Top Housing Finance Stocks Thriving with Low NPAs and Robust Growth Potential

The Indian housing finance landscape is thriving, fueled by a surge in homeownership and government initiatives like the Pradhan Mantri Awas Yojana. This growth trajectory presents a significant opportunity for housing finance companies (HFCs) as the demand for affordable housing continues to rise.

Growth in the Housing Finance Sector

Over the past five years, HFCs have experienced impressive growth, achieving a CAGR of 13.5%. This growth is supported by increasing incomes and favorable government policies. Despite this expansion, India’s mortgage penetration remains relatively low, with a mortgage-to-GDP ratio of only 12.3%, significantly trailing behind 28% in China and 60% in the United States.

Opportunity Ahead: The potential market for affordable housing is estimated at a staggering ₹45 trillion, indicating vast room for growth as the economy progresses.

Given these dynamics, affordable HFCs are well-positioned to capitalize on this burgeoning market. Among the frontrunners in this sector are Aadhar Housing Finance and India Shelter Finance, both of which have demonstrated robust growth while keeping non-performing assets (NPAs) low.

Aadhar Housing Finance: Leading the Way

Established in 2011, Aadhar Housing Finance has emerged as a major player in the low-income housing finance space, catering to the needs of economically weaker segments across 20 states with over 523 branches. The company serves clients with monthly incomes ranging from ₹5,000 to ₹50,000, providing loans with an average size of ₹1.5 million.

Impressive Asset Growth and Efficient Execution

Aadhar’s strategic execution has led to a remarkable increase in its assets under management (AUM), which grew at a CAGR of 13% to reach ₹211 billion in FY24. A significant portion—71%—of this AUM supports customers from economically disadvantaged backgrounds. Although this figure has slightly decreased from 80%, the company is diversifying its lending solutions.

Disbursements surged by 21% CAGR over the same period, with FY24 seeing a 23% increase in AUM and a 20% rise in disbursements compared to the previous year.

Aadhar’s return on assets (RoA) has also improved to 4.2% in FY24, up from 3.2% in FY22, highlighting efficient capital allocation.

Solid Asset Quality and Profit Growth

Aadhar has maintained strong asset quality, with its gross NPA decreasing from 1.5% in FY22 to 1.1% in FY24. This trend reflects its strategy of secure lending, with a fully secured retail book. The company’s average yield rose to 13.8%, driven by the expansion of its non-housing loan portfolio, which boasts a higher yield compared to traditional housing loans.

Profitability: Aadhar Housing Finance achieved a profit growth of 19% CAGR, reaching ₹7.5 billion in FY24, which enhanced its return on equity (RoE) to 18.4%.

As Aadhar looks forward, it aims for 20% AUM growth and plans to establish 70-75 new branches in FY25. With expectations of maintained credit costs and robust loan growth, the company is poised for sustained profit expansion.

India Shelter Finance Corporation: A Strong Contender

Founded in 1998, India Shelter Finance Corporation specializes in affordable home loans and loans against property. A significant 90% of its AUM originates from Tier 2 and Tier 3 cities, with an average ticket size of ₹1 million.

Exceptional AUM Growth and Diversification

India Shelter’s AUM has skyrocketed, growing at a CAGR of 48% since its inception, and achieving a 40% year-on-year increase to reach ₹61 billion in FY24. A diversified portfolio includes 58% from home loans and 42% from loans against property.

Disbursement Growth: The company’s disbursements have quadrupled, from ₹5.5 billion to ₹26.5 billion in FY24, contributing to a notable RoA of 4.9%.

Solid Financial Performance

India Shelter has maintained strong asset quality, with gross NPA reducing from 1.3% in FY20 to 1.0% in FY24, resulting in a decrease in credit costs to 0.4%. The company’s spread has expanded to 6.1%, supporting significant profit growth.

Profitability: India Shelter’s profit grew at a remarkable 40% CAGR, reaching ₹2.5 billion in FY24, leading to an increase in RoE from 5.7% in FY20 to 14%.

Looking ahead, India Shelter targets an AUM of ₹300 billion by 2030, indicating a 31% CAGR. With plans to open 40-45 new branches annually, the company aims to strengthen its position in the affordable housing market.

Conclusion: A Bright Future for Affordable Housing

As more than two-thirds of India’s population resides in rural areas, urban migration is anticipated to rise. Projections indicate that urban areas will host 40% of the population by 2030, amplifying demand for affordable housing.

Despite the existing supply-demand gap of 10 million homes, this is expected to escalate to 32 million by 2030, offering HFCs a financing opportunity of ₹45 trillion—a significant increase from the current loan volume of ₹13 trillion. With HFCs holding a 53% market share in the total loan market, companies like Aadhar and India Shelter are well-positioned to seize this growth opportunity.

For those interested in delving deeper into the housing finance sector, connecting with industry experts or financial advisors is advisable to navigate potential investment opportunities effectively.