or 50,000. And correspondingly, the price of the property is also -- the price of the property that they are targeting to build or buy has also gone up.
So as far as this segment is concerned, it is the same segment. It is just that there is an inflation effect on the ticket side. So it's a very gradual moment. What was INR 10 lakh 5 years ago is now INR 15 lakhs. That is the only way to look at it.
The next question is from the line of Raghav Garg from AMBIT Capital.
Congrats on a good set of numbers. I have three questions. So my first one is that you often talk about increasing LAP as being a margin-enhancer for you. But if I look at over the last 8, 9 quarters, despite share of LAP increasing, the spreads have declined consistently, which probably implies that there is pressure on HL yields. So what gives you the confidence that LAP will be able to -- increase in LAP will help you improve yields or NIMs when it has not happened in the past?
So the calculation of yields are what I want to first address, then hand over on to Manoj on the origination side. When you look at yields, whenever we take an NHB borrowing or a drawdown, which includes the HL pool, we have to reprice that pool of customers. So when you look at that total number, that repricing is also included. And bulk of that decline is coming from that line.
Of course, the LAP is contributing to the increase, and maybe Manoj can articulate better on the origination yield of both the products.
So one second, this spread has still declined, right? And it has been a function of NHB-led...
Spreads have declined in line with the cost of borrowing increase. So you see in quarter 1 of last year, the cost of borrowing was 8%. So that's a 30 basis points increase. And broadly, that the range in which the spreads have declined. So that is something that we have acknowledge, that there is a cost of borrowing increase, and we have not increased the rate over the last 1.5 years. And which is why we are now going in for a repricing to kind of bridge that gap.
Understood. And that's 35 basis points, right, from August onwards?
From August onwards, correct.
Yes. And the book is repriceable as and when the PLR hike is taken? Is that it?
Yes, because we have a floating rate book, except the portion I mentioned that it's maybe under NHB schemes where we cannot reprice. So rest of the book is -- we have the ability to reprice.
Right. My second question is on the ECL on LAP portfolio, which seems to be low relatively compared to peers, or even when compared to your own home loan portfolio. Now that may be the case because it's not a very well-seasoned portfolio given you've recently started focusing on it. But in your opinion, what should be an ideal ECL cover on the LAP portfolio? And do you think, over a period of time, as the LAP portfolio seasons, that will lead to higher credit cost for you?
See, we have been kind of late starter on LAP, and we have also observed the -- we have also observed how our peers are doing on that product because some of them started earlier and they have a higher proportion of LAP. So even through the COVID cycle, the LAP book in this segment seems to have done fairly well without any stress as such. So we don't anticipate any -- and don't see any early signals on the LAP portfolio in terms of stress, et cetera. So we think it will play out more or less like our home loan portfolio only. We don't -- we're not seeing any different behavior on it.
Understood. Just last one. What was the incremental disbursement ticket size? And that's all from my side.
Incremental disbursal ticket size would be around INR 13.5 lakhs.
The next question is from the line of Shreepal Doshi from Equirus.
Congrats on a good quarter. My question was on capital adequacy. So Tier 1 has dropped by almost 380 basis points sequentially. What explains this decline?
So good part of this, and we have discussed this in some previous calls that when we have our investment funding mutual funds, they carry 100% risk weight. So almost 1% is attributed to that. The rest is more consumption of capital because of growth in segment which -- so for example, LAP now requires 125% risk weight, which used as 100% until a few quarters back. So all of that is contributing now to higher consumption. 1% out of this has contributed both on higher mutual funds.
Okay. Okay. Got it. And the other question was on the technology front. So while we aspire to grow our book at 30% incrementally and also expand our reach in terms of branches. So how well are we placed on technology trend and will we further need tech-related CapEx in the coming years?
So see, we decided to adopt cloud-based technology very early on in our journey. So we adopted Salesforce platform. Salesforce is a globally used platform, and it has very high scalability. So the version that we are using and the implementation that we have done we can -- I mean we don't have to worry about it as far as the scale is concerned, I mean, we can add 5x, 10x, 20x or the number of customers to it without any change in the response or change in any additional investment which is required.
So from that perspective, we don't require -- we don't need to spend anything significant on our core applications. But of course, we will keep enhancing it and enhancing some of the ancillary applications or mobile apps plus the cybersecurity and various other MIS related visualization publication, et cetera. So those kind of things, we'll keep enhancing so that the customer experience keeps improving. But on the core application itself, we will not need to do any significant additional expense.
Got it. Got it. Most of my questions have been answered. Thank you and good luck for the next quarter.
The next question is from the line of Jignesh Shial from InCred Research.
Yes. Just again, I know it's digging to the same area. But what the yield softening, what we are seeing in cost of funds are moving up you would have done some PLR hike and all. So is it not getting reflected because you're doing more of low yield products? Or how exactly is it matching? I'm still a bit confused on that thing. And 2 more strategy-related questions I have. But if you can just give some idea on this, that would be really helpful.
So PLR increase, we have not yet taken. We are going to take in this quarter. So PLR increase has been initiated. That is what we have mentioned because we required -- we are required to give the customer 30 days notice. So they have given the 30 days notice and implementation will happen from 1st of August.
Understood, sir. But whatever, if you see the sequential, if I'm seeing all your yields, it has been softening around on a sequential basis on a consistent basis. So that is the reason I'm little confused that have we not taken any rate hike and you've not passed it on to the end customer? Or how exactly does it work?
Yes. So what you are seeing here from quarter 1 of last year, we have not taken any rate increase. On the right-hand side, if you see Page #28 of our investor deck, the repricing schedule is mentioned on the right-hand side. So the last repricing that we did was 50 basis points on 1st, April '23. Post that, we have not taken any pricing. So over the last entire 5 quarters, you can see there is no repricing. So which is why there is a softening of the spread.
That makes sense. Understood. Okay. Now 2 more, more like the strategy question. We have been tracking it for a while, and there have been decisions about moving away from your concentrated states and all. So what I see from Gujarat -- correct me if I'm wrong but Gujarat, Maharashtra and Tamil Nadu used to be the top 3 states earlier. So I see more or less, there had been some reduction, but more or less, your contribution comes out from these 3 states on a large basis. Are we going to see the similar trend going forward as well as you grow going forward as well? Or we see that some other states might be contributing pretty heavily in the next say, 2 years or 3 years down the line? How this geographical change is going to pan out if I see 3 years down the line?
So in terms of share, yes, there will be, see Gujarat still contributes 30% of the AUM. And if you see Maharashtra and Tamil Nadu, we are about 14%, 13% and 14% of the AUM. So I think we will more or less be able to maintain this share. But yes, the -- as the other states grow a little faster, like -- states like maybe Telangana, Andhra Pradesh, UP, MP, et cetera. Their share in the overall AUM will start climbing up a bit. As you can see, in the chart, as you see Page 12 of our investor deck, you can see that MP has moved up from last quarter, 6.2% to 6.6%. UP and Uttarakhand have moved from 6.2% to 6.5%. So there is a gradual increase in the share of the overall AUM from the new states and this is likely to continue. So over a longer period, maybe over, let's say, 8 to 16 quarters, these numbers can change.
So you can see probably a Gujarat share coming down below 30% and the share of some of the other states climbing up. So we have mentioned in the past that what we are expecting is that over maybe a 3- to 5-year period, we would have expected any of these shares to kind of be at the 10% mark as a share of the overall AUM of the country.
Understood. So is it fair to say that digging deeper into the existing states with more entering into the new states, I mean improving penetration into the new states will make sure that the growth momentum remains healthy for coming years. Is that fair to assume, right?
Absolutely, absolutely.
Understood. And just lastly, if I see your bounce rate, it's more or less or somewhere apart from gem that had happened during COVID. But your pre-COVID bounce rates used to be pretty lower. So is it possible that this trend of mid-teens will continue? Or do you think that even we can go back to the pre-COVID levels as because we are moving more towards a relatively high ticket sizes and all, say INR 10 lakhs to INR 25 lakhs, that's the average, I'm seeing about. But do you see that the bounce rates will remain more or less similar or we might see an improvement happening on that particular front as well?
Yes. So our intent is to try and improve it. But there is some customer behavior that has changed post-COVID, especially with the introduction of UPI. So we are finding it difficult to bring customers back on track because of that. So a lot of customers have multiple bank accounts now and they kind of move between accounts. So we are seeing slightly more casual approach towards the ACS debit.
But a lot of customers are actually clearing the payment within 3 to 4 days of bouncing the payment. So if you actually see the bounce rate, let's say, on the 14th of the month -- sorry, on the, let us say, 8th of the month, that is 3 days after the presentation date, the bounce rate is very similar to what it was pre-COVID. So within the first 3 to 4 days, the customers are actually making the payment, even though they are bouncing on a particular date.
Understood. Understood. And our mix is still more tilted towards salaries. So that trend will also continue going forward also, right? You will still be focusing on salaried customers itself.
We are -- in the market, we don't have any stated focus towards salaried customers. It's more a natural flow that comes to us because we are -- we have a more convenient process. So we are agnostic whether it is salaried or self-employed customers and in some of the smaller markets, as we kind of go deeper in the market, we do get more self-employed customers. So that trend may gradually, I mean it has been -- it has not changed much, but then it can gradually change over a period of time.
The next question is from the line of Chinmay Nema from Prescient Capital.
Just wanted to double-click on certain aspects of your operations. Could you provide some color on the operations of your field teams and RMs, what are the key activities, 2, 3 activities tied out by them? And what's their contribution to the underwriting, basically trying to understand how you deal with the subjectivity of underwriting with a centralized underwriting system?
So basically, the 3 things -- I have 2 or 3 core activities. Core activity is to develop business development, which is involved basically meeting builders, meeting connectors and originating loans from them. And the second activity is basically once the lead comes in to basically go convince the customer and close the transaction, close the deal with the customer. They also capture some information, physical information in terms of photographs of the property, photographs of the customer, customer paper work and things like that. And the rest of the correlation actually happens centrally.
So today, a lot of information is available on customers through digital API integrations. And with the account aggregator coming in, even that has become even more strengthened. So we basically pull the bank statements directly from the -- through the account aggregator and then we correlate, for example, if it's a salaried customer, we can correlate from the EPF records or Form-16 records. And so the triangulation happens centrally. Some information gets captured locally and gets floated on our cloud-based system. And then our triangulation is done by the central team of underwriters and the approval is given to the customer.
And what's the strength of the centralized underwriting team?
Centralized underwriting team, we have about 30, 35 people in our central office.
Understood, sir. And so for the sort of self-employed segment where there's a higher degree of unpredictability of cash flows, how is it done? If you could explain that on a centralized level, is it done through transaction statements and bank account statements? Or do you have more on the feed operations for underwriting to that segment?
So see, it started with subjectivity, but our objective since starting the company was to remove the subjectivity from process by collecting data and using that over a period of time. So today, we have removed a lot of the subjectivity from the process. So today, we have a lot of -- so called a lot of records, which are available centrally. For example, if the customer has a GST registration or a Udyog Aadhaar, we can actually take that centrally. As I mentioned, the banking comes completely centrally through the account aggregator.
And now we have experience with various segments and sectors and applications of people as to what their approximate monthly income would be. So we benchmark to that. Plus, we are also supported with bureau data as well as our own proprietary algorithm. So for particular -- customer comes from a particular segment with a certain set of characteristics, we know what would be the probability of default.
So from the time we started 15 years ago to now, we have actually eliminated a lot of subjectivity from the process, and that reduces the requirement of the local touch and feel and data collection that used to happen on the ground. So a lot of the data relation actually now happens centrally and the triangulation happens centrally.
The next question is from the line of Pritam Agrawal from -- as an Individual Investor.
Congratulations on the good set of numbers. So my first question is with respect to the sourcing mix for Q1 '25. So can you throw some light on what is the mix of direct connectors and the DSA what you have sourced? And what was it for FY '24 and where it will be going forward? How you see it?
So sourcing mix is -- basically connectors is about 77%. And as mentioned in our Page #13 of our investor deck, all the various channels from three-folds, broadly it has remained the same. Connectors range between 70% to 75%, 78% of our origination and then there is a long tail of various other channels. So broadly, that is how we operate.
And you see it still going further also?
Yes. At least the medium term, we are seeing this continue. So maybe for the next between 1 to 3 years, this is the trend that would be there.
Okay. And my another question is with respect to the under construction property in the outstanding AUM?
So under construction properties have also been largely range bound. So if you see our PMI overall ratio is 13%. And so that basically what is in PMI as a percentage of got reflect what is under construction because until the time of full disbursal happens, they remain PMI mode. So broadly, that is the ratio of under construction properties. So as a percentage of the overall property, so about 13%.
So on an AUM basis, which is 13%, right?
That is right.
The next question is from the line of Chintan Shah from ICICI Securities.
Yes. Congratulations on a good set of numbers and achieving the $100 billion milestone. So just wanted to understand. So now if we move further now are going down the line 2, 3 years from going to $100 billion to $200 billion. So how would the growth dynamics be. Now also more or like it would be sourced by a connector model or would be -- and continue with the lean brand structure or in the new geographies, would be we also expanding our branches.
So for example, if we see in the new geographies where you expanding UP, MP and Rajasthan, the players which are already present there are the leaders, they are mostly expanding via the branch network. They have a very exhaustive branch network in those areas. So would we also go via the branch model or the connector model. Yes, first question was on that? And secondly, on the technology piece, I think we are very well developed on the tech piece. But so if we grow double our AUM, for example, on the -- from currently, so would the current tech investment suffice? Or would there also be some onetime CapEx expense to be taken then? Yes, those are my questions.
So on the first question, our distribution model will remain the same. We are looking to -- so we have basically there are 2, 3 pillars in our distribution strategy. One is the hub-and-spoke model. So we have branches and then we operate through touch points, which are connected to the branches. So that strategy will remain the same. We are not looking to change it in any of the new expansions that we are planning. And second is the connector model. So connectors, again, the last mile connectivity with the customer. So there, again, we intend to be very granular. So we are not going after some of the large DSAs.
The origination from each connector is very, very low in terms of annual contribution. So we are talking about probably in the range of between 5 to 10 loans in a year, contributed by a connector. So that's a very granular connector approach is what we are intending to pursue. No change absolutely in that process at all. As far as your second question is concerned on the technology, the technology that we've adopted is actually very scalable. So it's a Salesforce platform. It's a global used platform by very, very large companies in this world with a much larger customer base than us.
So it's a very scalable platform does not require any additional investment as such. It's a cloud-based platform and we have just to only buy the licenses. Of course, there are some enhancements on which we need to invest, which we are investing on an ongoing basis, but nothing which is like a very significant jump in an investment that we need to make to sustain the growth.
Sure. And sir, just one more bit on the spread and just harping upon on that again. On the cost of borrowings piece. So assuming, sir, there is a rate cut in the next 12 months or so. So how are we placed on the cost of borrowing side due to a rate cut? How much beneficial would it be or how much percentage of our borrowing would be on the floating NHB?
So rate cuts, I think as and when it happens, generally it gives us temporary expansion and spread as we are seeing in the last rate cycle also. But that is still some quarters away. So there is some lag between the rate cut happening and passing it on to the customer. So there is a temporary expansion in spread, which is there for a couple of quarters. Yes, but that's really still a couple of quarters away.
Sure. And this '25 book transmission would be immediate and almost for the entire book, except for the NHB-reated, right?
No. So first of all, it will -- we will lose 1 month in this quarter. So this will be effective from 1st of August. So we get 2/3 impact in this quarter plus there is NHB book as well as some historical customers where we need to do some adjustment in terms of the risk adjustment because we have to offer similar rates to similar profiles of customers. So those customers will get the advantage of it. So like I said, in this quarter, we will get a benefit of about 15 basis points.
The next question is from the line of Siddharth Chandrashekhar, an Individual Investor.
Okay. So my question is regarding our capital structure and the way we are utilizing our off book strategy, right? So right now, if I see -- we are already a AA-rated company. And we already have if I'm not wrong, capital adequacy ratio of around 36 percentage, right? So if we see the soft book, right, that is a trend. And even if I listen to your comments on the last 2 calls, right, we are doing more amount of co-lending along with securitization, right. So why we are not actually utilizing our on book and make sure like our capital adequacy falls to 25% or something like that. Then we go for outlook strategy? Just comments on this.
So we are trying to build a family. So this is why if you see, we have not aggressively gone up to co-lending or direct assignment. It's just a start. And it will also take time to understand it, understand the partners because the co-lending has to be done with bank partners. So there is also the process that needs to be streamlined, et cetera. So it will take time for it to scale up. So we don't want to start late because then again, it will take 2 years for us to understand the process and streamline all of that.
So which is why we have started early, and we are going at a very nominal level. So at this point, the contribution of co-lending is only about 5% to 7%. Our first aim is to take it to about 10%. Similarly, on the assignment, it's about 13% is our assignment as a percentage of AUM. So both are -- we have catered at a fairly low level at this point. And when required, we can always scale it up. The idea is to understand the dynamics and understand the process well. so that when it is required, we can actually utilize it.
Okay. Okay. Understood. So one more question on the capital front, right? So till then, at what point of time you will hit the market again for the capital rise and what sort of mature level capital adequacy ratio that as a business we are looking for is something around 20 percentage or where we are looking for around 30% then we will keep on going for market for new funds.
Right. So if you see our consumption, as Nutan mentioned in the call, it's about 2% to 2.5% is the capital consumption based on our growth that we are having at this point. So we would have -- we have a cushion of about 15% to 18% there. So we can say about 4 to 8 quarters worth of capital is still there. And even after that, we will still have a question because the regulatory cut off is 15%. So somewhere in that zone between you can say, in the next 6 to 18 quarters, we will look at raising capital.
Okay. So during this time we will be around capital adequacy of around 26% or something.
Yes. I mean keeping that they should not -- I mean, keeping an internal threshold of say 20% because 15% is a regulatory cutoff. So we don't want to go very close to the regulatory cutoff and start looking for capital at that point. So I think keeping the regulatory cut off at about 20%. That is how we will approach the capital raise. Does it answer the question?
Yes. And regarding ROE profile, so when you are maximum utilization level of our capital. So what sort of return on equity that we can look for.
Return on equity, see last year, we ended the year at 16.1%. And for the full year, we delivered 15.5% ROE. We had mentioned that every year, we are looking to increase that by about 75 basis points. So we can expect that kind of -- those kind of numbers. So this year, last year, we delivered 15.5% this year, full year, we want to deliver between 16.2% to 16.5% kind of a number for the full year. And every year, we can expect 50 to 75 basis points increase in ROE.
The business model will be catch 20% plus or 18%, 19% would be the maximum kind of level that we are looking for.
Our first milestone is to hit about 17.5%, 17.5% to 18%, and then we will see from there, depending on how the market is.
The next question is from the line of Aravind R from Sundaram Alternates.
Congratulations on a great set of numbers. Can you quantify, how much we have a floating provision over and above ECL, like if you can give me a thread, that is my first query. And the second query, like will this hike in PLR? Will it be on the entire home loan book or will it be like in phase manner. That's my second question, yes.
So on your first question, over and above, ECL it's about INR 13 crores approximately. On your second question, the hike is on the entire book. But like Manoj was mentioning that the NHB fixed book does not undergo repricing. And we're also looking at the back book and looking at the risk categorization and considering the good pool of customers we are seeing how we can address the pricing there because that's also a requirement that we have to do and also driving to do. So adjusting for all of this, about 10 basis points to 15 basis points is the net impact that we expect from this increase in PLR.
The next question is from the line of Sonal from Amsec.
Just similar question. So generally, banks who are giving out loans for the first year loans to fixed rate loans. So for us, whatever the portions we've done in last 1 year, even over there will be repricing the PLR? Or how does that happen?
Sonal, we do not do any fixed price loan.
We don't have any fixed price loans.
So not even for a year?
Yes. What gets fixed is actually the NHB. So when we originate the loan, it is a floating rate loan. But some of the NHB schemes require us to fix the interest rate later. If the concession needs to be passed on to the customer. So a certain portion of the book gets fixed at a later point if we are getting a corresponding fund from NHB. So that is what we are calling as a fixed NHB book.
So basically, for disbursements, what we've done in Q4 of last year, even for those disbursements, there will be a 35 bps of PLR hike. Is that correct?
Yes, depending upon the risk categorization of the customer.
Okay. And the other question I had is on DA income. So do we actual or is it only on a yearly for the same year that we take the income in our P&L. How does it happen?
Under IndAS, we do have to upfront that is a regulatory guideline.
Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to Mr. Manoj Viswanathan for closing comments. Please go ahead, sir.
Thank you. We are confident to continue the growth momentum, led by a strong economic environment, expanding distribution network and differentiated business model. We continue to stay focused on providing loans for affordable housing led by distribution and user technology, backed by diversified funding and strong risk management. Thank you, everyone, for joining us on this call. I hope we have been able to answer all your queries. In case you require any further details, you may get in touch with Manish Kayal. Thank you.
On behalf of Home First Finance, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.