Aadhar Housing rallies 6%, hits record high; JM Financial sees more upside

JM Financial Institutional Securities has initiated coverage on Aadhar Housing Finance with a 'Buy' rating and a target price of Rs 600

Aadhar Housing Finance (Aadhar) share price hit a record high of Rs 493.10, rising 6 per cent on the BSE in Monday's intraday trade, after JM Financial Institutional Securities initiated coverage on the largest listed affordable housing financier with a 'Buy' rating and a target price of Rs 600.

The stock of the housing finance company surpassed its previous high of Rs 486.75, hit on July 23, 2024. Aadhar made its stock market debut on May 15, 2024. Currently, the stock is trading 57 per cent higher than the issue price of Rs 315 per share.

Aadhar enjoys a strong parentage of its Promoter Company and benefits from the resources, relationships and expertise of Blackstone, one of the world's leading investment firms. Blackstone's asset management businesses include investment vehicles focused on real estate, private equity, public debt and equity, growth equity, opportunistic, non-investment grade credit, real assets, and secondary funds, all on a global basis.

Aadhar Housing Finance remains focused on the low-income housing segment mortgage market and economically weaker and low-to-middle income group segment of the economy. This approach of financial inclusion for these customers, together with digital expansion, will enhance the company's loan portfolio, JM Financial said.

Aadhar Housing Finance has a diversified presence across 21 states, where it aims to go deeper into geographies going forward. This, the brokerage said, should keep growth healthy and well-balanced. Its graded branch expansion strategy allows it to set footprints in tier-4/5 areas at cheaper costs while use of Aadhar Mitra (lead generation channel) and smart use of tech to handle day-to-day operations significantly contribute to operational efficiencies.

The housing finance sector, especially in the low-income segment, is set to expand significantly. Anticipated to grow at a compound annual growth rate (CAGR) of 13-15 per cent from fiscal 2023 to 2026, the market is demonstrating resilience. This growth is supported by the increasing robustness of the rural economy and a shift towards digital lending platforms, which enhance transparency and affordability in the housing sector. 

"With the urban population projected to increase, the demand for urban housing is set to rise, supported by an improving per capita GDP, which experienced a 6.8 per cent rise in fiscal 2024. This growth underscores the government's effort to position India as an upper-middle-income economy. The Union government’s Pradhan Mantri Awas Yojana (Urban) has been and will be a key factor to boost demand in urban locations," Aadhar Housing Finance had said in its FY24 annual report.

Against this, JM Financial believes a strong asset under management (AUM) growth, led by deeper geographical penetration and government push on housing, largely steady net interest margins (NIMs) led by higher floating rate loans, operating leverage from smart expansion strategies and tech innovation and benign credit environment, should aid strong return ratios going ahead.

"As we move towards the rate cut cycle, NBFCs with higher floating rate assets are likely to encounter margin compression. Aadhar has 80 per cent of its assets and 78 per cent of its liabilities on floating rate which will lead to pass through of initial rate cuts. However, potential ratings upgrade (led by strong performance and continued parent (Blackstone L.P.) should aid borrowing costs in the medium term. On the assets side, shift towards self-employed (43 per cent of AUM) and LAP (25 per cent of AUM) will support yields, offering cushion against increase in cost of funds," the brokerage firm said in its coverage initiation report.

Aadhar Housing Finance's inability to manage NIMs amid increasing competition in the affordable housing space and inability to maintain asset quality in its self-employed as well as informal salaried book are key risks to our call, analysts said.