A trend that started with Utkarsh Small Finance Bank seems to have latched on in the financial services sector. The fifth in line to come out with its initial public offering is Aadhar Housing Finance, a Blackstone-led affordable housing finance company. The issue, priced at ₹300–315 a share, works out to roughly 2.4x FY24 estimated price to book value. Considering that its peers such as Home First Finance and Aptus Housing priced their IPO at least 40–70 per cent premium to Aadhar Housing about two years ago, the upside offered by Aadhar Housing IPO seems to be much more attractive.

While this is one of the biggest plus points the public issue offers to investors, the backing of a strong private equity promoter — which helped bring the company back on the map and build scale in the business organically — and seasoned set of professional top management executives leading it, are the other positive factors for investors to consider the IPO. Investors could subscribe to the IPO with a long-term horizon.

Business and operations

Possibly among the oldest affordable housing companies which has seen multiple change in ownership; last being in 2019 when Blackstone took over Aadhar Housing from Dewan Housing Finance Corporation for $300 million, the company has weathered many challenges and grown to scale to now become the largest affordable housing company. At a loan book of ₹19,865 crore as on December 31, 2023, there’s a reasonable gap between Bengaluru-headquartered Aadhar Housing and Aavas Financiers (₹ 16,079 crore).

Catering to the home loan segment, 100 per cent of its loan book is secured and the lender’s average ticket size is ₹10–15 lakh. Salaried customers account for 57 per cent of its loan book and 73 per cent of its loans are towards economically weaker section or low-income group where the borrower profile would be that of a first-time home buyer. Such borrowers not only tend to be sticky but, over time, have demonstrated reasonable repayment discipline as well.

While Maharashtra and Uttar Pradesh are the top two States for the lender, accounting for 27 per cent of loans, there’s reasonable geographical dispersion, making it a pan-India player (see table). Spread across 487 branches, a potent combination of physical touch points and technology-led underwriting and customer retention practices are advantages for Aadhar Housing.

Financials

Affordable housing finance has grown faster than prime home loan lending in recent years due to deeper geographic penetration. Therefore, if loans are underwritten well, and with pangs of the pandemic behind us, this should be a segment with little concerns on growth or asset quality. Both are reflected in Aadhar Housing’s financials (see table). Gearing ratio of 3.1x as on December 31, 2023 offers comfort.

While cost of fund has increased by 40 basis points since FY22, Aadhar’s AA rating has helped keep a lid on this factor. However, given that this segment caters to first-time aspirational buyers, a pass-through in costs should barely be a constraint and that’s reflecting in Aadhar’s yield on loan book, which stood at 14 per cent as of December 2023(see table). Overall, financials offer comfort.

Risk factors

Blackstone holds over 98 per cent stake in the company and, through the IPO, will reduce it to 76.48 per cent. Given the trend of how private equity and venture capital funds have cashed in on the recent market rally to mark exits from their investments, this is an overhang which could exist with Aadhar Housing also. With reasonable stake likely on the block, it could weigh on the stock.

Another factor that investors not just of Aadhar Housing but of all affordable housing finance companies should bear in mind is the fall in valuations. While a correction in valuations is par for the course, especially in high-growth segments, from an asking price upwards of 4x one-year forward P/B which existed in FY21-22 for the IPOs that came up at that time, valuations have plunged to 2.5–3x one-year forward multiple now. Is the market discounting for a possible decline in growth or asset quality, going forward? That said, financials of Aadhar or any affordable housing finance company aren’t showing signs of these factors. Perhaps investors should keep an eye out.

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