Affordable housing finance sector is past its prime, says Elara Capital

Elara Capital flags scale challenges for the affordable housing sector, expects ROE to decline to 15-16 per cent from 18-20 per cent; check recommendations

The affordable housing finance sector is "past its prime," according to Elara Capital, which expects growth moderation ahead due to scale-related challenges and intensifying competition. The brokerage also flagged stretched valuations relative to fundamentals, warranting a more selective investment approach.

 

Elara has initiated coverage on Aptus Value Housing Finance with a 'Buy' rating and assigned 'Accumulate' ratings to Aadhar Housing Finance, India Shelter Finance, and Home First Finance. It has also upgraded Aavas Financiers to 'Accumulate' from 'Reduce', citing improved risk-reward dynamics.

 

The brokerage projects return on equity to decline to 15-16 per cent during FY25-28 from 18-20 per cent in FY21-24 (excluding Aptus), reflecting scalability challenges and rising operational costs.  CATCH STOCK MARKET UPDATES TODAY LIVE

 

Stock performance

Year-to-date, most AHFC stocks have outperformed broader markets. Aadhar Housing Finance gained 23 per cent, Aptus rose 22 per cent, India Shelter surged 28 per cent, and Home First Finance climbed 25 per cent. However, Aavas Financiers slipped 1.3 per cent. In comparison, the Nifty Realty index fell 12 per cent, while the Nifty50 rose 5 per cent.

Growth transition

AHFCs delivered 35-45 per cent asset under management (AUM) growth during FY15-24, driven by rural market penetration, technology enhancements, and workforce expansion. However, this growth is forecasted to moderate, as loan growth may be curtailed to around 20 per cent during FY25-28.

 

The brokerage analysis suggests companies that have scaled up beyond a ₹20,000 crore loan book, such as Aadhar Housing Finance and Aavas Financiers, are adapting their business models, as the scaled-up phase is characterised by rising competition, enhanced productivity requirements, and higher attrition and provisions.

 

In such a scenario, strategic geographic expansion and productivity improvements can help overcome these challenges, with Aptus and Home First Finance expected to lead the pack given their expanding footprints and superior productivity metrics.

Operational efficiency under pressure

Analysts anticipate that scaling challenges will likely impact operational metrics. The operating expense-to-assets ratio is projected to increase from 2.8 per cent during the high-growth phase of FY21-24 to over 3 per cent during the steady growth phase of FY25-28E.  ALSO READ | UBS bullish on cement: Top picks Ambuja, UltraTech, Dalmia for FY26 

This operational efficiency decline stems from the high operating expense model that poses scalability problems and limits pricing flexibility for AHFCs. To offset these cost pressures, companies will need hybrid models that blend technology with human interaction, coupled with in-house customer acquisition strategies. Here, Aptus and Home First Finance Company are well-positioned, according to Elara Capital; however, sustainability amid evolving market dynamics bears watching.

Margin stabilisation expected

As the sector focuses on maintaining high growth through elevated leverage, along with dissipating operating leverage benefits and increased competition, AHFC margins are expected to stabilise during FY26-27E.

 

Further, margin improvement stemming from yield-cost interplay can be achieved through careful assessment of business mix shifts and ratings revision. Niche business models of companies such as Aptus (100 per cent NBFC subsidiary structure) and India Shelter (higher share of loan against property) may continue to witness net interest margin (NIM) upticks.

Asset quality concerns

With an increase in scale, housing finance companies face the risk of elevated operating expenses and Stage 2 movement. Stage 2 are loans where there has been a significant increase in credit risk; they are not yet in default but show signs of deterioration. 

 

The high growth phase of FY21-24, led by new geographic forays, product portfolio expansion, and rising ticket sizes, saw Stage 2 spike of 10-20 basis points (bps) and credit cost 8- 10 bps. Elara reckons the next phase, characterised by regional and structural headwinds, would see Stage 2 surging to 3 per cent in FY25-28E from 2.5 per cent in FY21-24.  It expects a two-year lag in non-performing assets (NPA), credit cost rising 5 bps and over 10 bps, respectively, (FY26-28E). Among sector players, Home First Finance is considered best positioned to navigate these asset quality challenges.