IPO: Aadhar Housing Finance

Aadhar Housing Finance Company (HFC) is coming up with its IPO (initial public offering) on May 8, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: It reported a three-year average ROE > of 15 per cent. Moreover, it maintained an average gross NPA (non-performing assets) level of 1.3 per cent in the last three financial years.
  
• Growth: Over the last three years, its AUM (assets under management) grew by 14 per cent annually and PAT (profit after tax) by 27 per cent annually.
  
• Valuation: The stock is valued at a P/E and P/B of 19.5 and 2.6 times, respectively, compared to its peers' median P/E and average P/B of 27.16 and 3.47 times.
  
• Overview: Rising disposable incomes, the nuclearisation of families, and government support will help drive the demand for housing. According to an RBI report, the housing shortage in India is estimated to be around 10 crore units by 2022. Most of this shortage is among the lower-income groups (LIGs) and economically weaker sections (EWS). This is set to boost the demand for housing finance companies like Aadhar that cater specifically to low-income groups.

About Aadhar Housing Finance

Incorporated in 1990, Aadhar Housing Finance provides low-income/affordable housing loans (average loan value less than Rs 15 lakh). With an extensive network of 487 branches, it has a presence in 20 states and union territories. Formerly known as DHFL Vysya Housing Finance, its ownership was transferred to BCP Topco, which belongs to Blackstone Group, in 2019.

Strengths of Aadhar Housing Finance

• Geographical diversification: The company is present in 20 states and union territories, the highest among its peers, with no single state contributing more than 15 per cent to its AUM. Thus, the company is relatively less vulnerable to political or social upheavals in a particular region.
  
• Prudent lending norms: Although the maximum loan-to-value (LTV) limits for a property with a market value up to Rs 30 Lakh are as high as 90 per cent, the company maintained an average LTV of 57 per cent during FY21-23, showing its cautious approach to housing finance. Its average GNPA (gross non-performing assets) ratio for the FY21-23 period stood as low as 1.3 per cent.

Weaknesses of Aadhar Housing Finance

• Slow sectoral growth: The low-income housing finance sector has grown at a meagre 3 per cent annually during FY18-23, compared to the overall housing finance sector's growth of 14 per cent during the same period. This is primarily due to the overall subdued demand for low-cost housing and the highly unorganised state of financing in this segment. However, various affordable housing schemes by the government are expected to boost the demand.

Risk report

Management

• Is Aadhar Housing Finance free from regulatory penalties?
  Yes. The management is free from regulatory penalties.
  
• Does the company provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  No. Its provision coverage ratio stood at 31 per cent as of December 31, 2023.
  
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  Yes. ESOPs (employee stock ownership plans) constitute a major part of top-level management's remuneration.

Financial strength and stability

• Does Aadhar HFC have a fresh slippage-to-total advances ratio of less than 0.25 per cent? (fresh slippages are loans that became NPAs in the last financial year)
  No. The ratio of net slippage to total advances stood at 0.39 per cent for nine months ending December 31, 2023.
  
• Did the company generate a current return on equity (RoE) of more than 12 per cent and a return on assets (RoA) of more than 1 per cent?
  Yes. The company reported an ROE and ROA of 19 and 4 per cent, respectively, on a TTM basis.
  
• Has the company increased its loan book by 20 per cent annually over the last three years?
  No. It has increased its loan book by 14 per cent annually between FY21 and FY23.
  
• Has Aadhar HFC increased its net interest income (NII) by 20 per cent annually over the last three years? (Net interest income is the difference between the revenue generated from an HFC's assets and the expenses associated with paying out its liabilities.)
  Yes. It achieved an annualised growth rate of 28 per cent in net interest income between FY21 and FY23.
  
• Is there a direct relationship between the increase in the loan book and the increase in net interest income (NII)?
  Yes, there is a direct relationship. The growth in net interest income has exceeded the growth of advances, primarily due to increasing spreads (the difference between the yield on advances and the cost of borrowings.)
  
• Is Aadhar HFC's capital adequacy ratio more than 15 per cent?
  Yes. It reported a capital adequacy ratio of 39.7 per cent as of December 31, 2023.
  
• Can the company run its business without relying on any external funding in the next three years?
  Yes. Its capital adequacy ratio stood at 39.7 per cent as of June 30, 2023. The financial strength, coupled with the IPO proceeds, would ensure the sustainability of business operations without external help.
  
• Did the company generate an average net interest margin (NIM) of over 3 per cent in the last two years? (Net interest margin or NIM is the difference between the interest income earned and the interest paid by an HFC or financial institution relative to its interest-earning assets like cash.)
  Yes. Its average three-year net interest margin (NIM) stood at 6.9 per cent.
  
• Is Aadhar HFC's average gross NPA ratio (Gross NPAs/Total advances) over the last three years less than 1 per cent and the average net NPA ratio (Net NPAs/Total advances) less than 0.5 per cent?
  No. It reported an average gross NPA of 1.3 per cent and an average net NPA of 0.9 per cent in the last three years.
  
• Does the company have a cost-to-income ratio of less than 50 per cent?
  Yes. Aadhar HFC reported a cost-to-income ratio of 38.1 per cent in FY23.

Growth and business

• Will Aadhar HFC be able to scale up its business?
  Yes. The company will be able to scale up its business due to the government's policy support and higher under penetration of organised lending in low-income housing.
  
• Does the company have a loan book of more than Rs 1,00,000 crore?
  No. It reported an AUM of Rs 19,865 crore as of December 31, 2023.
  
• Does Aadhar HFC have a recognisable brand truly valued by its customers?
  No. Many banks, NBFCs (non-banking financial corporations) and SFBs (small finance banks) cater to the housing finance segment.
  
• Does Aadhar HFC have a credible moat?
  No. It operates at a small scale in a commoditised market.
  
• Is the level of competition faced by the company relatively low?
  No. There are many banks, SFBs and NBFCs present. Although the sector grew just 3 per cent annually during FY18-23, if the growth accelerates, there is a high chance that banks (with the lowest cost of funds) will compete aggressively in this market.

Valuations

• Is Aadhar HFC's price-to-earnings ratio lower than its peers' median level?
  Yes. It is valued at a price-to-earnings ratio of 19.5, lower than its peers' median level of 27.16.
  
• Is the company's price-to-book ratio lower than its peers' average level?
  Yes. It is valued at a price-to-book ratio of 2.6, lower than its peers' median level of 3.47.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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