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Home First Finance Company India Ltd
Earnings Call Analysis
Q3-2024 Analysis
Home First Finance Company India Ltd
Home First has showcased a robust performance in the third quarter of the 2024 financial year, demonstrating a persistent growth trajectory. The company's strategic expansion into new markets, coupled with intensified efforts to deepen its hold in existing ones like Uttar Pradesh and Madhya Pradesh, is indicative of seizing the opportunities in emerging affordable housing segments. The operational addition of 3 new branches and the leveraging of 305 touch points reflect the company's proactive distribution strategy. This expansion translated into a 29.1% increase in disbursements, totaling INR 1,007 crores, catapulting the Assets Under Management (AUM) by a significant 33.5% to INR 9,014 crores.
Even in the face of high inflation, Home First has managed to deliver a noteworthy Return on Equity (ROE) of 15.8%. Financial prudence remained a consistent theme, with the maintenance of healthy spreads at 5.3% and a steady Return on Assets (ROA) at 3.7%. Operational efficiencies were mirrored by a consistent asset quality, with a particularly emphasized management of early delinquencies, evidenced by a slight increase to 4.5% in 1+ days past due (DPD). This level of asset quality underscores the company's commitment to maintaining a robust balance sheet and a controlled credit environment.
The company's capital strength is signified by a total capital adequacy of a towering 40.9%, with Tier 1 capital at a similar 40.5%. This robust capital foundation endows Home First with the ability to sustain organic growth and preserve liquidity. With a debt to equity ratio of 3.4 times and a net worth reported at INR 2,032 crores, the company's financial stability is poised to support its ambitious growth strategy. Furthermore, the book value per share softly aligns with this strong financial position, registering at approximately INR 230, which serves as an indicator of intrinsic value and reassures stakeholders of the company's consistent value creation.
Home First has projected the spread to remain within the targeted guidance range of 5% to 5.25% for the medium term, suggesting confidence in its pricing and cost management structures. The Net Interest Margin (NIM) of 5.7% for the third quarter reflects the proactive financial handling in light of the rising cost of borrowings and adequate liquidity maintenance. The Net Interest Income (NII) has seen a 20% rise year-over-year, indicating growing profitability from the core business activities. Operating costs are managed effectively, with an expectation to keep costs comprised between 3% to 3.2% of total assets as the company ventures into new markets. The Cost-to-Income ratio's slight increase remains a point of observation but does not detract significantly from the company's overall operational efficiency. Credit costs, maintained at 30 basis points, sit comfortably within the guided expectations.
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Ladies and gentlemen, good day, and welcome to the Q3 FY '24 earnings conference call of Home First Finance Company India Limited. [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, Mr. Manish.
Thank you, [ Zeco ]. Good afternoon, everyone. I hope that all of you and your families are safe and healthy. I extend a very warm welcome to all participants on our Q3 FY '24 conference call. I hope everybody had an opportunity to go through our investor deck and press release uploaded on stock exchanges yesterday. We have also uploaded the Excel fact sheet on our website. Please go through it. On today's call, Home First is represented by our MD and CEO, Mr. Manoj Viswanathan; and CFO, Mr. Nutan Gaba Patwari. As usual, we'll start this call with an opening remarks by Manoj and Nutan, and then we will have a Q&A session. With this introduction, I will now hand over the call to Manoj. Over to you, Manoj.
Thank you, Manish. Good afternoon, everyone. I'm pleased to share with you the highlights of our quarter 3 FY '24 performance. Growth momentum for Home First continues in quarter 3 with stable asset quality. Performance has been strong across all operating and financial parameters. During a high inflationary environment, we have delivered an ROE of 15.8%.
We continue to build distribution by simultaneously entering new markets and deepening our presence in our existing markets. The states of Uttar Pradesh and Madhya Pradesh are emerging as large affordable housing markets and we have taken steps to strengthen our existing presence and deepen distribution in these growing states. Overall, we have added 3 branches in quarter 3, and now we have 123 physical branches. Including potential and digital branches, we now do business across 305 touch points across Tier 1 to Tier 5 markets in 13 states and 1 union territory of India. Disbursement in quarter 3 at INR 1,007 crores grew by 29.1% on a year-on-year basis, leading to an AUM growth of 33.5% on a year-on-year basis to INR 9,014 crores.
Spreads remain healthy at 5.3%. The PAT at INR 79 crores and ROA is range bound at 3.7%. Our asset quality continues to be strong with a focus on early delinquencies. 1 plus DPD is at 4.5% which is plus 10 basis points on a year-on-year and flat on a quarter-on-quarter basis. 30 DPD (sic) [ 30 plus DPD ] is at 3%, which is flat on a year-on-year basis, and there is an increase of 10 basis points on a quarter-on-quarter basis.
Gross 3 -- Gross Stage 3, that is GNPA, is at 1.7%, which is a decline of 10 bps on a year-on-year basis and flat on Q-on-Q basis. Prior to the RBI classification circular of November '21, it stands at 1.11%, which is flat on year-on-year and Q-on-Q basis. Our credit cost at 30 basis points declined by 10 basis points on a year-on-year and Q-on-Q basis.
Technology continues to be at the core of our strategy. Account aggregator adoption has now become mainstream with close to 40% adoption rate. We have set in motion several account aggregator-led initiatives that will further strengthen our speed and accuracy in underwriting.
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 all. Coming to financial performance. Starting with spreads. Our spread is at 5.3% and is within our guidance range of 5% to 5.25%. Our quarter 3 NIM of 5.7% is due to projected increase in cost of borrowings and higher cash balances during the quarter. As discussed earlier, the increase in cost of borrowing is from MCLR resets that have continued to happen on historical borrowing book. Cost of borrowing is expected to grow by another 10 basis points. And I would like to reiterate our spread guidance of 5% to 5.25% for the medium-term. Net interest income has gone up by 20% on a Y-o-Y basis.
Moving to operating cost. Operating cost to assets at 2.9% is stable. We expect this ratio to remain in the range of 3% to 3.2% going ahead as we focus on expansion and getting deeper into newer markets. Cost-to-income at 35.9% is an increase of 60 basis points on a Y-o-Y basis. Credit costs at 30 basis points remains well within our guided range.
Moving to balance sheet. It remains strong and ready to take on the growth ambitions of the company. Starting with borrowings. 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 56% from banks. NHB refinance share is stable at 22%. We have drawn INR 200 crores in quarter 3, and we have another INR 250 crores to be drawn in quarter 4. 14% is from direct assignment and 3% from co-lending, 3% is from IFC NCD. We continue to have 0 borrowing through commercial papers.
Our cost of borrowing is competitive at 8.2%, an increase of 10 basis points on a Q-on-Q basis. We expect further increase of around 10 basis points in quarter 4. Coming to capital, our total capital adequacy is at 40.9% and Tier 1 is at 40.5%. The impact on -- of our capital adequacy is 2% on account of organic growth and 3% on account of higher liquid fund balances at the end of the quarter.
Our debt to equity is now 3.4x. Our December '23 net worth stands at INR 2,032 crores. Book value per share is [ INR 230 ]. Moving to provisions. We continue to have remained conservative and continued to carry provision overly over and above the ECL requirement. Our total provision coverage ratio stands at 52%. Prior to NPA reclassification of RBI circular provision coverage ratio stands at 79%. On specific transactions, we did direct assignment of INR 135 crores during the quarter as a liquidity strategy.
We continue to have a robust demand for our portfolio of assets. We also executed a co-lending transaction of INR 61 crores in Q3. Co-lending business is growing and is expected to contribute to around 10% of disbursement in the near future.
With this, I open the floor for question and answers. Thank you.
[Operator Instructions] The first question is from the line of Rajiv Mehta from Yes Securities.
So Manoj, how should we read the persistence of BT pressure, which is reflecting in both BT out remaining higher than trend and the pressure on the back book yield because of repricing of BT request. And also, when I look at your incremental lending rate, the origination yield, it has been pretty stable over the past few quarters and we haven't been able to fully pass on the increase in the incremental cost of borrowings. So can you comment on both of these things in the context of the competitive intensity?
On BT outs, the BT out has moderated slightly if you see compared to last quarter. So that is the result of some of the actions that we have taken to retain customers, et cetera. And so it's kind of moderating and trending back towards our earlier levels. And repricing of back book, we have not done a lot. I mean, that is not really the reason for the compression in the spreads. The spreads have compressed because the cost of borrowing has gone up.
So back book repricing is only very, very minimal. I mean, there are a few customers who come to us with some requests are only getting repriced. There is no systematic repricing of the back book at this point. And as far as origination is concerned, we have always been maintaining that we are operating at a certain yield point, and we continue to operate there. And the yield is -- I mean, the spreads are moving up and down depending upon the cost of borrowing.
So we don't want to operate at very high yield because then we tend to tread into a different customer segment altogether. So we have kept that balance. And we've always maintained that the spreads are likely to hover around -- or settle down around 5.25%, 5% to 5.25% is what we have always maintained. So that is just coming to play right now.
I'd just like to add to your question, Rajiv. The 13.6% to 13.5% yield that you see is an outcome of 3 aspects: one, the new business that we have done at 13.7%, the NHB-led repricing, like I was mentioning earlier, we have taken INR 200 crores of NHB this quarter, which entails repricing of that pool of customers down to 10.7%. And thirdly, this line that you see of yield is gross of co-lending. But what you are seeing on the origination yield line is net of co-lending. So that difference contributes as well. So overall, we have not passed on any systematic repricing downwards to customers apart from NHB repricing.
No. So Nutan, just to clarify, the origination yield, which you put out in the presentation, that is excluding the co-lending yield, right? That's what you're saying. And that is a blended number for both home loan as well as LAP.
But the yield line does not exclude co-lending.
Okay. Okay. And the second question is on the employee base. So I mean this quarter, we have seen some decline in employee base. So any comments on whether the challenges persist in terms of employee attrition or backfilling the employees who have attrited and whether this can impact our growth execution?
No, it is just a cycle. It's a cycle of when people are hired, when they join, et cetera. So generally, our hiring cycle is from campuses. Largely, we hire from campuses. So the hiring actually happens in the October to December period, a lot of the hiring. So -- and then they join between January to June. So I think this month itself, probably more than 100 people would have joined us. So it's just where the cycle is. So portfolio -- I mean, sorry, the employee attrition is at similar levels, it's about 30%, 35% in that range. And still not gone to the highs that we saw last year, still fairly moderate and what we have had historically. So the employee number should come back again this quarter.
Just a last thing on the bounce rate in January remaining slightly higher than usual. So typically in Q4, the bounce rate subsides, but in January, it has been slightly higher. Just understanding whether the increase in bounce rate has any repercussion for our RMs' productivity?
The increases are fairly marginal, so it does not really impact the productivity much. So like if you see as on date, hardly 4% out of that is left. So today, we are sitting on 19th, and each RM would have probably 3, 4 loans left to collect with 10 to 12 days left. So it doesn't really -- I mean, these marginal changes don't really impact the productivity.
Our next question is from the line of Renish from ICICI.
Congrats on a good set of numbers. Again, 2 questions on spread and bounce rate. So on spread, if you look at the incremental spread at 5.3%, which is broadly at par with our Q3 blended spread and also it is very close to our guided range as well. But now if you look at the pricing trend, yes, right, I mean we have not hiked our rate since April '23.
And if we look at the competition, I am assuming it would be difficult to hike rates further. So in that scenario, let's say, where do you see a spread settling? And if one has to assume the rate cycle reversing over next 2 to 3 quarters and given we have a fairly high share of floating net book, directionally, how should spreads behave? I mean, considering the rate cycle as well as the competition and a limited room for further rate hike.
So we intend to continue or maintain the origination yields that we have. And -- unless there is a reduction in rate. If there is a reduction in rates, then we obviously intend to pass that on to the customer, as we mentioned earlier. And -- so if we do that, then both the spreads will remain where it is and yields will go down. So, overall, we are looking to maintain the 5% to 5.25% kind of spreads. So if there is any advantage that we're getting out of reduction in cost of borrowing, then we intend to pass at least or most of it to the customer so that we remain competitive and we are still earning a healthy 5% to 5.25% kind of a spread.
Got it. Got it. So it's right to assume that over the next 2 to 3 quarters, we will maintain the spread guidance of 5% to 5.25%?
That's right.
Got it. And sorry, again, circling back to the check bounce rate. So of course, our 1 plus DPD and 30 plus DPD has been fairly stable sequentially. But generally, your Q4 is the strongest quarter in terms of check bounce rate growth. But in Jan '24, this check bounce rate going up, though it's marginal, but is there -- I mean, how should one read this data? Is there a change in customer behavior because of the, let's say, last couple of quarters or, let's say, 3, 4 quarters rate hike, so that the EMI might have gone up, et cetera. So how one should look at this data, increasing the bounce rate in Jan month?
So, I would say the minor fluctuations keep on happening. I mean if you see the overall bounce rate curve, it's kind of an up and down, up and down curve. Sometimes it's 15.3%, sometimes it has gone down to up 14% and comes back up. So within that 100, 150 basis points, there is always some movement. So as long as it's range bound, it frankly does not impact our operations that much. I mean, sometimes it is just the date on which it is presented. If it is a Sunday, the bounce rate is a little higher things like that.
So I can't read much into it, as we have mentioned before. So as long as it is in the 13% to 15%, 15.5% kind of a range, I can't really read much into it because the collection results are fairly similar whether it is 13% or 15%. By 20th of the month, we have -- we would have collected about 10%, 11% out of that 15%. So we would be left with hardly 4% as on date, which is a very, what you call it, reasonable number for the organization or for even an individual RM to kind of focus on in the remaining 10 days of the month. So yes, we can't really read much into it.
Got it. Got it. So just follow-up on that. So I mean, let's say, on ground, we don't foresee any early warning signal in any of the geography as of now, right?
Not at all. Not at all. As far as collections is concerned, we're not really seeing any headwinds or anything which is worse than what we have seen in the past.
Our next question is from the line of Mayank Agarwal from Incred Research.
Congrats for the good set of numbers.
Sorry to interrupt, sir. May I request you to use your handset, please? Your audio is not clear.
Hello. Is it better now?
Yes, sir, please go ahead.
Yes, yes. Congratulations for the good set of numbers. Sir, my first question is on bounce rate. So is there any specific geography like Tamil Nadu or any [indiscernible] which has witnessed an increased bounce rate and because of any particular region or it was broad-based?
No, it is broad-based. Generally, the fluctuations happen only branch to branch and not region to region. I mean, we have never seen any major increase in any particular region -- major increase or decrease in any particular region as a whole. But of course, there are fluctuations within the region and specific branches, et cetera, which is all business as usual.
And my second question is on account -- use of account aggregation. So in terms of customer understanding of the customer, speed, have you witnessed any kind of benefits from the use of account aggregation or how it works for you?
Yes. To start with, the major benefit is that the bank statements of the customers come to us directly. So -- it helps us in 2 ways. One is that we get a more detailed understanding of the customer. Plus it's an authentic -- we are guaranteed that it is an authentic document. So we don't need any further verification of the bank statement or any crosscheck to ensure that it is an authentic document.
So it helps us to start the credit valuation process quickly by getting this -- getting the bank statement electronically. I mean, that is like -- that is the basic -- the most elementary advantage that we gain out of account aggregator. Of course, there will be other benefits like I mentioned in the -- in my -- in the call that we have set in motion a couple of initiatives, which is based on account aggregator, which will allow us to improve our underwriting further because analysis of the bank statements and models built on the base of bank statements, et cetera, help us to underwrite better, but those are -- those have been set in motion.
After looking at this initial success of almost 40% adoption within a few months of launching, we are encouraged to kind of create models based on the bank statements. So we have put that in motion.
Any change in rejection rates or a change in the [indiscernible] score category-wise rejection rates like you can now give loan to certain lower savings customer as well? Or any interesting thing to highlight in that?
Based on credit score, it's more of an elimination. So if you look at credit scores, which are less than 700, we have only about 10% of our business coming from that segment, where the credit score is less than 700. So within that, it is more of a case-to-case decision that we take. If the customer has good credentials and some justification for earlier deposals et cetera. And beyond 700, it's more of a selection credit. The 700, it can be looked at for a loan. But then the credit score itself will not be the sole criteria. I mean, we will have to look at multiple other criteria.
So approval rates, yes, definitely, if the credit score is more than 700, the approval rate will be definitely higher. In less than 700, it is more of a selection like I said. So more likely the customer will get declined rather than approved if the score is less than 700.
And in terms of sanity of the industry, so any specialty sectoral trends you're witnessing that the customers rejected by you are still getting the loan at a similar rate from the competitors. Anything -- any trend you want to highlight? Because what we are seeing is that competition is getting aggressive day by day and they have the ability to -- because of easy capital assets, they have ability to offer riskier customer at lower rates also. So anything you are replacing on that front?
I can't say it is anything new, but this kind of trend usually happens because we are a fairly large player now in affordable housing. So yes, there may be declines on credit score, et cetera, which are picked up by smaller players. That has been a general industry trend. When a new player comes in the market, they like to or they have to take a little higher risk. So they tend to be more liberal or more lenient with poorer scores, et cetera. That's a normal market trend. We're not seeing anything which is new or something which is very significant.
[Operator Instructions] Our next question is from the line of Raghav Garg from Ambit Capital.
One of my questions is that you gave this breakup by ticket size, right, 1 million to 1.5 million and then all the way up 2.5 million and above. Is there any yield differential between these cuts in terms of the ticket sizes that you disclosed? And if yes, can you give us data in terms of which ticket size would be commanding how much yield? Yes, that's my first question.
Generally, the yields tend to follow the ticket strength. So the higher the ticket size, the yields tend to be a little lower. See, our interest rate offers in the market are based on an algorithm, which takes into account multiple factors, including ticket size, bureaus scores, customer's income, whether salaried, self-employed, et cetera. So multiple factors are taken into account before we offer the rate. But generally, in the market, if you look at it, the higher ticket sizes come and lower yield because the customer generally tends to be more affluent, having more stable income, et cetera. So they have more choice in the market and they are -- some more competitive.
So broadly, that is a trend, but because we are operating in a fairly tight band up to INR 25 lakhs, we don't deviate that much on the -- and we have a fairly, you can say, strict policy as far as rates are concerned. We have to maintain a certain yield. So we don't fluctuate that much on the yields between ticket sizes. But yes, there would be some trend of lower pricing as the ticket size increases.
The reason why I asked this question is that if you look at your trends for last several quarters, AUM part, which is -- or where the ticket size is more than 2 million that's been going at some 50%, 60% for last many quarters now. Is that something that's weighing on your yields, which have come off by about 12 basis points versus last quarter?
It's a more gradual trend. But if you see the AUM cuts, the segment that is more than INR 25 lakhs is still in the 12% odd range. I mean, I think maybe 6, 8 quarters ago, it might have been 10% and 9.9%. It's gone up about 2%, 3%. So that is a more secular trend, which is following the inflation and overall price increases, et cetera. We are not going after that segment specifically.
Just to add, the co-lending products that we do is in the INR 20-lakh-plus segment where the spreads are protected given the nature of the agreements with the bank and the regulatory interface. And we see that increase. Now, like I was mentioning earlier to a previous question, the yield line that you see is -- does not exclude the co-lending yield. But the origination yield that we've given does. So that probably is what is the issue. And the second part, the 12 basis points decline that you've seen is also contributed by the NHB-led repricing.
Sure. Understood. The second question is, would you have seen any impact of elections in Rajasthan and Madhya Pradesh on collections? Or there was nothing like that?
No. In our portfolio, these are you can say states which are doing extremely well on collections.
Mr. Nidhesh Jain from Investec, please go ahead.
First question is on the growth. So as we prepare for next 3 years, reaching roughly around INR 20,000 crore book, how do we prepare ourselves in terms of distribution, in terms of products, customer segment? Do we see that the current segments that we are operating that can take us to that level of loan book over the next 3, 4 years? And how we plan to scale our distribution to achieve that?
Yes. So if you see the quarterly disbursement in the segment, I mean, even if we take it -- take the ticket size only up to INR 25 lakhs, the quarterly disbursement is around INR 45,000 crores to INR 50,000 crores. We -- I mean, if you exclude the states where we are not present, say about 20% of that volume will go away. So let us say ballpark around INR 40,000 crores is the potential or addressable market that we have in the states that we are present in.
So the plan for the next 3 years is to ensure that we are able to get to all the pockets, all the PIN codes of the existing states, so that we have complete access to that entire INR 40,000 crores potential market, which is there in this segment. So very, very granular distribution in all the states where we are present. So as we have been saying in the past, there were 2 or 3 states, which are central and northern states where we had only skeletal presence, so Rajasthan, UP, MP. So these are states which we are focusing on now. We are -- they are emerging as large states. The per capita incomes are increasing in these states. The industrialization is increasing and they are getting more urbanized.
So we are seeing those green shoots, so we are looking at building distribution in these states. So that will be one of our key focus areas to ensure that we have access to that INR 40,000 crores. So currently, as you can see, we have done INR 1,000 crores out of that INR 40,000 crores. So it's kind of a 2.5% share that we have in that segment. And so the idea is to take that INR 1,000 to INR 2,000 crores kind of a level over the next 3, 4 years.
And parallelly, we are also -- to expand the addressable market, we are also doing co-lending. So that will give us access to probably another 10,000 crores to INR 15,000 crores, which is in the, let's say, INR 25 lakh to INR 35 lakh segment, which can be addressed through co-lending. So that is the parallel effort that is going on. On loan against property, we have been conservative in the past. We have maintained at about 15% of disbursal and about 12% to 13% of the AUM. So that is also something which we can explore in terms of taking it up a little bit more because our current performance so far has been good in that and we still have a lot of headroom there from a regulatory sense.
So these are the ways -- these are 3 ways in which we are looking at the next 3 years. So the aim is to get from INR 10,000 crores to INR 20,000 crores in the next 3 years, FY '27, try to close it at about INR 20,000 crores. And at the same time, deliver similar productivity, similar -- and keep improving on the other metrics, which is cost as well as profitability metrics. So to try and deliver a 17% plus kind of an ROE in that time frame.
Sure. And what were the branch network -- what is the branch network expansion strategy in terms of number of branches, number of employees? What are the numbers that we should look at?
The branch expansion strategy, when we listed the company, we were at about 100 touch points and we said we are going to take that to about 400 touch points in the next 3 to 4 years. So currently, we are at 300 touch points. So now our strategy is to take the 300 to 500 touch points in the next 3 years. And branches will keep expanding as a kind of a byproduct of that at about 25 branches a year. So currently, we are at 123. So probably in the next 3 years, expand to over 200 branches and servicing about 500 touch points. So this is our overall strategy in terms of distribution.
Sure, sir. And in terms of your market share in some of the states like Gujarat, Maharashtra in the segment where we operate, what would be the market share in disbursement in these states?
So Gujarat, for example, our market share is -- so on an overall average, our market share is about 2.5%, 2.5%. But in Gujarat, it would be higher, it would be 3% to 4% market share. Maharashtra, we still have some way to go. We are still at about 1%, 1.5% market share. And -- so that is the journey that we will be undertaking in the next 3 years. So wherever we are at 1%, 1.5%, the idea is to take it to about 3%. And where we are already at about 3% to 4%, we take it beyond 5%. So that's the aim.
Sure. And as the co-lending scales up, so first of all, what is the time line when -- by when we will reach 10% of disbursement through co-lending, and as co-lending scales up, how it will change the P&L construct?
We are at about 6% of our disbursals. If you see last quarter, we disbursed INR 60 crores in co-lending and out of INR 1,000 crores overall. So we are maybe a couple of quarters away from hitting a 10% share of co-lending as a percentage of disbursal. So our aim is to do that first and then take that to 10% of the AUM -- the co-lending to 10% of the AUM. Co-lending should not -- would not change the profitability structure very, very much because at the current rates which we are lending, we are making a 5% plus spread on the co-lending portfolio. And our aim is to keep doing that. If the rates start trending down, then the spread should improve, so making it more ROE accretive.
Okay. And lastly, what is the number of active connectors this quarter and the number of sales manager or RMs as on December '23?
So we have scaled up the connectors to about 2,900 active connectors this quarter and relationship managers are at about 800 relationship managers now.
Our next question is from the line of Arjun Bagga from Baroda BNP Paribas Mutual Fund.
Yes. I had just one question regarding the yields. So I understand the last repricing that we took I think that was in the month of April, and we did take some 50 basis points. At that time, I think Q4 was -- we were at some 13.4% yield. Then Q1, we improved to some 13.7%. But since then, we have been coming down. So how should I understand -- because I think my understanding would be that yields should actually increase for the remainder of the loans when -- as and when they are repriced. But is it the BT out pressure that -- which is keeping the yields under pressure? Or how exactly is it, sir?
So what has been happening every quarter, we have been taking NHB drawdown. And when we take the NHB drawdown, there is a portion of that drawdown, which we allocate to specific customers, which happens at 10.7% yield to customer and approximately 5.5% cost of borrowing to us. So when we reprice, the overall yield shows a drop, and that's what you see in that number. So we've been taking about INR 200 crores every quarter.
Okay. So this decline is entirely due to that -- the spread maintenance.
Yes.
Our next question is from the line of Mohit Surana from HDFC AMC.
Yes. Sir, if you can throw some light around in terms of the BT out customer how their eventually -- how their eventual asset quality has behaved versus -- if you have tracked this versus your own book. And secondly, what is the percentage of BT out customers that go to a bank lending institution versus NBFC?
Majority of the BTO outs go to bank. I mean, if we now consider HDFC -- HDFC used to be one of the large entities doing the BT out. But if you now consider that as bank, a large part of the BT outs go to banks only. That would be a small residual portion that goes to other housing finance companies. And as far as the quality is concerned, I did not get that question properly.
So I was asking like if you have monitored the quality of BT out book versus your own book, if there is any differential to highlight.
Like BT as in BT in? What we are doing -- where we are doing BTs?
No, no. The book which has gone out, if you have tracked the asset quality of that book versus the customer.
BT out, we have not kept track of the BT out.
Our next question is from the line of Gaurav Sharma from HSBC.
Am I audible?
Yes, sir. May we request you to use your handset, sir?
We can't hear you.
Mr. Gaurav Sharma?
Am I audible now?
Yes, sir, please go ahead.
So, sir, just a small question on that. Yesterday, one of the HFCs mentioned that they have slowed down their disbursement through co-lending as they received some criteria from NHB that minimum certain threshold of a loan has to be maintained at their own book. So just wanted to understand whether you have also received instructions based on this? And if yes, can you please elaborate on that?
No, we have not received any intimation. And we are maintaining the minimum percentage as per the RBI guidelines, which is 20%.
The co-lending guidelines are fairly well articulated and there is a transfer of loans circular also, which companies need to follow. We are following both of them.
Okay. So no intimation from NHB as of now to you.
No issues whatsoever.
Our next question is from the line of Bhaskar Basu from Jefferies.
Yes. I just had one question. This is on your guidance for spreads. I mean if I get it right, are you now guiding to 5% to 5.3%. I think earlier you used to kind of guide to about 5.3%. So is there a downward revision in the spread guidance? And what is this being driven by?
Bhaskar, the guidance always was 5% to 5.25%. I think we chose the higher number. So I think what's been happening is that we have seen this cost of borrowing projection for a long time. And of course, we've been managing above 5.5% levels. So we've slightly got used to that number. But if you look at the business model, the business model works best from a growth perspective as well at a 5% to 5.25%.
And I mean from a perspective of the recent RBI tightening and general increase in funding cost, what is the incremental impact you're seeing? I mean I see that marginal cost of borrowing is kind of similar. So do you see some increase because of this -- because of the RBI tightening because of the...
The RBI framework on this aspect either capital adequacy or bank credit to NBFC actually is favorable for housing finance companies as you would have read. So what we are actually seeing on the liquidity and the funding side, we are getting more preference over NBFCs. So in no case, for example, has our bank term loan pricing gone up. We're able to retain the exact same marginal cost of borrowing for like 4 quarters now despite increase in MCLR, despite the RBI regulations.
Coming to the capital adequacy part of it, housing part is clearly excluded. There remains a confusion on the non-housing part specifically LAP portfolio for us. We have also looked at the details. We have also engaged with some experts. The clarity is still not there on the secured asset side, specifically loan against property. Our understanding is that there is likely to be some clarification, so we await that clarification. However, we've also done simulation at our end to see that if LAP gets considered at 125% risk rate, what will be the impact for us. So that is about 2% for us on the capital adequacy. So what you see is 40.9% will perhaps come down to 38%, 39%. So that is how it will look like. From a capital perspective, fairly well covered, even leverage is at 4.3%. It's a long way to go on the capital side as well.
Okay. So just following up on the spread and the cost of funding issue. With this 10 bps hike -- increase, which you're kind of guiding for the next quarter, would you say that the whole MCLR repricing is largely done? Or we continue to see some more increase in the coming quarters.
So largely done, Bhaskar. However, if you see, for example, HDFC Bank, I'm just taking as an example, in the last 6 months, the MCLR for 1 year has gone up by 20 basis points. SBI in the last 6 months have gone up by 10 basis points. So we should assume a formula of, let's say, a public sector bank, so let's say SBI is a good representative. So whatever MCLR increase is happening for SBI, 50% of that comes and resides on our book over a 1 year period. right? So SBI has taken up by 10 basis points, we will get another 5 basis points in the next 12 months. That's really the impact and hence, we've kind of chosen to call it minimal. So 8.30% levels is what we will definitely likely see in the next quarter. But I think after that, we are largely done.
And whenever kind of rate cycle turns, given that MCLR -- your borrowing is largely MCLR and you intend to pass on some of the rate cuts to the borrower, do you see some kind of a timing difference between the way you kind of pass on? Or would you kind of time it similarly because your cost of fund will also fall with the lag, I guess?
Similar is the best approach. However, few weeks here and there can always be there.
Our next question is from the line of Aravind R from Sundaram Alternates.
I'd just like to understand like if BT out rate is it increasing or anything? Are we comfortable with the current BT out rates? That is my first question. And my question on borrowing costs has been answered. But what about yields continue still declining? Like is it just because of the higher ticket sizes, disbursements in higher ticket business continues to grow faster than the overall loan book?
BT out trend has moderated compared to last quarter. So still maybe 1 percentage point higher than what we used to see earlier, but it's moderated from the high of last quarter. The second question, I did not hear it clearly.
The question is on why yields are dropping, right?
Yes, yes.
Yields, okay.
Yields are not dropping. The yields are only getting adjusted for the NHB drawdown that we are taking every quarter.
Okay. What was the cap on spreads on NHB fans?
Close to 5.5%.
Close to 5.5%. Okay. And do we have anything like leverage total that we are comfortable with?
So we are 4.3 on asset to equity. We are very comfortable to at least go up to 5.5, 6 levels.
Our next question is from the line of Omkar Kamtekar from Bonanza Portfolio.
I hope I am audible.
Yes.
So one of the questions was with regards to the leverage. So you said you're comfortable to go up to?
5.5, 6 levels asset to equity.
May I request you to use your handset, please?
Is this better?
Yes, sir, please go ahead.
Yes. So you said you're comfortable to go up to 5.5, 6x leverage. So it would be assumed that, say, by FY '26, if we hit a leverage of, say, 5.5x and the ROA remains same, so our ROE will be much higher. So we could be closer in the -- closer to the 20s. Would that be a fair assumption then?
No. I think what we are looking at is more in the range of 17% ROE. As we grow the book and the debt portion of the balance sheet becomes larger, there will be compression in the NIM. And we are looking at an ROA close to 3.5%, 3.6%, let's say, in about 24 months' time. And then, of course, leverage of, let's say, 5x, I mean, approximately 17%, 18% is a max that we are working at. We are not looking at a 20% ROE.
Okay. So 5 -- So okay. So if we take it at 5x, then it makes sense. And also, will there be an equity raise be required by the firm, or do you see a need for an equity raise to happen in the near future?
In the future, yes, maybe not in the next 2 years.
Okay. Okay. And with respect to the run rate. So now we've hit the INR 1,000 crores disbursement per quarter. Will this become sustainable from the next quarter itself? Or will it take some time to steady state itself at this level and then run at INR 1,000 crores per quarter is the question?
INR 1,000 crore per quarter is -- so we have -- if you see last 12 quarters, we have continuously increased the disbursal quarter-on-quarter. So we are looking at a similar trend going forward.
Okay. So if that is the case, I think the base -- what is the base target that we are looking at for disbursals for FY '25 and '26 if that could be given?
So we are looking at a 30% AUM growth. So the disbursals will follow that -- follow the trend, which will -- which is required to achieve that. So probably a disbursal growth of 20% to 25% should be able to achieve a AUM growth of 30%.
Okay. So -- okay. So okay, that is the question. And the asset quality has also remained very much stable at 1.21% and 1% which will remain stable -- 1%, 1.2%. So do you see any points of concern that it might marginally increase?
Absolutely not. Asset quality, there is absolutely no concern at all. It is looking very stable and even from the ground, the feedback that we get, the monitoring that we are doing, it looks absolutely stable.
Okay. And finally, with respect to co-lending, the co-lending, I think we did about INR 60 crores worth of disbursements. You said it will be targeting 10% of AUM. So incrementally, there will be a higher share of disbursement in the disbursement through co-lending in the coming quarters. Is that -- will that be a fair assumption?
Yes, marginally higher because we are currently at 6 -- about 6% or 7% of the disbursal. As we kind of inch up towards 10%, yes, the share of co-lending, you can say is going up.
Okay. Okay. And the spreads on that, what you -- what I think someone had mentioned -- from the management was 5% if I -- did I get it, right?
That's right.
Our next question is from the line of Chandrasekhar Sridhar from Fidelity.
Question on spread basically 5%, 5.25%. Is that more a function that beyond a point while your costs are increasing still because of some of these MCLR hikes you don't want to basically underwrite beyond a certain hurdle rate in terms of the customer of yield because you sort of underwrite a different set of customers. Is that primarily why you're looking to maybe absorb a little bit at this moment?
That's right, Chandra.
That is correct. That is correct. And also, it's about whether you want to reprice the back book too much, I mean. So we have already passed on 125 basis points. At this point, we are looking at passing that. So -- but -- although actually in practice, we have got a 20 basis points increase over the last quarter, but we are not passing that on to the customer effectively.
Okay. So some of this realistically is function of where we are. Maybe at some point in time, if rates go down, some of these things could change. It's not like...
Absolutely.
That's right.
Our next question is from the line of Aravind R from Sundaram Alternates.
I just had one question. Do we get any income for co-lending?
Sorry, what is the question?
Do we get any fee income for co-lending?
Fee income, we get a processing fee on the -- on originating the loan. This is the normal processing fee that we charge on our own loans that we originate. The same processing fee we earn on co-lending as well.
Okay, sir. And just one more thing, like when we say that we intend to pass like the benefit of funding cost if the rate reverses. Would we be like looking to pass on everything or like a part of it?
Depends on how sharply it moves. I mean, if it moves very gradually, then we may just pass it on. But most sharply, we could probably retain a portion and pass on the balance.
Next question is from the line of Amit Jain from Axis Capital.
Yes. Am I audible?
Yes.
Yes.
Yes. So I just had one question. So as you grow bigger and bigger, so in terms of distribution, will account aggregate -- aggregator be the way ahead? Or would you like to look at other forms as well, such as BSA?
No. So distribution -- our distribution is basically through individual connectors, individual agents who refer customers to us. And we intend to continue that model. That model has worked extremely well for us. We have certain competitive advantages there in the way we manage it, et cetera. So we intend to continue to leverage the connector model. Account aggregator is more for credit evaluation. So that is for basically collecting information about the customer. So that is a different purpose altogether. As far as distribution is concerned, we intend to stick to our connector model.
Our next question is from the line of Omkar Kamtekar from Bonanza Portfolio.
So first -- so another question was on the average ticket size of the loan. So is there any specific bucket of loans that is growing faster? And from the previous comment on the co-lending becoming 10% of the AUM, and I think the higher ticket size that is INR 25 lakhs and above is where the co-lending higher transactions are there. So would the average ticket size on a whole increase over, say, the next 2 to 3 years?
Yes, average ticket size will increase. The reason being that what was, let us say, INR 5 lakhs a few years ago is now INR 10 lakhs and so on and so forth. So if you rewind 5 years ago, the -- our core segment used to be between INR 5 lakhs to INR 10 lakhs. But now the INR 5 lakhs to INR 10 lakhs segment -- because of inflation that segment has moved to INR 10 lakhs to INR 15 lakhs. So now our core segment is INR 10 lakhs to INR 15 lakhs or INR 10 lakhs to INR 20 lakhs. So it's just the impact of inflation. The profile of the customer is the same, but the ticket sizes are gradually moving up. So as a result, yes, every 5 years, you will see some shift in the ticket sizes.
Okay. So it is more so from the perspective of a structural change and not because of the co-lending and et cetera that you would see a higher -- a bigger expansion in the ATS?
Yes. Ex of co-lending. Yes, co-lending is definitely contributing to it or it's contributing more to it. But if you remove co-lending also, there is a gradual shift in the ticket sizes. So you will see that our growth in the INR 10 lakhs to INR 15 lakhs and INR 15 lakhs to INR 20 lakhs is higher than the INR 5 lakhs to INR 10 lakhs segment. That's because of the gradual shift in ticket sizes. Apart from that, there is obviously an extra contribution from the co-lending aspect as well.
Got it. Got it. And any specific bucket that -- of the [ bifurcation ] that you have given by ticket size. Any specific segment that is growing that -- which is the fastest growing, which you could give, which is the fastest growing and maybe anything in that side.
Yes. So like I mentioned, INR 10 lakhs to INR 20 lakhs. So INR 10 lakhs to INR 15 lakhs and INR 15 lakhs to INR 20 lakhs are growing faster than the other -- I mean, the smaller segments.
Our next question is from the line of Sonal Gandhi from Centrum Broking Limited.
Yes. Thanks for the opportunity, and congrats on good set of numbers. I had a few questions. Basically, I needed some clarifications before I move to questions. So if you could just let me know what exactly happened in Tier 1 capital, wherein it's gone from 45% to 40.5% because I heard Nutan saying that if we take that risk weighted and LAP portfolio, this might actually go down to 38.5%...
Yes. So the 45% to 40% journey, let's discuss that first. So there are 2 components to this. If you see our investments in December versus September, they have gone up significantly. Now when you park funds in liquid funds, liquid funds carry 100% risk weight under the capital adequacy regulation. However, if you park the same money in deposits, they carry a 0% risk weight. So this 3% increase is contributed by just how we've chosen to invest our cash and carry balances. The other 2%, which is basically coming from organic growth.
What I was trying to mention earlier, if we took the impact of the circular, then this 40% will look like 38%. Now if you want to look at it, 3% is just how we choose to allocate funds between fixed deposits and liquid funds. So March quarter, for example, you can see this going back. But organic growth-related capital consumption will continue to happen.
Sure. That's helpful. The other one was on co-lending. So the upfront income co-lending as we do in direct assignment, which is the fair value gain?
No, we don't do that.
Okay. So we had this stated policy wherein we were planning to do about INR 100 crores of direct assignment every quarter. That number has gone up this quarter. So how should we see this upfronting income from -- moving from here?
So there are 2 ways to look at it. INR 100 crores plus/minus is the kind of number we've discussed in the past. The other way to look at this is the proportion of direct assignment to the overall AUM. If you look at that, that has remained constant at this 13%, 14% level. So I think that will be the right number to look at. That -- the overall composition of the off-book contributed but assignment is not increasing. But with the growth in the book, the absolute number might shift.
Hello?
Ms. Sonal, does that answer your question?
I think network issues.
Ms. Sonal, we're unable to hear you. We'd request you to unmute your line from your side? So may I request that we move to the next question?
Yes.
Our next question is from the line of Ravi Naredi from Naredi Industries.
First of all, congratulations to close INR 1 billion market cap of our company. Sir, our check bounce rate increase and higher side at 15.1%. So many questions asked by so many investors. My point is that if check bounce and his customer bank account charges -- bank charges check bounce charges from the customer, it increases cost of middle-class borrowers. So have you planned to control this?
So we keep educating customers that they should clear the payment at the first go, et cetera. But there would be a set of customers where probably it is not impacting them because probably they have -- they are not using those accounts or maybe those accounts are in minimum balance, et cetera. So which is probably the reason they are bouncing those payments. So difficult for us to -- I mean, we, of course, encourage our customers to keep clearing it on the same date and not bounce it. But today, with so many different options for repayment through UPI and through multiple channels, customers don't take that very seriously. So which is also one of reason why there is a higher bounce rate.
Okay. Okay. Understand. Sir, company maintained INR 2,460 crores liquidity against AUM of INR 9,014 crores or borrowing is against [indiscernible] means 36% loan amount liquidity we are maintaining. So you think monthly, it is higher side?
That number that you are seeing is including the undrawn lines. What we are carrying on the balance sheet is INR 1,200 crores, sir.
Okay. Understand. Understand.
Which is probably -- sorry, sir.
Yes, yes, yes. Understand, ma'am. Sir, any equity raise on cards?
Not for the next 2 to 3 years. We have enough accruals, which will carry us through for at least 2 to 3 years.
All the best Ma'am. Manoj ji, you are doing a very nice job.
Thank you, sir.
Our next question is from the line of Raghav Garg from Ambit Capital.
Just one clarification. At what rate would we be getting the NHB borrowings? Would it be somewhere around 6.5%?
Depends on schemes, Raghav. So it will be, yes, around that range if it is the weighted average cost, but it could be different for different schemes.
Right. And you also mentioned that our spreads on this particular piece is about 5.5%.
That's right.
Right. So Nutan, if I just calculate the impact of NHB borrowings that comes to about 4 basis points. The -- right, but your yields have actually compressed by about 12 basis points. So what explains the other 7, 8 basis points of compression?
Right. So the full delta is actually 8 basis points. I think there could be some rounding off numbers. About 5 basis points is contributed by NHB and around 2 basis points is contributed by co-lending, and there is also some marginal contribution by the BT out. So that is the full breakup.
Sorry, how do you arrive at 8 basis points because as per your reported numbers, it's about 12 basis points.
Where do you see that? Because what we have is 15.3%. 13.58...
13.62% going down to 13.5%.
No. So there is a rounding off that we are doing. So we are looking at 13.58% to 13.52%.
Ladies and gentlemen, that was the last question of our question-and-answer session. As there are no further questions from the participants, I now hand the conference over to Mr. Manoj Viswanathan for closing comments.
Thank you. Thank you, everyone, for joining us on the call. I hope we have been able to answer all your questions. In case you require any further details, you may get in touch with Manish Kayal. Thank you very much.
On behalf of Home First Finance Company India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.