Housing finance penetration in India lags behind that of both developed and developing countries. This is mainly because banks and major non-banking financial companies (NBFCs) have traditionally focused on serving customers in the prime and above segments. This approach was favoured due to simpler underwriting processes and smoother collections, said the brokerage firm Centrum Broking.
According to Government of India (GOI) estimates, there is a shortage of 100 million units with a large gap witnessed in housing for Economically Weaker Sections (EWS) and Lower-Income Groups (LIG) customers. This provides financing opportunities to the tune of Rs 58 trillion, it noted.
The AHFCs have registered a 5-year AUM CAGR in the range of 28% to 40%, with RoA exceeding 3.5% and low credit costs (0.2%–0.5% 5-year average). Notably, their stringent underwriting practices have proven resilient during the COVID-19 pandemic, resulting in minimal write-offs despite serving informal customer segments.
Competition from large banks and NBFCs is at bay due to the branch and people-intensive business model, customer cash flow-based income assessment, low average ticket size (ATS) ranging between 0.8 million to 1.1 million, and understanding of local nuances, the brokerage pointed out.
Yields across players have remained strong and healthy across cycles, while the cost of funding has been in control due to NHB borrowings. PPOP/assets have remained strong in the range of 4.6% to 10.7% despite opex-intensive business. The AHFCs are well capitalised to support growth over the next few years, said Centrum Broking.
Amid this backdrop, the brokerage has initiated coverage on three affordable housing finance companies, namely Aavas Financiers, Aptus Value Housing Finance, and Home First Finance Company, with a 'buy' rating.
The company's primary focus is on housing loans within the EWS+LIG segment (comprising 78% of its portfolio), serving a primarily salaried customer base (70%) and providing financing for self-constructed residential properties.
Home First Finance targets large markets, and its presence in key areas of Gujarat, Maharashtra, Andhra Pradesh, Telangana, Karnataka, and Tamil Nadu gives it access to 50% of affordable housing finance markets.
Centrum Broking anticipates that Home First Finance will achieve a 30% CAGR in AUM and a 25% earnings CAGR over FY23 -26E. These growth projections, as per the brokerage, are supported by an expanded distribution network, gaining market share, and tapping into a broader addressable market through co-lending partnerships. Centrum Broking has factored in a RoA and RoE of 3.5% and 17.1%, respectively, for FY26E.
The brokerage valued Home First Finance Company at 4x H1FY26E P/ABV to arrive at a target price of Rs 1,130 apiece, initiating with a 'buy' rating. The stock is the brokerage's preferred pick in the affordable housing finance segment.
Aptus Value Housing Finance (Aptus) operates in a niche segment of affordable housing finance and small business loans. The company's focus is on the self-employed segment with low household incomes (<Rs 0.6 million per year) in underserved rural and semi-urban regions.
Tamil Nadu and Andhra Pradesh together account for 78% of its Assets Under Management (AUM) as of 1QFY24, while it is actively expanding its presence in Telangana and Karnataka. Aptus is also entering new states, specifically Odisha and Maharashtra, said Centrum Broking.
Despite having 78% of its customer base in the Low-Income Group (LIG) and Middle-Income Group (MIG) segments, Aptus demonstrated robust underwriting practices during the COVID-19 pandemic, with minimal write-offs (13 basis points of operating gross loans in FY22), the brokerage underscored.
The company's ability to exercise pricing power and maintain low operating expenses contributed to achieving a healthy RoA of 7.8% and RoE of 16.1% (leverage at 2.1x) in FY23, it highlighted.
Looking ahead, Centrum Broking anticipates that Aptus, with its small size (AUM at Rs 71.2 billion), extensive market penetration, geographic expansion efforts, and enhanced productivity, will aid it in delivering a CAGR of 29% in AUM and 24% in earnings over FY23–26E. It expects an RoA and RoE of 7.1% and 20.1% in FY26E.
Centrum Broking has set a target price of Rs 380 for the stock, which reflects an upside potential of 22% for the stock from its previous closing price.
Aavas Financiers is a formidable player in affordable housing, with 346 branches spread across North and West India. Notably, 60% of its customer base comprises self-employed individuals, with the remaining 40% being salaried employees in informal sectors.
Aavas plans to add 30–35 branches every year and enter one new state every 3–5 years. This expansion strategy, with a particular focus on tier 3/4/5 towns where mortgage penetration is only 2-3%, coupled with branch additions and branches maturing beyond three years, is expected to bolster the growth of AUM by 20–25% over the next few years, the brokerage underscored.
The company has made significant investments in technology and digital capabilities, which should support growth and improve operational efficiencies going forward.
The brokerage expects AUM and profit CAGR of 22% and 23% over FY23-26E, with RoA and RoE of 3.7% and 16.5% by FY26E, respectively. Centrum valued Aavas at 3.5x H1FY26E P/ABV to arrive at a target price of Rs 2,070 apiece.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before making any investment decisions.
