Aadhar Housing Finance stock surges 6% as Kotak Institutional initiates coverage with ’buy’ rating. Projects 41% upside

Shares of Aadhar Housing Finance spiked up 6.3% 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, which signals an upside potential of 41% 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% CAGR during FY2024-27 is more in line with mature housing finance companies than with smaller, faster-growing affordable housing finance companies.

Established in 2010, Aadhar has a higher vintage than most listed peers, originating 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% of its exposure, compared to Home First, where 31% of its loan book is concentrated in Gujarat.

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

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 AUM (AAUM) ratio, Aadhar ranks third with a ratio of 3.1%, trailing Aptus and Home First, both at 2.7%.

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%, which is lower than most peers’ 2.7–7.6%, likely due to the company’s focus on the salaried segment. However, Aadhar’s return on equity (RoE) was higher at 18.4% in FY2024, although Kotak expects this to moderate to 16.9–17.6% in FY2025-27E due to capital issuance during the IPO. The brokerage projects that Aadhar will deliver a 21% loan book CAGR during FY2024-27E, compared to 22-30% for other listed affordable HFCs.

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

However, disbursement growth picked up to 48% in FY2023, and AUM growth followed in FY2024, reaching 23%. 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—who are typically more resilient to economic cycles—the company has gradually increased its loans to self-employed customers, rising from 36% in FY2021 to 43% in FY2024.

This shift has also involved a greater emphasis on the informal segment, with the share of informal self-employed customers growing to 33% in 1HFY24 from 20% in FY2021. Despite higher yields from self-employed customers (16.1% vs. 12.5% for salaried in 1HFY24), Kotak highlights that the gross NPAs for self-employed customers have been more volatile, ranging from 1.7% to 2.8%, compared to 0.7% to 1.3% for salaried customers.

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

For long-term growth, Kotak assumes a rate of 7%, which is 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.