 "Kotak 'assertive' on affordable HFCs; Aadhar, Aavas, Aptus among top picks")
Kotak Institutional Equities is “assertive” on the medium-term prospects of the affordable housing finance sector, and it believes that the growth trajectory of these companies will remain significantly above the banking system. While loan growth has slowed and asset-quality trends are mixed, falling interest rates, better risk practices and reasonable valuations keep the risk-reward favourable, according to analysts. However, they remain watchful of overleverage and developments in export-oriented sectors.
“Valuations have come off to 2.2-2.6 times book and 14-18 times earnings FY2027E, for arguably mid-to-high teen RoE (on full leverage) and 20 per cent loan growth,” the brokerage highlighted.
Within the space, Kotak’s preferred names are Aadhar Housing Finance and Aavas Financiers, citing their positioning and growth potential. It also finds Aptus Value attractive for its superior profitability metrics.
“Overall, we see affordable housing finance companies (HFCs) as well placed to deliver structurally higher growth than the system, with improving processes and risk discipline,” Kotak noted, even as it advised investors to monitor leverage and asset-quality trends closely over the next few quarters. ALSO READ | 4 reasons why ICICI Sec initiates coverage on Travel Food Services with Buy
Growth slows, but companies still investing for the medium term
Kotak noted that disbursement growth for select affordable housing finance companies moderated sharply, to around 10 per cent in FY2025 from 19–34 per cent in the previous two years. Most listed players reported disbursement growth of 7 per cent to 10 per cent in the last two quarters, as against 20–25 per cent earlier.
Despite this, the management of housing finance companies indicated that the slowdown is largely transitional, Kotak said in its report. Additionally, they are continuing to open branches and expand their footprint.
One concern around the current phase of expansion is that a large part of incremental growth is being driven by poaching teams and deepening presence in established markets rather than entering new “white spaces”, according to Kotak Institutional Equities.
However, management of the housing finance companies defended this approach as calibrated, highlighting early-stage moves into newer states, local operating challenges and a preference for measured expansion over aggressive, untested growth.
While medium-term loan growth guidance has generally shifted to below 30 per cent — lower than the post-Covid surge — companies are keen to avoid plateauing and are positioning themselves to scale up sustainably, according to Kotak’s report. ALSO READ | Motilal Oswal ups Piramal Finance target, retains 'Buy' on retail-led surge
Asset quality: Stress inching up, but “risk-first” stance
Asset-quality performance across affordable housing finance companies has been mixed, noted Kotak, with stressed loans ticking up for several players over the last two quarters. Some of this could normalise, but worries around borrowers overleveraging have become a key talking point.
The spike in non-performing loans at micro, small, and medium enterprises (MSME)-focused non-banking financial companies (NBFCs) such as Five-Star and SBFC has also triggered fears of spillover into non-home loan books. However, most affordable housing finance companies have stressed the differences in business models and have highlighted a cautious approach to riskier segments outside core housing loans.
Kotak highlights that lenders are broadly adopting a “risk-first” stance in their near-term strategy, even as they continue to invest for growth.