What Helped Home First Finance Cross Rs 10,000 Crore AUM Milestone?: MD & CEO Gives Insights

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00:00Housing finance market, Home First Finance has seen a comfortable growth crossing the

00:1310,000 crore AUM milestone in FY24. Here's Harsh in conversation with MD and CEO Mr.

00:20Manoj Viswanathan to understand the segment and his future plans.

00:26So any discussion on growth runway always starts with the most cliched statistic, which

00:34is the mortgage to GDP ratio in the country, which is currently around 11 to 12%, and which

00:40is obviously much lower than most of the countries in the world, whether you consider the developing

00:45countries or even developed countries. It's a low figure. And different states within

00:53the country itself are at different levels of mortgage to GDP penetration. So the more

00:58developed industrialized states like Tamil Nadu, Gujarat, Maharashtra, they are at higher

01:02levels compared to the country. And the less developed states are at lower levels. So which

01:09basically or clearly indicates that there is a growth runway for affordable housing

01:15or the housing industry as a whole. As per capita incomes increase, as the GDP increases,

01:22the mortgage penetration is also going to keep on increasing. And even if we look at say a moderate

01:30penetration of say 25 to 30%, which is where China would be today, it is a very, very long

01:37runway for the housing finance industry. But just talk to us about competition, because

01:43we've had a slew of larger players enter mortgage in a very serious fashion. Of course, HDFC,

01:49the old guard, of course, part of that. But even some of the larger players have entered

01:55in a big fashion, something like a Bajaj group has entered it. What's the kind of competition

02:01you're facing on ground? And what helps you differentiate with others? What gets you to

02:08do that? Because for a 30% sustainable growth, that I believe would be the first possible

02:15speed bump. So, you know, there is obviously, I mean, because the runway is very long, and

02:22you know, there is, you know, the housing potential is so high. There is obviously opportunity

02:28for multiple players to exist in the industry. Having said that, there is likely to be some

02:35competition and some competition is healthy to have in the industry. There are, of course,

02:42you know, larger players operating in a different segment. When you look at the housing finance

02:46industry as a whole, if you look at annual disbursals, they are in the region of around

02:5010 lakh crores. But this 10 lakh crore is split across multiple segments. I mean, there is a

02:560 to 25 lakh segment, there is a 25 to 40 lakh segment, 40 to 75 lakh, 75 lakh plus.

03:02Each of these segments is quite large in its own right. And there are different players operating

03:09in different parts of the segment. The banks are operating in the higher ticket size segment.

03:13You know, the housing finance companies are operating in lower ticket size. And within that,

03:18there are, you know, specialized affordable housing finance companies like us, which are

03:22operating in 0 to 25, 0 to 30 lakh range. So, there is enough business for everybody. It is

03:28currently a very fragmented market. So, coming back to your question on, you know, how do we,

03:34you know, keep hitting the 30% annual growth rate. So, growth for us is, I mean, one is to

03:41keep moving in tandem with the growth of the country. So, country is growing at a strong clip.

03:45So, making sure that, you know, we are doing all the right things to, you know, ensure that

03:50our growth keeps pace with that. Broadly, for us, the growth will come from three vectors.

03:56So, one is basically expanding the geography. So, when we say expanding geography, it is not

04:02about expanding into new states. We are currently present in 13 states. So, we are going to,

04:08basically, you know, expand into those 13 states. So, we still have a lot more opportunity for

04:13expansion in these 13 states. So, new districts, new cities, etc. And then a second vector is

04:20basically a deeper penetration within existing cities. So, we are already present in about 200

04:25cities. So, you know, but there may be parts of the city which are still not penetrated by us.

04:30So, building our presence within the city or deepening the presence. And the third vector

04:35is, of course, the market share, you know, capturing market share. Through better service,

04:39better process, we capture share from others. So, these are the three vectors for growth. And

04:46this gives us the confidence that we will be able to hit that 30%

04:51growth rate, you know, for the foreseeable future. Okay. So, looking fairly comfortable.

04:59What does competition do, therefore? Do you think yields will start coming off if competition

05:08pressure increases? Or are you still reasonably comfortable that even with competition,

05:13their existing has always been there, you will be able to sustain this kind of a yield curve of

05:1913 and a half odd percent? So, it is, see, competition, you know,

05:26within the same segment, competitors tend to act fairly rationally as far as pricing is concerned.

05:31Because, you know, at the end of the day, ultimately, everybody has to make certain

05:34margins and they have to deliver returns to the shareholders. So, it is not that within the same,

05:40because within the same segment, the profitability matrix remains similar. So, you know, if we are

05:49charging a certain yield and there is a certain cost attached to it, there is a certain credit

05:52cost or losses, and then you end up making the profit. So, there is, it tends to be very similar

05:59for most of the players in the same segment. So, within the same segment, pricing is, you know,

06:04range bound. So, you will not have, you know, somebody operating at very low pricing in our

06:09segment. So, in each segment, there is a certain pricing that, you know, the players are operating

06:15at. So, what I'm saying is that competition tends to be rational. So, ultimately, it boils down to

06:21who's delivering better servers and who can extract that less small premium from the customer

06:26for delivering that extra service. I fully take your point. I fully take your point.

06:31If I were to kind of try and understand your margin trajectory, it's come off,

06:38even though ROAs have improved and essentially the metric should be ROAs, but just to try and

06:44understand where margins are therefore going and rate cards should probably help margins as well,

06:49give us that perspective. But margins, where would you like to see it, therefore?

06:56So, margins, see, we have always maintained that, you know, our business, the affordable

07:00housing business is a 5 to 525 margin business, you know, spread business, 5 to 5.25% spread

07:07business. And the margins, net interest margins will keep compressing as we keep delivering the

07:13book. You know, as we load, keep on loading more debt on the balance sheet or the net interest

07:19margins will compress gradually. So, the metric that we should be looking at is the ROE,

07:26because even the ROAs will, you know, compress slightly as we keep on leveraging the book.

07:32But ROE is what we are focused on. And because that's what we are returning back to shareholders.

07:38And that's a number that we are very focused on. We have been delivering industry leading ROEs.

07:43So, 16% plus we have crossed for the last two quarters consecutively. And we are confident

07:49we can deliver 17 to 18% ROEs in this business at the kind of leverage that is allowed for our

07:57company. But what gets you there? What gets you to the 17 to 18% in your view, sir?

08:07So, what gets us to 17 to 18% is, I mean, we have to deliver around 3.5% ROEs.

08:14Yes. So, let us say the net interest margin is around 5%. On that, we add another, let's say,

08:22two to two and a half percent, which is our additional income. So, income that comes from

08:28fee income, etc. So, seven and a half percent is the total income for the business. So, obviously,

08:37you know, cost to income ratio you would have seen is around 35%, 34, 35%.

08:41So, you knock off about two and a half to 3% there. So, between four and a half to 5% is our

08:49PBT. And, you know, take away another 1% for the cost. So, we are able to deliver about three and

08:54a half percent ROEs. So, three and a half percent ROEs with about five, between five and six times

09:00leverage will take us to that 17 to 18% number. So easily explained. Thank you for that. If I

09:08were to try and understand what helps Home First stand out, one of the things that helped, at least

09:14in terms of understanding what helps you stand out is with regard to the number of dispersals or the

09:22loan book per branch that you have versus peers, it's extremely high. Talk to us about this. Talk

09:30to us about sustainability of this and talk to us about growth in branches. So, this number,

09:36do you expect it to come down as you grow geographically or do you expect that number to

09:40sustain? So, our aim is to, so this is, you know, part of our differentiation strategy. So, differentiation

09:48starts with, you know, more empowered, a leaner team, but more empowered team, more well-trained

09:55team. So, which is delivering a higher productivity. I mean, ultimately that is the crux of the strategy.

10:02So, higher productivity that is delivered because, you know, our, because of our use of technology,

10:08because of our strong processes, we are able to get the team to deliver a higher productivity.

10:14And that in turn, in the metric, it translates to basically higher dispersal per employee.

10:22So, in our case, it's about 3.5 crores per year is the dispersal per employee, which is again higher

10:27than most of the competitors. And like you mentioned, dispersal per branch and the EUM

10:32per branch number is also industry leading figures. So, our aim will be to keep on building that margin,

10:38building that gap between us and competitors. So, higher dispersal per employee, higher dispersal

10:43per branch, dispersal and higher EUM per branch. So, we still have a long way to go there.

10:50So, currently we are at about, give or take about 6-70 crores of EUM per branch. But, you know,

10:58that number, I mean, we have some branches which are even at 200 crores EUM. So, there is still,

11:04you know, good headroom there for us to improve. And we'll keep on building on that.

11:10Understood. Now, I want to couple the last two questions along with this one.

11:14So, ROAs plus the strategy with regard to branch plus your centralized strategy with regard to

11:21approving of loans, which is done centralized. Please correct me if I'm wrong.

11:27How does that tie in with credit costs? So, if you can give us the full picture with the credit

11:33cost expectation, how it's played out, the FY22 number was slightly elevated and how it ties up

11:40with your ROA anticipation and ROE of 17 percent? Right. So, credit cost, I mean, so,

11:46I mean, ROA calculation of 3.5 percent, we spoke about 30 to 40 basis points credit cost.

11:54So, from the PBT of 4 percent up, there is another, you know, 30 to 40 basis points that

11:59needs to be taken off, which leads to the 3.5 percent ROA. But how do you manage it,

12:07Mr. Viswanathan, with this whole, you know, with the way in which you do your business, which is

12:13branches are smaller branches, higher AUM per branch plus centralized disbursements or

12:20centralized approvals for disbursements. So, how do you manage that 30 to 40 bips

12:25and grow at 30 percent and kind of tie it all in? Yes. So, since the time we started the business,

12:33our ideology has been to convert, I mean, this business was always seen as a touch and feel

12:38business, you know, where there is a local understanding of the customers required to

12:43assess the income, assess the business, et cetera. So, our ideology has been to see how we can make

12:50this scalable, because if it is going to be very localized, then it will be difficult to scale.

12:55So, we have tried to bring in that scalability angle through, you know, capturing more data

13:01from day one so that, you know, over a period of time we can analyze it.

13:06And also, you know, trying to make this whole assessment process more objective,

13:11and which is why our, you know, push towards a centralized underwriting.

13:15And our whole, you know, our strategy has actually been, you can say, boosted or supported by the

13:22entire Aadhaar stack, because today, you know, we can actually get digital imprints on customers

13:29sitting in a central office, which helps us to triangulate whatever information and

13:33data that we are capturing at a local level. So, the idea is to capture certain things locally,

13:38which gives us that granular feeling or understanding of the customer, and triangulate

13:43it centrally using digital imprints and data that is available centrally. So, that makes the whole

13:49process more accurate and more consistent and more scalable, because it is, you know,

13:56we have a small central team which is doing the underwriting, which is able to do the

14:01load balancing, which is able to give consistent turnarounds across the country.

14:05And it also makes the business more scalable, because if we want to launch new markets,

14:09you don't have to worry about, you know, underwriting, the underwriting is done centrally.

14:13Right. With that, completely out of time on this edition of the SMID show. From Mahima,

14:16myself, everyone who puts the show together, thanks so much for watching. Stay tuned,

14:19more action on the other side.

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