Housing finance stocks to buy: Nirmal Bang suggests Aavas, Home First Finance on healthy growth prospects

The affordable housing finance sector may be on the cusp of strong growth owing to a significant housing shortage, rising per capita income and low mortgage penetration in India, according to Brokerage firm Nirmal Bang.

According to the brokerage firm, amid sectoral tailwinds, those players who have geographically diversified portfolios, deep distribution focus, niche customer segments and granular underwriting models look best placed to capture the opportunity.

The brokerage firm is positive about Aavas Financiers and Home First Finance (HFFC) and they are its top picks in the space.

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While Home First Finance shares have risen approximately 23 per cent in the past year, slightly below the 25 per cent gain seen in the equity benchmark Nifty 50, Aavas Financiers has faced challenges. Their share price has declined by as much as 14 per cent over the same period.

Nirmal Bang Equities has initiated coverage with a buy recommendation on Home First Finance Company, pegging the target price of ₹1,150, valuing the stock 3.6 times FY26E P/ABV (price-to-adjusted book value).

Besides, Nirmal Bang has retained a buy call on Aavas Financiers with a target price of ₹1,775, valuing it three times December FY26E P/ABV.

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"India’s significant housing shortage (100 million units housing demand), low mortgage penetration (12.3 per cent of GDP as of FY23), rising per capita income and affordability indicate huge scope for growth over a multi-year horizon," said Nirmal Bang.

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The brokerage firm believes the affordable housing finance segment is set to increase its share in the overall mortgage pie.

Moreover, the brokerage firm highlighted that the government's strong emphasis on “Housing for All” along with several other initiatives to drive homeownership means a conducive growth environment for affordable housing finance companies.

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"Deep distribution, niche customer segment, in-house underwriting and improving productivity are key success factors for affordable housing finance companies. Despite an unfavourable borrowing profile and high perceived risk in the customer segment, return ratios of these entities remain strong," Nirmal Bang said.

However, the brokerage firm underscored that despite healthy growth trajectory and return ratios, listed affordable housing finance companies have seen a sharp de-rating in recent months.

"Apart from top management attrition (Aavas), stake sales by large PE funds have led to underperformance," Nirmal Bang observed.

Nevertheless, the brokerage firm remains positive on the ability of these companies to deliver long-term growth, while maintaining a decent asset quality profile, factoring in a gradual decline in operating costs as they build scale.

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Nirmal Bang expects earnings CAGR of 19-28 per cent for these companies over FY23-26E led by continued growth momentum, geographical expansion and stable asset quality metrics.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.