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A good show

Aadhar reported a stable 2Q performance, with healthy AUM growth, sequentially improving spreads and a reduction in stressed loans. Disbursements were a tad lower, reflecting the stress in select pockets and a high base. Overall execution seems smooth, marching toward 17-18% medium-term RoE. Aadhar remains our favored pick in affordable HFCs; BUY; FV Rs625.

Lower credit costs drive earnings beat

Aadhar Housing Finance reported a PAT of Rs3.4 bn in 2QFY26, up 17% yoy and 3.6% above our estimates. The earnings beat was driven by lower-thanexpected credit costs (10 bps below our estimates). NII was up 18% yoy, driven by 21% AUM growth. Reported spreads expanded 10 bps qoq to 5.9%, driven by a moderation in the cost of borrowings to 7.9%.

A tad weak disbursements; spreads normalize and stressed loans decline

Aadhar’s 2QFY26 performance was encouraging, with expanding spreads (a trend similar to peers) and a sharp reduction in stressed loans (down 26-29 bps, qoq and yoy). Disbursement growth was moderate at 4%, reflecting the high base; disbursement growth for 1H was moderate at 16% (9% in home loans due to reclassification). Aadhar seems to be on track for 20%+ loan growth.

NII growth in 2QFY26 was 18%, 300 bps below loan growth, reflecting yield pressure in the preceding quarters. With falling costs, the same will come back to parity in 2H. As of now, we understand that affordable HFCs are not under pressure to cut home loan rates. Many peers are facing challenges in multiple pockets, which may reduce competitive pressure. While Aadhar acknowledges similar pressure, its book is well diversified (largest state at 14% of AUMs) and has generally maintained focus on lower-risk salaried customers.

Overall execution remains smooth; best placed in the pack

Aadhar accelerated its growth trajectory to 20-22% from FY2024 despite a higher base, up from the high teens in the preceding five years that reflected challenges due to promoter changes and Covid. Its execution engine seems to run smoothly, with 20%+ loan growth sustained in the medium term despite its bigger balance sheet size. Most peers may seem to slow down due to challenges in pockets or segments. Aadhar’s borrower profile reflects lower risk (high share of salaried and home loans) and hence the impact of macro challenges, especially in self-employed and non-home loans, will have a lower hit than peers. We, hence, believe that the company is well placed both on asset quality and growth trajectory over most peers.

Retain BUY with FV of Rs625

We revise estimates by -1.7% to +1.9% to reflect the slightly slower benefit of rate cuts. With smooth growth execution, tailwinds to margins and lower asset quality challenges, we expect RoE to inch back to 17-18% (pre-IPO levels) by FY2027E. Retain BUY with an RGM-based FV, rolled forward to Rs625.

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