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Buy Aadhar Housing Finance; target of Rs 625: ICICI Securities

ICICI Securities Recommends 'Buy' on Aadhar Housing Finance with Target Price of Rs 625

In a recent research report, ICICI Securities has initiated coverage on Aadhar Housing Finance Limited (AHFL), a prominent player in the affordable housing finance sector in India, with a strong 'Buy' recommendation. The brokerage has set an ambitious target price of Rs 625 per share, implying a significant upside potential from the stock's current market levels. This optimistic outlook is grounded in AHFL's robust business model, its focus on underserved markets, and promising growth trajectories amid India's evolving housing finance landscape. As the affordable housing segment continues to gain traction, driven by government initiatives and increasing urbanization, AHFL stands out as a key beneficiary, according to the analysts.

Aadhar Housing Finance, established in 2010, specializes in providing housing loans to low-income and economically weaker sections (EWS) of society. The company operates primarily in semi-urban and rural areas, where access to formal credit remains limited. With a network spanning over 300 branches across 20 states and union territories, AHFL has built a niche in catering to borrowers who are often overlooked by larger banks and non-banking financial companies (NBFCs). Its loan portfolio is predominantly secured by self-occupied residential properties, with an average ticket size of around Rs 9-10 lakh, making it a true affordable housing financier. ICICI Securities highlights that AHFL's customer base is diverse, including self-employed individuals, small business owners, and salaried employees from lower income brackets, which adds resilience to its operations.

The brokerage's positive stance is bolstered by AHFL's impressive financial performance in recent years. In the fiscal year ending March 2024 (FY24), the company reported a net interest income (NII) growth of approximately 25%, driven by a healthy expansion in assets under management (AUM). AUM stood at over Rs 18,000 crore, reflecting a compound annual growth rate (CAGR) of around 20% over the past five years. This growth has been achieved while maintaining strong asset quality, with gross non-performing assets (GNPA) at a manageable 1.2% and net NPA even lower at 0.8%. ICICI Securities attributes this to AHFL's rigorous underwriting processes, which include on-ground verification and a focus on cash flow-based lending rather than collateral value alone. The company's provision coverage ratio remains healthy at over 60%, providing a buffer against potential credit risks.

One of the key drivers for the 'Buy' rating is AHFL's strategic positioning in the affordable housing market, which is poised for exponential growth. The Indian government's flagship schemes like Pradhan Mantri Awas Yojana (PMAY) and the Credit Linked Subsidy Scheme (CLSS) have created a conducive environment for companies like AHFL. These initiatives aim to provide housing for all by 2025, with subsidies and incentives that make home ownership more accessible for low-income groups. ICICI Securities estimates that the affordable housing finance market could grow at a CAGR of 15-20% over the next five years, outpacing the overall housing finance sector. AHFL, with its specialized focus, is expected to capture a larger market share, potentially increasing its AUM to Rs 30,000 crore by FY27.

Analysts at ICICI Securities also praise AHFL's operational efficiency and cost management. The company's operating expense to AUM ratio has been declining steadily, thanks to digital initiatives and branch optimization. For instance, AHFL has invested in technology platforms for loan origination, customer onboarding, and collections, which have reduced turnaround times and improved customer satisfaction. This digital push is expected to further lower costs and enhance scalability. Moreover, AHFL's funding profile is diversified, with borrowings from banks, capital markets, and international lenders, ensuring stable and cost-effective access to funds. The cost of funds has been trending downwards, contributing to net interest margin (NIM) expansion. In FY24, NIMs were around 7-8%, which is higher than many peers in the housing finance space, underscoring AHFL's profitability edge.

Looking ahead, ICICI Securities projects strong earnings growth for AHFL. They forecast a revenue CAGR of 22% and a profit after tax (PAT) CAGR of 25% over FY24-FY26. This is based on assumptions of continued AUM expansion, stable asset quality, and margin improvements. The return on assets (RoA) is expected to hover around 3.5-4%, while return on equity (RoE) could reach 18-20% by FY26, making it an attractive investment proposition. The target price of Rs 625 is derived using a price-to-book value (P/BV) multiple of 2.5x on the estimated FY26 book value, which the brokerage deems justified given AHFL's growth prospects and superior return ratios compared to competitors.

However, the report does not shy away from acknowledging potential risks. ICICI Securities notes that the affordable housing segment is sensitive to economic cycles, interest rate fluctuations, and regulatory changes. For example, any slowdown in rural income growth or delays in government subsidies could impact loan disbursements. Additionally, competition is intensifying, with larger players like HDFC and LIC Housing Finance entering the affordable space, which might pressure margins. Asset quality risks persist, especially in a high-inflation environment where borrowers' repayment capacity could be strained. Geopolitical uncertainties and liquidity conditions in the NBFC sector are also flagged as watch points. Despite these, the brokerage believes AHFL's conservative lending practices and strong parentage—backed by Blackstone Group—mitigate many of these concerns. Blackstone's involvement provides not just capital but also strategic guidance, enhancing governance and risk management.

From a valuation perspective, AHFL is currently trading at around 1.5-1.8x its FY25 estimated book value, which ICICI Securities views as undervalued relative to its growth potential. The stock has shown resilience post its IPO in May 2024, where it listed at a premium and has since delivered decent returns. The brokerage compares AHFL favorably with peers like Aavas Financiers and Home First Finance, noting that while Aavas commands a higher multiple due to its longer track record, AHFL's lower valuations offer better entry points for investors. The 'Buy' call is thus positioned as a long-term bet on India's housing story, particularly in the underserved segments.

In conclusion, ICICI Securities' initiation of coverage on Aadhar Housing Finance with a 'Buy' rating and Rs 625 target underscores the company's solid fundamentals and bright future in the affordable housing domain. As India pushes towards inclusive growth and urbanization, AHFL is well-placed to thrive, delivering value to shareholders through consistent growth and prudent risk management. Investors are advised to consider this opportunity, keeping in mind the inherent risks of the sector. This recommendation aligns with broader market sentiments favoring housing finance stocks amid economic recovery and policy support.

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[ https://www.moneycontrol.com/news/business/earnings/buy-aadhar-housing-finance-target-of-rs-625-icici-securities-13343745.html ]