Affordable housing financiers now attractively valued after correction

Affordable housing financiers face slower growth, higher delinquencies and weak branch productivity despite strong demand, even as falling CoF supports spreads and valuations turn attractive

The affordable housing financiers (AHF) segment is a long-term structural story, given low mortgage penetration and favourable policy. The industry is looking at stricter underwriting and a focus on branch productivity.

 

The Q2FY26 was muted and it led to price corrections. Demand is improving but concentrated in larger-ticket loans. Around 80 per cent are in the ₹10 lakhs-₹1 crore ticket size with faster growth in higher ticket sizes.

 

Interest rates have declined meaningfully. But AHFs faced headwinds in Q2, marked by slow disbursements, elevated delinquencies and resultant increased credit costs. AHFs may also have scalability challenges and there’s rising competition. 

All AHFs reported moderation in asset under management or AUM growth by 600-700 basis points (bps) in Q2FY26 and H1FY26 versus respective prior growth rates across the last three financial years.

 

In Q2FY26 Home First’s AUM grew 26 per cent year-on-year (Y-o-Y) vs. 33 per cent annual growth or CAGR in FY23-25. Similarly, Aptus reported 22 per cent Y-o-Y AUM growth vs 27 per cent CAGR in FY23-25. Aavas reported 16 per cent Y-o-Y AUM growth vs 20 per cent CAGR reported in FY23-25.

 

The moderation is partly due to base effect but lower branch productivity and cautious underwriting plays its part.

 

Disbursement lagged AUM growth. Aptus’s Q2 disbursements grew only 3 per cent Y-o-Y while Home First’s grew 9.6 per cent while Aavas grew 21 per cent Y-o-Y.  This indicates conservative credit filters. Aptus saw a shift toward ticket sizes above ₹70 lakh, and Aadhar sounded caution while Homefirst saw tariff-led uncertainty disrupting disbursements.

 

Going by trends, AHFs growth rates may normalise to 17-20 per cent AUM CAGR during FY25-28 vs 35 per cent in the past five years. On the asset quality front, 1+DPD (payment delay of one day on loan) and 30+DPD (30day or more delay) remains high for most AHFs in H1FY26.

 

Aptus has industry leading spreads of 8.9 per cent while Home First’s spread is 5.2 per cent, Aavas’s spread is 5.23 per cent and India Shelter’s spread is 6.4 per cent.

 

The Q2FY26 also saw higher bounce rates of 20-22 per cent, which may push credit cost to 35-50bps (the historical range is 20-30bps).  In Q2FY26, Aadhar saw a higher 1+DPD at 7 per cent. While 1+DPD for Aptus remains elevated at 5-6 per cent average, Gross Stage 3 has been restricted to below 1.3 per cent.

 

Demand is robust but balancing growth with controlled opex and credit costs in the below ₹10 lakh segment is a challenge.

 

Return on equity (RoE) may therefore be curtailed to 16 per cent by FY28. The AHF also overlaps MSME segment (with about 20 per cent exposure), and that’s a further issue since MSME has credit quality challenges. Players in this space must invest in high levels of human verification, to control credit risks.

 

Despite the slowdown, AHFs do deliver high double digit AUM growth and profitability.

 

On the positive side, spreads are improving as cost of fund or CoF declines. AHFs have accelerated branch expansion but productivity at new branches is low.

 

All major AHFs maintain Stage 3 around 1-2 per cent. Aadhar’s Stage 3 is about 1.5 per cent, Aavas at 1.24 per cent, Aptus (1.55 per cent), Home First (1.9 per cent) and India Shelter is at 1.2 per cent. These ratios are stable but near the upper end of guidance.

 

However, Aadhar has reduced Stage 2 to 3.5 per cent from 3.7 per cent Q-o-Q, whereas India Shelter’s Stage 2 has risen to 3.8 per cent from 3.4 per cent Q-o-Q. Aptus has elevated Stage 2 at 4.8 per cent albeit improved Q-o-Q from 5.0 per cent in Q1FY26.

 

The ECL coverage on Stage 3 assets ranges from 20 per cent for Home First to 34 per cent for Aadhar. Credit costs are 66 bps for Aptus (attributed to change in write off policy) and Home First (53bps) while Aavas has credit cost of 19bps.

 

AHF valuations have corrected down by 2-3 per cent in the past six months vs the Index which is up 5.3 per cent. Given long-term demand, this could be an attractive entry point. Investors must monitor Gross Stage 2 (GS2) trends, and the trajectory of CoF, along with new branch productivity.