The king of affordable housing might be staging a comeback—but it’s not Bajaj Housing

The listing of Bajaj Housing Finance has energized the housing finance sector. Or was it the other way around? The listing’s success reflects the strong performance of housing finance overall.

A robust quarter-on-quarter (QoQ) growth of 7.9% (28.7% annualized) in home loans outstanding supports this trend, and expected rate cuts are likely to further boost growth.

As a result, most listed housing finance companies have seen a significant re-rating in their price-to-book (P/B) ratios, a common valuation metric for banks, NBFCs, and financials. Of the 15 largest listed housing finance companies, 13 have experienced a P/B re-rating—evidence that the market is recognizing the sector’s improving prospects.

However, housing finance companies (HFCs) differ significantly across the broader market, which includes banks, non-banking finance companies (NBFCs), and HFCs. These players compete based on ticket size (sub ₹25 lakh, ₹25-50 lakh, and ₹50 lakh+), funding costs, risk assessment abilities, and other key factors.

For more such analysis, read Profit Pulse.

For instance, while banks benefit from lower funding costs, they are not always efficient in servicing all segments, such as affordable housing loans.

For this discussion, we'll adopt the National Housing Bank (NHB) definition of affordable housing, which classifies any housing loan under ₹25 lakh as affordable. Aavas Financiers is the undisputed leader in this segment, though the last two years have been tough. However, the worst seems to be behind the company, positioning it for a turnaround.

Before understanding why, let’s evaluate the lender based on three key metrics:

Gross Non-performing Assets (GNPA %)

GNPA represents loans overdue for more than 90 days.

In housing finance, actual losses are low unless there’s fraud, as loans are secured by property. However, high NPAs hurt growth by lowering an HFC's credit rating, increasing borrowing costs, and weakening competitiveness.

Read this | Three companies winning the profitability game hands down

While the problem is less severe than in microfinance, where loans are often unsecured (as seen with Bandhan Bank), high GNPA remains an issue. Aavas Financiers consistently maintains better asset quality than its peers, even across different cycles.

Return on Equity (ROE %)

ROE is a crucial profitability measure, with 15% generally seen as a respectable benchmark. Among peers, higher ROE is typically favoured, as it signals greater profitability. The ROE profile of the six affordable housing finance players shows Aavas Financiers with the lowest ROE in FY24.

This is likely due to its lower yields compared to competitors like Aptus Value Housing, Home First, Aadhar, and India Shelter Homes. Additionally, Aavas has the highest operating expenditure (as a percentage of total assets) among its peers, and its PAT growth has been more subdued.

PAT Growth (FY20-24)

Aavas Financiers has seen the lowest PAT growth among peers over the last four years.

Part of this can be attributed to a leadership transition—both in chief executive and promoter—from Kedaara Capital to CVC Capital. With the new CEO, Sachin Bhinder, and new promoter firmly in place, concerns over the company's asset quality going forward remain.

Price-to-Book (P/B) Ratio

All six affordable housing finance players have seen sharp P/B re-ratings over the last four months. Aavas, currently at 3.88x, ranks 4th among peers.

Although this P/B ratio is relatively lower, it’s likely a reflection of management changes, slower PAT growth, and lower ROE. However, with the overhang lifted, Aavas is poised to improve ROE and focus on growth.

More here | Can Dixon Technologies break ₹1 trillion valuation barrier?

Signs of operational efficiency are already emerging. The opex-to-assets ratio improved from 3.68% to 3.27% between FY23 and Q1FY25. Additionally, sector-level boosts, such as the ₹10 lakh crore central assistance in the PMAY budget and potential rate cuts, should support both the sector and Aavas Financiers moving forward. How exactly this will unfold remains to be seen.

Note: This article primarily relies on data from www.Screener.in. In instances where data was unavailable, we have used alternative but widely accepted sources. The purpose of this article is to share interesting charts, data points, and thought-provoking opinions. It is not a recommendation. For investment considerations, please consult your advisor. This article is for educational purposes only.

Rahul Rao has been investing since 2014. He has helped conduct financial literacy programmes for over 150,000 investors, helped set up a family office for a 50-year-old conglomerate, and worked at an AIF focusing on small and mid-cap opportunities. He evaluates stocks through an evidence-based, first-principles approach, rather than relying on comforting narratives.

Disclosure: The writer holds stocks mentioned in this article.