| Price | Lot Size | Issue Date | Issue Size |
|---|---|---|---|
| ₹ 300 to ₹ 315 | 47 | 06th May, 2024 – 08th May, 2024 | ₹3,000.00 Cr |
Company Overview
Aadhar Housing Finance Ltd. (Aadhar) is one of India’s largest low-income housing finance companies. It serves the home financing needs of low-income sections of society and endeavours to empower underserved millions to own their first homes. The company has a well-established network of 487 branches, including 109 sales offices across 20 states and union territories. As of December 31, 2023, the company operated in 10,926 pin codes across India, which helped it to reach more than 90% of the country’s population and provide credit solutions that make homeownership accessible to everyone. The company secures financing from various sources, including term loans and cash credit/working capital facilities, proceeds from loans assigned, proceeds from the issuance of NCDs, refinancing from the NHB, and subordinated debt borrowings from banks, mutual funds, insurance companies, and other domestic development financial institutions, to meet capital requirements. The top five states and union territories in terms of contribution to AUM collectively accounted for 62.0% of AUM as of March 2023. According to CRISIL, the cumulative share of top five states in terms of AUM is much lower than other players in the peer set. The company has robust and comprehensive systems and processes for underwriting, collections, and asset quality monitoring. These systems and methods are technology-enabled across the front and back offices to digitize a loan’s entire life cycle from origination to closure. The loan applications from salaried customers go through regional processing units (“RPUs”) which increases efficiency, while those from self-employed customers, which require a close understanding of the customer and their cash flows, are managed regionally.
Objects of the issue:
The offer comprises fresh issue and offer for sale. The net proceeds from the fresh issue will be used towards the following purposes:
- Meeting future capital requirements towards onward lending; and
- General corporate purposes.
Investment Rationale:
Focused on the low-income housing segment in India and has the highest AUM and net worth among peers
Aadhar Housing Finance Limited is a housing finance company primarily focused on providing financial assistance to the low-income housing segment in India. According to CRISIL, the company had the highest AUM and net worth among analyzed peers in the nine months ended December 31, 2023. The company’s gross AUM increased from Rs. 133,271.0 million in FY21 to Rs. 147,777.9 million in FY22 and Rs. 172,228.3 million in FY23. With a widely dispersed branch and sales office network, no state accounts for more than 14.0% of gross AUM, while the top two states account for 27.6% of gross AUM as of December 31, 2023. Aadhar Housing Finance believes that its scale and diversified reach makes it well-positioned to cater to the specific needs of target customers across geographies in urban and semi-urban areas. The company primarily serves the underserved category of low-income or mid-income customers who may be salaried, working in the informal sector, or self-employed and running a small business. This presents a unique opportunity for them to leverage their position as the leading HFC focused on the low-income housing segment in terms of AUM and net worth and be the lender of choice for customers from this segment. Further, the low-income housing segment also benefits from various government and regulator initiatives to promote the construction of affordable housing projects and enable financing for customers of such projects.
Strong systems and processes for underwriting, collections and monitoring asset quality to improve collection efficiency
Aadhar Housing Finance has implemented a robust and comprehensive credit assessment, risk management, and collections framework to identify, monitor, and manage risks inherent in operations. They exclusively finance retail customers, mostly salaried individuals purchasing residential properties. Under this policy, the company routinely monitors performance against qualitative and quantitative metrics. These include capital, profitability, asset quality, credit, operational, liquidity, and compliance risk. They have split the underwriting process so that underwriting for salaried customers is undertaken at RPUs for quick turnaround and processing. All other customer segments at the branch level have specialized teams for credit underwriting, technical and legal due diligence, and fraud control. They have an experienced team of credit managers across branches to undertake credit assessments. The company’s well-defined systems and processes, along with proper checks and balances, enable credit approvals to be done by the appropriate underwriting authority. The company also streamlined sanction, pre-disbursement, and post-disbursement processes on the IT platform, which cover the entire customer lifecycle, from lead generation, credit underwriting, legal and technical processes to loan disbursement, monitoring, and collections. This continuous engagement led to gradual improvement in quarterly collection efficiencies.
Valuation and Outlook:
Aadhar Housing Finance focuses on the low-income housing segment, serving economically weaker and low-to-middle-income customers requiring small-ticket mortgage loans. The company operates a financially inclusive and customer-centric lending business and believes that its business model contributes significantly to the economic uplift of target customers by improving their standard of living. Housing loans are considered a safer asset class than other asset classes, such as vehicle loans, construction equipment loans and personal loans, as borrowing is usually for a self-occupied residential property of the borrower where the propensity of default is relatively lower. The company’s financial performance has remained consistent and resilient through various cycles in the Indian economy. The overall growth, portfolio performance, asset quality, and continued profitability during these periods demonstrate the strengths of the business and management team. On the financial front, Aadhar Housing Finance reported the second-highest return on equity in FY23 at 15.9%, followed by Aavas Financiers (14.1%) and Home First Finance (13.5%). During the same period, it also reported the third lowest employee cost at 2.10% in FY23 among the peers compared. Among the peer sets analyzed, Aadhar Housing Finance reported annualized yield on advance and return on equity at 14.2% and 18.4%, respectively, in nine months ended December 31, 2023. As we advance, we expect operational performance to improve, led by the dominant low-income housing segment, low cost of borrowing, and higher return ratio among peers. At a higher price band of Rs. 315, the stock is valued at 3.1x P/BVPS on FY23 book value, which we feel is fair compared to its peers. We, therefore, recommend a SUBSCRIBE rating for the issue.
Key Risks
- The company is vulnerable to interest rate volatility and may face interest rate and maturity mismatches between assets and liabilities in the future which may cause liquidity issues.
- The company’s inability to comply with the financial and other covenants under its debt financing arrangements could adversely affect its business, results of operations, and financial condition.
