Home First Finance AUM growth and stable asset quality underpin earnings outlook

Investment View and Valuation

Motilal Oswal Financial Services Ltd. (MOFSL) retained its Buy recommendation on Home First Finance following the company’s 1QFY27 results. The broker viewed the quarter as demonstrating healthy execution on AUM growth and asset quality.

MOFSL raised its FY27E and FY28E EPS estimates by 3% and 2%, respectively, to incorporate slightly higher growth, assignment volumes and NIM. It set a target price of Rs 1,425, based on 2.6 times FY28E book value, versus the CMP of Rs 1,181.

1QFY27 Financial Performance

Annualised credit costs were around 47 basis points, within management’s guidance range of 45–50 basis points.

Strong Business Momentum and AUM Growth

Disbursements grew 31% year on year and 4% quarter on quarter to around Rs 16,300 million. This supported AUM growth of 26% year on year and 6.7% quarter on quarter to around Rs 169,000 million.

Management indicated that approximately half of the AUM growth came from higher origination volumes and half from higher average ticket sizes. It remains confident of achieving around 25% AUM growth in FY27, supported by healthy demand, a granular secured portfolio, disciplined underwriting and stable asset quality.

Maharashtra, Gujarat and Madhya Pradesh remain key growth markets, while Tamil Nadu, Rajasthan, Uttar Pradesh and other southern markets are gaining traction. Tamil Nadu’s tariff-related and team issues have been addressed, and improved team building in Madhya Pradesh has helped build momentum.

Margins, Funding Costs and Interest-Rate Risk

The annualised BT-OUT rate declined to around 4.5% in 1QFY27 from 6.4% in 4QFY26 and 6.0% in 1QFY26. Management attributed the improvement to internal process changes and aims to maintain BT-OUTs within 5–6%.

Reported yield fell around 10 basis points sequentially to approximately 13%, while the cost of funds also declined around 10 basis points to around 7.8%. As a result, spreads remained stable at 5.2%. Reported NIM improved around 10 basis points sequentially to 6.0%.

Management expects long-term spreads of 5.0–5.25% and does not anticipate material spread compression from rising ticket sizes, attributing this resilience to higher customer incomes within its existing target segment. MOFSL models NIM of 6.2% in FY27E and 5.9% in FY28E.

Home First Finance’s 100% floating-rate balance sheet limits interest-rate risk and preserves pricing flexibility, according to MOFSL.

Stable Asset Quality and Capital Position

Asset quality remained stable despite typical first-quarter seasonality. Gross Stage 3 was unchanged sequentially at 1.8%, Net Stage 3 remained at 1.4%, and 1+ DPD was stable at 4.7%. Provision coverage declined around 50 basis points sequentially to approximately 23.4%.

Bounce rates increased around 40 basis points sequentially to 16.3% in 1QFY27. However, the July 2026 bounce rate was 15.2%, and management said bounce rates had improved modestly over the preceding two quarters.

Stress in Surat and Tirupur, partly linked to tariff-related challenges, had not affected Home First Finance’s asset quality or collections and was improving. Loan against property (LAP) accounts for around 13% of the portfolio, with asset quality broadly comparable to home loans.

Capital adequacy stood at 42.6% as of June 2026, including Tier 1 capital of 42.2%.

Earnings Outlook and Management Priorities

MOFSL forecasts AUM and PAT CAGR of around 24% and 21%, respectively, over FY26–28E. It estimates FY28E RoA of around 3.8% and RoE of around 14.8%. The estimates assume FY27E and FY28E credit costs of approximately 43 and 35 basis points, respectively.

Management expects operating expenses to assets to remain within 2.6–2.7% in FY27 despite investment in branch expansion, implying an improvement of around 10 basis points year on year.

Co-lending volumes are expected to normalise gradually as partners adjust to revised policies. The benefits of artificial intelligence are expected to emerge progressively across underwriting, collections, cost efficiency and customer experience.