Buy Aadhar Housing Finance Ltd for the Target Rs. 650 By Citi Research
What’s New, Pivotal, Incrementally Relevant from HK Investor Meetings
We hosted MD&CEO, CFO of Aadhar Housing for investor meetings in Hong Kong. Pivotal, incrementally relevant insights: [1] Strategically positioning as low-income housing financier (ATS of 4.4%/16% RoA/RoE. We already have 90D+ CW open with TP of Rs650.
Strategic niche positioning as low-income housing financier (eschewing wider affordable housing segment) — Aadhar is strategically positioning as niche low-income housing financier (ATS of Rs1.5mn) eschewing the wider affordable housing segment (including ticket size of Rs1.5-3.5mn). Amidst rising incremental ATS (~Rs1.3mn) and lower incremental yields (13.4% vs 13.8% book), management reoriented its distribution strategy with differential focus on urban and emerging markets. Urban markets and emerging 'A' aim for volume and AUM growth with better credit. Conversely, emerging 'B' & 'C' target value and enhanced risk-adjusted returns for bottom-line contribution. Emerging markets yield higher RoA (5.2-5.4% vs Urban 3.0-3.2%), potentially elevating RoE to 17.5-18.0% with 4.0-4.5x leverage (AA+ rating).
Confident of 20-22% AUM growth in the medium term — Aadhar confidently targets 20-22% AUM growth over the medium term, aiming for Rs450-500bn AUM over 3 years despite already surpassing Rs250bn and 300k active customers. This will be fueled by 17-20% disbursements growth. Post-achieving this scale, AUM expansion is projected to moderate to 16-18%.
Effectively manages distinct market dynamics of urban and emerging markets –
Aadhar effectively manages distinct market dynamics, with incremental disbursement ATS varying across Urban (Rs1.7mn), Emerging Category A (Rs1.1mn), B (Rs1.0mn), and C (Rs0.8mn) markets, leading to an overall company ATS of Rs1.27mn. System-wide restrictions exist on ticket sizes (eg, Cat A at Rs3.5mn, Cat B at Rs2.5mn and Cat C at Rs1.5mn), with CBO approval needed for exceptions. Resources are actively re-allocated to scale emerging markets, which initially performed at 75-80% of target but have now reached 90% within five months. The company anticipates achieving 100% targeted levels for ticket size balancing. Currently, disbursements are skewed 53-55% towards urban markets, with a strategic goal to shift this to ~55% in favor of emerging markets, leveraging their incremental yield premium of ~200/300/400bps over urban areas. Urban markets typically feature a higher salaried segment (~65-70%) and increased reliance on external intermediaries for sourcing. Breakeven points for Urban and Emerging A markets are projected at 12-15 months, while ultra micro/deeper impact Emerging C branches achieve breakeven in 9 months. Small branches, with annual operating cost of Rs1.2-1.4mn, are encouraged to generate Rs40-50mn annual business, enabling them to breakeven in 9 months and become self-sustainable within 15 months.
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