Aadhar Housing up 6% as Kotak Institutional initiates coverage with 'Buy'

The surge in Aadhar Housing share came after Kotak Institutional Equities initiated coverage on the company with 'Buy' rating for a target price of Rs 550, marking an upside of 41%.

Aadhar Housing in focus: Financial service company Aadhar Housing shares surged as much as 6.29 per cent to hit an intraday high of Rs 414.65 apiece on Tuesday, September 3. 

The surge in Aadhar Housing share price came after domestic brokerage Kotak Institutional Equities initiated coverage on the company with a ‘Buy’ rating for a target price of Rs 550, marking an upside potential of 41 per cent.

“We initiate coverage on Aadhar Housing with a ‘Buy’ rating and RGM-based fair value (FV) of Rs 550 per share (41 per cent upside). Aadhar stands out versus most affordable peers due to a larger balance sheet, longer vintage and superior return on equities (RoEs). On the other hand, its loan growth (21 per cent CAGR during FY2024-27E) is comparable more to mature housing finance companies than fast-growing smaller affordable housing finance companies (HFCs),” Kotak Institutional Equities analysts said in a note.

 

Meanwhile, here are the top factors for initiating coverage:

Strong presence

Aadhar Housing, with an asset under management (AUM) of Rs 21,100 crore for FY24, is the largest among affordable HFCs compared, analysts highlighted. Holding a 7 per cent market share in FY24, Aadhar benefits from a well-diversified customer base (57 per cent salaried, 43 per cent self-employed) and a broad geographic footprint (15 per cent of AUM from Uttar Pradesh, the largest state). 

Analysts pointed out that the company's growth strategy includes expanding its presence through various branch formats and pioneering initiatives like the Aadhar-mitra programme. This approach is expected to drive a 21 per cent compound annual growth rate (CAGR) in AUM from FY2024 to FY2027. 

Aadhar’s robust underwriting process—centralised for salaried profiles and decentralised for informal ones—combined with a dedicated collections team, analysts reckon, supports its low non-performing loan (NPL) ratios. 

Over FY2021-24, the overall credit cost has been in the range of 0.2-0.4 per cent, comparable to listed peers (0.1-1.1 per cent). Although its gross stage-2 loans are slightly higher than peers, gross stage-3 loans are in line, the brokerage added.

Projected RoE recovery

Kotak Institutional Equities analysts anticipate Aadhar Housing will achieve a 22 per cent earnings per share (EPS) CAGR from FY2024-27, driven by 21 per cent AUM growth, stable spreads, increased fee income, and improved operating leverage. 

RoE is expected to rebound to high-teens levels post-IPO, following a temporary reduction in H1FY25, as leverage increases and core profitability (RoA of 4.4-4.7 per cent) remains strong. 

Despite rising funding costs and competitive pressures in the affordable housing sector, Aadhar's focus on expanding into underserved areas should mitigate these challenges. Additionally, higher income from insurance distribution will bolster net interest income (NII). 

The company's shift towards non-home loans (25 per cent of AUMs in FY2024), along with a higher share of self-employed (43 per cent of AUMs) and informal (44 per cent of AUMs) profiles, analysts believe, is expected to enhance profitability.

On the flipside, potential risks include decreased net interest margins (NIM) or slower growth due to heightened competition in major centres or from larger HFCs targeting the affordable housing segment. 

Effective implementation of growth strategies, especially with Aadhar's diverse approach and appraisal methods, analysts noted, poses a risk. 

Furthermore, the rising share of self-employed borrowers could impact asset quality, and there are potential concerns related to cross-default and cross-acceleration clauses in loan agreements.

At 9:50 AM, Aadhar Housing share was trading 4.33 per cent higher at Rs 407 per share. In comparison, BSE Sensex was trading 0.12 per cent lower at 82,463.11 levels.