Aadhar Housing Finance share price jumps 6% after Kotak Institutional’s ’buy’ rating, sees 41% upside

Domestic brokerage firm Kotak Institutional Equities has initiated coverage on Aadhar Housing Finance with a 'buy' rating and set a target price of 550 apiece, which implies an upside potential of 41.4% from the stock's previous closing price of 390 apiece.

A Ksheerasagar
Published3 Sep 2024, 11:24 AM IST
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Aadhar Housing Finance surges 6.3% as Kotak Institutional initiates coverage with 'buy' rating. TP set at  <span class='webrupee'>₹</span>550
Aadhar Housing Finance surges 6.3% as Kotak Institutional initiates coverage with ’buy’ rating. TP set at ₹550(Pixabay)

Shares of Aadhar Housing Finance spiked 6.3 percent in today's intraday deals to 414.50 apiece after the domestic brokerage firm Kotak Institutional Equities initiated coverage on the stock with a 'buy' rating and set a target price of 550 apiece. This ‘buy’ rating signals an upside potential of 41 percent from the stock's previous closing price of 390. 

The brokerage noted that Aadhar stands out among its affordable housing finance peers due to its larger balance sheet, longer operational history, and superior return on equity (RoE). Kotak also pointed out that Aadhar's projected loan growth of 21 percent CAGR during FY2024-27 is more in line with mature housing finance companies than smaller, faster-growing affordable housing finance companies.

Also Read | Nomura sets record target price for Aadhar Housing Finance, sees 20% upside

Established in 2010, Aadhar has a higher vintage than most listed peers. It originated as a partnership between Dewan Housing Finance and IFC to improve mortgage penetration in underserved segments of India.

Larger and more diversified versus peers

Kotak highlights that Aadhar Housing Finance stands out among its peers as the largest HFC (Housing Finance Company) focused on affordable housing finance, with an AUM of 211 billion in FY2024, slightly surpassing that of Aavas. Kotak notes that Aadhar’s loan book is more geographically diversified, with its largest state, Uttar Pradesh, accounting for only 15 percent of its exposure, compared to Home First, where 31 percent of its loan book is concentrated in Gujarat.

Additionally, Aadhar has a higher proportion of salaried customers at 57 percent, compared to the 26 percent to 68 percent range seen in most of its peers.

Also Read | Bajaj Housing Finance IPO: Price band set at ₹66-70 per share; check details

Kotak also points out that Aadhar has the third-highest branch productivity, with 428 million AUM per branch, following Aavas at 465 million and Home First at 740 million. On the cost-to-average Assets Under Management (AAUM) ratio, Aadhar ranks third with a ratio of 3.1 percent, trailing Aptus and Home First, both at 2.7 percent.

The brokerage also mentions that Aadhar benefits from the maturity of its branches, while Home First operates a decentralized model that is not directly comparable.

Higher RoEs than faster-growing peers, 20%+ growth

Kotak notes that Aadhar has a return on assets (RoA) of 4.2 percent, lower than most peers', at 2.7 percent to 7.6 percent, likely due to the company's focus on the salaried segment. 

However, Aadhar's return on equity (RoE) was higher at 18.4 percent in FY2024, although Kotak expects this to moderate to 16.9 percent to 17.6 percent in FY2025-27E due to capital issuance during the IPO. The brokerage projects that Aadhar will deliver a 21 percent loan book CAGR during FY2024-27E, compared to 22 percent to 30 percent for other listed affordable HFCs.

Also Read | Bajaj Housing Finance IPO: GMP jumps after announcement of subscription date

Kotak also noted that Aadhar faced several challenges during FY2020-22, resulting in subdued AUM growth of 11percent to 17 percent, compared to 14 percent to 48 percent for its listed peers.

However, disbursement growth picked up to 48 percent in FY2023, and AUM growth followed in FY2024, reaching 23 percent. Despite being large, with an AUM of 211 billion in FY2024, Kotak expects Aadhar to grow at a slower pace than its peers.

Shifting toward self-employed and informal

Kotak observes that Aadhar Housing Finance continues to focus on India's low-income mortgage market, catering to both salaried and self-employed individuals in economically weaker and low-to-middle-income groups. The brokerage notes that while Aadhar has traditionally targeted salaried customers—typically more resilient to economic cycles—the company has gradually increased its loans to self-employed customers, rising from 36 percent in FY2021 to 43 percent in FY2024.

Also Read | Centrum Broking initiates coverage on these 3 affordable housing finance companies with a ’buy’ rating

This shift has also involved a greater emphasis on the informal segment, with the share of informal self-employed customers growing to 33 percent in 1HFY24 from 20 percent in FY2021. 

Despite higher yields from self-employed customers (16.1 percent vs 12.5 percent for salaried in 1HFY24), Kotak highlights that the gross NPAs for self-employed customers have been more volatile, ranging from 1.7 percent to 2.8 percent, compared to 0.7 percent to 1.3 percent for salaried customers.

Kotak estimates that Aadhar Housing Finance will experience medium-term earnings growth of 18 percent (FY2026-36E) on a high base, with growth expected to moderate to 13 percent over the next 10 years and further to 11 percent in the following decade. 

For long-term growth, Kotak assumes a rate of 7 percent, broadly in line with other HFCs.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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First Published:3 Sep 2024, 11:24 AM IST
Business NewsMarketsStock MarketsAadhar Housing Finance share price jumps 6% after Kotak Institutional’s ’buy’ rating, sees 41% upside

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