Aadhar Housing Finance Limited – IPO Note – Equity Research Desk

Company overview

Aadhar Housing Finance Ltd. is a retail focused Housing Finance Company (HFC) focused on the low-income housing segment (ticket size less than Rs.1.5 million), serving economically weaker and low-to-middle income customers in India. The company offers a range of mortgage-related loan products, including loans for residential property purchase and construction; home improvement and extension loans; and loans for commercial property construction and acquisition. As per CRISIL report, the company has the highest AUM and net worth among analyzed peers in FY21, FY22, FY23 and nine months ended December 31, 2022 and December 31, 2023. As of 31 March 2023, the company has presence in 20 states and union territories (highest amongst the peers as analyzed by CRISIL).  The average ticket size of loans was Rs.0.9 million and Rs.1.0 million with an average loan-to-value of 57.7% and 58.3%, as of December 31, 2022 and December 31, 2023, respectively. 

Objects of the offer

• To meet future capital requirements towards onward lending.

• General corporate purposes.

• Achieve the benefits of listing Equity Shares on the Stock Exchanges.

• Carry out offer for sale of Equity Shares worth up to Rs.2,000 crore by the Selling Shareholders.

Investment Rationale

• Dominant position – The company had the highest AUM and net worth among its analyzed peers in FY2021, FY2022, FY2023 and nine months ended December 31, 2022 and December 31, 2023. As of 31 December 2023, it has gross AUM of Rs.19,865 crore.  In addition, according to the peer set analyzed by CRISIL, the company also had the highest number of live accounts in FY2023.

• Extensive branch and sales office network – The company has extensive branch and sales office network, geographical penetration and sales channels which contribute significantly to loan sourcing and servicing. AHFL has tailored its branch setups to align with the specific needs of each location. At the regional level, branches are classified as main and small branches, serving as hubs. Furthermore, the company extends its reach by establishing micro or ultra-micro branches under the umbrella of main or small branches, enabling deeper penetration into the market. The company has actively expanded branch and sales office network and have increased the number of branches (including sales offices) from 310 branches as of March 31, 2021 to 332 branches as of March 31, 2022 to 469 branches (including sales offices) as of March 31, 2023 and further to 487 branches (including sales offices) as of December 31, 2023.

• Financial track record – The company reported a revenue of Rs.2,044 crore in FY23 as against Rs.1,729 crore in FY22, an increase of 18% YoY. The revenue has grown at a CAGR of 14% between FY21-23. The EBITDA of the company in FY23 was Rs.1,537 crore and EBITDA margin was at 75%.  The PAT of the company in FY23 is at Rs.545 crore and PAT margin is at 27%. The CAGR between FY2021-23 of EBITDA is 10% and PAT is 27%. The ROA and ROE of the company stands at 3.6% and 16.5% respectively in FY23. Net Interest Margin improved from 5.8% in FY21 to 8.0% in FY23. GNPA improved from 1.50% in FY22 to 1.2% in FY23. NNPA improved from 1.1% for FY22 to 0.80% for FY23.

Key risks

• OFS risk – In addition to a fresh issue, the IPO will see the sale of shares worth up to equity shares aggregating to Rs.2,000 crore by Promoter Selling Shareholder BCP Topco VII Pte. Ltd.

• Regulatory risk – Changing laws, rules and regulations and legal uncertainties, including adverse application of RBI or NHB regulations or tax laws and regulations, may materially adversely affect business, financial condition, results of operations, cash flows and prospects.

• Default risk – The risk of non-payment or default by customers (heightened by the fact that bank caters majorly to economically weaker and low to middle income segments) may adversely affect the company’s business, results of operations and financial conditions.

Outlook

The company excels in its field, focusing on low-income housing. It has consistently shown growth in both revenue and profit over the reported periods. According to RHP, Aptus Value Housing Finance India Limited, Aavas Financiers Limited, Home First Finance Company India Limited and India Shelter Finance Corporation Limited are the listed competitors for Aadhar Housing Finance Ltd. The peers are trading at an average P/E of 31.85x with the highest P/E of 34.90x and the lowest being 28.10x. At the higher price band, the listing market cap of India Shelter Finance will be around ~Rs.13,434.78 crore and the company is demanding a P/E multiple of 24.64x based on post issue diluted FY23 EPS of Rs.12.79. When compared with its peers, the issue seems to be reasonably priced in (fairly valued). Based on the above views, we provide a ‘Subscribe’ rating for this IPO for a medium to long-term Holding.