Kotak Institutional Equities has reiterated a BUY rating on Home First Finance Company (HFFC), setting a revised Fair Value target of Rs1,560. The Kotak research report navigates a careful course between optimism and caution as HFFC posts a mixed first-quarter performance for FY26. While headline earnings surpassed forecasts, underlying growth signals and credit metrics demand vigilant monitoring. The research underscores structural strengths, prudent risk management, and sustained value creation even as a few operational red flags appear on the horizon.

Home First Finance: Mixed Signals, Robust Core

Home First Finance continues to showcase strong execution in India’s affordable housing segment, reporting a 35% year-over-year jump in profit after tax for 1QFY26—outpacing expectations by 12%. However, muted disbursement growth, an uptick in early delinquencies, and localized asset quality pressures temper the quarter’s headline optimism. Kotak Institutional Equities remains constructive on HFFC’s long-term trajectory and efficient capital deployment, maintaining a BUY rating and revising the Fair Value to Rs1,560. The call is underpinned by resilient earnings, sector-beating NIMs, and adept navigation of India’s affordable mortgage landscape, but investors are urged to keep a close watch on early warning indicators.

Earnings Momentum Meets Sluggish Disbursements

Home First’s 1QFY26 profit after tax surged 35% year-over-year, buoyed by strong fee income and higher-than-expected other income. Yet, loan disbursement growth was a tepid 7%, well below the management’s 20% annual guidance. The report flags this as a monitorable development, especially in the context of sector aspirations. The management attributed April’s slowdown to operational setbacks, with improvement observed in May and June—a trend that investors should scrutinize for sustainability.

Asset Quality – Early Delinquencies Nudge Upwards

Delinquencies, specifically loans overdue by more than a day (1+ dpd), climbed to 5.4%, up from 4.5% both sequentially and year-over-year. Gross Stage-2 and Stage-3 ratios also increased, signaling emerging stress pockets, particularly in certain geographies like Surat and Coimbatore-Tirupur with high exposure to factory workers. Still, HFFC’s consistent approach keeps overall gross Stage-3 loans under 2%, providing comfort on medium-term loss rates.

Spreads and NIMs – Stability Amidst Competitive Flux

Despite sector-wide competition and shifting dynamics, Home First arrested any further compression in lending spreads, reporting a stable 5% spread and a notable 42 bps sequential jump in Net Interest Margins (NIMs) to 7.1%. The positive delta is attributed to recent capital raising, which has temporarily reduced funding costs. The company’s focus on salaried, affordable borrowers and reduced outflow via balance transfers (BT-outs at 6%) have supported yield resilience.

Growth Outlook – Strong Core but Moderation Anticipated

Management and Kotak estimate 20% annual disbursement growth and 27% AUM growth for FY26, with further moderation expected into the next two years as market penetration matures. HFFC’s market share in its core Rs0.5-2.5 million ticket segment stands at just 2.3%, offering significant headroom for expansion but also highlighting its relatively nascent footprint in a fragmented market.

Growth Projections Table

Asset Quality & Provisioning – Credit Discipline Sustained

Credit costs ticked up marginally to 0.4% of AUM in 1QFY26, predominantly reflecting localized stress but remained well within prudent limits. The report anticipates flat ECL coverage and disciplined provisioning, with write-offs maintained at moderate levels through FY28. Even during previous cycles, Stage-3 ratios peaked at just 2.3%—attesting to strong risk filters.

Cost Management: Efficiency on an Upward Arc

Operating expenses tracked the 32% AUM growth, but Home First’s cost-to-average AUM ratio remains among the best-in-class at 2.7%. The company is modeling 200-300 staff additions annually, but expects operating leverage from tech investments and branch additions to gradually moderate cost ratios to 2.4% by FY28.

Cost Ratio Table

Valuations and Investment Levels

At a current market price (CMP) of Rs1,372, Home First Finance trades at 25.1 times FY26 estimated earnings and 4.2 times book value, with a fair value (FV) target pegged at Rs1,560 according to Kotak’s revised estimates. This signals a projected upside north of 13% over the next 12 months, not including any potential for upward earnings revision should asset quality pressures subside. The stock’s premium valuation is justified by sector-leading growth, asset quality discipline, and the franchise’s demonstrated resilience.

Key Levels for Investors

Bottomline – Verdict and Investor Takeaway

Home First Finance’s latest quarter marries a robust core performance with a sprinkling of caution—classic for lenders operating in the high-octane affordable mortgage space. Kotak Institutional Equities’ BUY rating rests on solid execution, sector outperformance, and prudent financial discipline. Yet investors should stay alert to disbursement slowdowns and emerging early delinquencies, even as the longer-term growth runway and operational leverage remain intact. With a target of Rs1,560 and sector “Attractive” view, HFFC is poised for further value creation—provided it can deftly navigate the evolving credit landscape.