Multiple triggers ahead for affordable housing finance companies

Mortgage finance remains a structural growth opportunity in India with a policy focus on affordable housing, housing shortages, low mortgage penetration, and rising incomes as drivers. Affordable Housing Finance Companies (AHFCs) serve the mass market, low-income segments, which is the least-serviced category, and to operate in this segment, the mortgage provider needs good assessment skills.

AHFCs and HFCs have also been increasing exposure in other mortgage segments (loan against property, developer loans among others). Investor interest in AHFCs has increased, given expectations of measures in the Budget to boost the affordable housing market as well as the growth trajectory.

India has a significant housing shortage (unfulfilled housing demand of 100 million units), low mortgage penetration (12.3 per cent of GDP as of FY23 and slated to rise to 15 per cent by FY25-end), rising per capita income, and therefore, affordability. This indicates a multi-year growth runway.

Affordable housing finance should increase its share in the mortgage market (loans below Rs 15 lakh form 15 per cent of the overall housing finance market). AHFCs have built good business models (with an average ticket size of Rs 10 lakh) with a focus on salaried or self-employed customers, in rural/semi-urban areas.

Strong distribution, niche customer segmenting, in-house underwriting and high productivity are key factors. Listed AHFCs have seen sharp de-rating in recent months mainly due to stake sales by large PE funds. But there are indications they can deliver long-term growth, while maintaining good asset quality, and enjoy a gradual decline in operating costs as they scale.

Overall, the Indian home loan market has expanded at a healthy annual rate of 13 per cent (growth in loans outstanding) over FY19-FY23 to Rs 29 trillion. An RBI report of 2019 estimated a housing shortage of 100 million units by 2022 with acute shortages in the lower income group (LIG) and economically weaker sections (EWS).

The total incremental demand required to address shortages was estimated at Rs 50-60 trillion. Overall home loans outstanding (excluding Pradhan Mantri Awas Yojana- PMAY loans) as of March’23 was Rs 31.1 trillion, indicating a huge opportunity. The total value of units to meet the shortage is estimated at Rs 149 trillion, of which Rs 58 trillion is estimated at aggregate loan demand.

The market share of the total housing market in FY23 was split between public sector banks (PSBs), which held 40 per cent followed by HFCs (34 per cent), private banks (20 per cent), others (4 per cent) and NBFCs (2 per cent). The affordable segment could see earnings CAGR of 19-28 per cent over FY23-26E.

Loan book diversification (geographical as well as products), wide distribution, differentiated customer segment focus, strong underwriting, improving productivity, and better valuation skills are important for evaluating AHFCs.  Aadhar is the most diversified AHFC with a presence in 20 states and union territories vs 13 for Aavas and HomeFirst.

Aadhar and Aavas are focussed on self-employed and informal salaried customers while Homefirst focuses on salaried customers. Aadhar also has one of the lowest opex ratios despite an increase in FY24 due to IPO-related expenses. On the asset quality side, the 3-year average credit cost for Aavas, Aadhar and Homefirst stand at 0.2 per cent, 0.3 per cent and 0.4 per cent respectively. The 3-year average return on equity (RoE) (FY22-24) of Aadhar is the highest at 17 per cent vs 14 per cent each for Aavas and Homefirst.

AHFCs are trading at a premium over prime HFCs, due to expectations of 20 per cent loan growth and 15-18 per cent RoE over the next decade. Aadhar is most tipped by analysts due to being at lower valuations compared to peers.