The Affordable Housing Finance Sector in India: Opportunities and Challenges

The affordable housing finance sector in India is emerging as a significant opportunity, driven by a substantial demand for low-cost housing among the country’s rural and middle-class populations. Despite the promising potential, the sector has experienced varied performance over the past year. This article will explore the reasons behind this, analyse specific companies within the sector, and provide insights into future growth prospects.

The Potential in Affordable Housing Finance

India’s mortgage-to-GDP ratio stands at a mere 11%, significantly lower compared to the United States (67%) and the United Kingdom (90%). This ratio is even lower outside the top 100 cities of India, at just 3%. Given that a large portion of India’s population resides in small towns and villages, there is a substantial opportunity for companies specializing in affordable housing finance, particularly those targeting low and middle-income segments.

Key Players in the Sector

Three prominent companies in this sector are Home First Finance, Aavas Financiers, and Aptus Value Housing. Despite their potential, the share prices of these companies have remained relatively flat over the past year.

Growth Drivers

Under penetration

A significant portion of India’s population still dreams of owning a home, and there is a substantial market for affordable housing loans ranging between Rs 10 to Rs 15 lakh.

Limited Competition from Established Banks

Traditional banks focus on urban and commercial segments and have stringent loan disbursement criteria, making them less competitive in the affordable housing finance segment.

Agility in Loan Disbursement

Affordable housing finance companies like Aavas and Home First disburse loans much faster than traditional banks, making them more attractive to potential borrowers.

Company Performance and Financial Growth

Aavas Financiers

Aavas Financiers has shown impressive growth over the years. Its Assets Under Management (AUM) have grown from zero in FY12 to Rs 173 billion in FY23. Similarly, its revenue has increased from Rs 18 crore in FY13 to Rs 3,057 crore in FY23, and net profits have surged from Rs 2 crore in FY13 to Rs 693 crore in FY23.

Home First Finance

Home First Finance has also experienced significant growth. Its AUM has expanded from Rs 8.4 billion rupees in FY17 to Rs 96 billion rupees in FY23. The company’s revenue has grown from Rs 6 crore in FY13 to Rs 1,157 crore in FY23, and net profits have risen from Rs 3 crore in FY13 to Rs 306 crore in FY23.

Factors Affecting Stock Performance

Despite robust financial growth, stock performance has been underwhelming due to several factors:

Higher Interest Rates

Over the last two years, the Reserve Bank of India (RBI) has increased interest rates from 4% to 6.5%, raising borrowing costs and squeezing margins for these companies.

Promoter Selling

Early investors, particularly private equity firms classified as promoters, have been selling their stakes, leading to selling pressure on the stocks. However, these shares are being bought by strong institutional investors (FIIs and DIIs), which is a positive sign for long-term stability.

Stock-Specific Issues

Both Aavas and Home First experienced high valuations post-IPO, leading to a natural correction in their price-to-book ratios.

Future Outlook

The long-term prospects for the affordable housing finance sector remain positive, driven by:

Continued Underpenetration

The vast rural and middle-class populations continue to provide a substantial market for affordable housing loans.

Improving Business Metrics

Both Aavas and Home First have shown strong growth in loan disbursements and AUM. Management in both companies is optimistic about future growth, predicting 30% AUM and profit growth.

Reduction in Interest Rates

A potential future reduction in RBI’s interest rates could alleviate margin pressure, further boosting profitability.

Conclusion

The affordable housing finance sector in India offers significant growth potential due to under penetration and increasing demand for low-cost housing. Companies like Aavas Financiers and Home First Finance are well-positioned to capitalize on this opportunity despite current challenges such as higher interest rates and promoter selling. As these issues stabilize and with continued business growth, the sector is poised for a promising future.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.