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Leading the Pack: Shines with Stellar Performance

Aadhar Housing Finance (AADHARHF) is a leading affordable HFC with AUM size of INR 217bn commanding 2% share in Indian affordable housing market. With diversified presence across 21 states, focus on low-income housing and resilience business model, AADHARHF is well placed to deliver high quality growth. Its ability to deliver superior margin, cost-efficient expansion & contained credit cost ensure strong profitability (23% PAT CAGR over FY24-26E driving >20 bps expansion in RoA to ~4.5%). We initiate coverage on AADHARHF with ‘BUY’ rating and assign target price of INR 555/shvaluing at P/BV 3.0xFY26E BV.

Investment Rationale

Extensive distribution network, focus on EWS/LIG ensure sustenance of robust >20% AUM growth:

Since starting lending operations in 2011, AADHARHF remained focused on widening presence rather the deepening penetration in a particular geography. Within five years, the company enhanced its footprints to 10 states with 100 branches. The strategy also paid well for it in terms of understating credit market across India breadth, building scale with lower concentration risk and remain diversified since from starting. No state contributes 15% of AUM as of Jun’2024, and the top 3 states share stands at ~40% as compared to >50% for peers, showing business model resilience to micro-market risk. As AADHARHF has already diversified its presence across 21 states, now it is strategized to deepen penetration in selected tier 4/tier 5 geographies. This will further broaden the customers’ acquisition catchment area, adequately leveraged by its focus on Aadhar Mitras + DSTs sourcing channels (61% of disbursements). An additional tailwind to growth is AADHARHF’s continued focus on EWS/LIG (70% of AUM) which presents immense latent potential for growth as 95% of the housing shortage is expected to be driven by this segment.

Scalable business model resilient to bear economic cycle impact:

AADHARHF is geographically much better diversified than its peers which we think is prime requisite for HFCs focused on low-income housing as it largely protects from region/state specific credit risk. Furthermore, cost-efficient branch expansion model by testing new geography through opening ultra small branch/sales point and higher share of salary segment (57% of AUM) securebusiness resilience. AADHARHF’s 30% PAT CAGR, avg. GNPA ~1.2%and credit cost ~33 bps over FY21-24 is a testament of its resilience business model. The company adopts a combination of centralized (for salaried segment)/decentralized (for self-employed) underwriting processes along with internally developed credit assessment model which bring more efficiency in TAT and risk containment.

Refine assets-liability management to sustain margin >6.5% over FY25-26E:

Despite high exposure to formal salaried customers and low non-HL mix, AADHARHF generates one of the highest assets yield/spread among peers (AADHARHF’s FY24 spread at 6.5% vs HOMEFIRS at 5.1%, AAVAS at 5.1%, INDIASHL at 6.1%). AADHARHF is expected to continue generating strong YoA (>14%) on the back of 1) high pricing power due to significant presence in underpenetrated states such as UP, MP, Chhattisgarh among others 2) higher exposure of relatively high yield EWS/LIG (70% of AUM) and 3) rising share of informal customers in AUM mix (45% in FY24 vs 31% in FY21). Alternatively, CoB, rose by ~30 bps over FY23-24 despite 200 bps increase in the repo rate driven by AADHARHF’s effective liability management by increasing cheap NHB borrowing thereby minimizing the impact of rising MCLR. CoB is expected to remain 6.5% over the next two fiscals (vs avg. 6.4% in FY23-24).

Core PPOP/AA expects to reach 5.0% over FY25-26Edriving RoAto ~4.5%:

Sustained increase in core PPOP/AA to 4.8% in FY24 from 3.6% in FY21 (higher than peers i.e. HOMEFIRS at 3.8%, AAVAS at 3.0% in FY24) which reflects AADHARHF’s focus on achieving quality growth in cost-efficient way with the better margin. Driven by cost-efficient expansion strategy, incremental business scale will come at lower cost thereby boosting productivity. Growth in core PPOP is expected to remain strong (23% CAGR) on healthy spread and low cost/opex (~3.0%) which is likely to keep core PPOP/AA of 5.0% over FY25-26E.

View & Valuation:

Diversified book with no state constituting 15% of AUM and deeper presence in underpenetrated market helped AADHARHF to scale business faster than peers while remaining immune to micro-market risk. RoA almost doubled to 4.2% in FY24 from 2.6% in FY21 on steady improvement in risk adjusted yield (13.8% in FY24 vs 12.6% in FY21) and contained CoB & opex/AA. We view AADHARHF is better placed to deliver 21.5% AUM CAGR over FY24-26E driven by extensive distribution network, strong growth potential in targeted EWS/LIG segment and industry related tailwinds like PMAY scheme. NIM (on avg. AUM) expects to be at a healthy level of ~6.6% (avg) and credit cost at~23 bps over the nexttwo fiscals. We expect AADHARHF to deliver 23% PAT CAGR over FY24-26E which will drive >20 bps expansion in avg. RoA to ~4.5% and generate avg. RoE ~17.3%. Given AADHARHF’s ability to deliver an excess return of 500 bps (over CoE) over the next two fiscals, the current valuation of IY forward P/BV 2.4x looks attractive. We initiate coverage on AADHARHF with ‘BUY’ rating and assign target price of INR 555/sh valuing at P/BV 3.0xFY26E BV.

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