Aadhar Housing CEO: Eventually it will be a two-horse race between us and Aavas Financiers

Aadhar Housing confident of maintaining 20 percent AUM growth

Aadhar Housing Finance, backed by the Blackstone Group, has garnered significant interest from renowned global investors and long-only funds for its initial public offering (IPO).

Morgan Stanley, CLSA Global, Amundi Funds, Neuberger Berman Emerging Markets Equity Fund, Theleme India Master Fund, SBI Life Insurance Company, ICICI Prudential Life Insurance Company, HDFC Mutual Fund (MF), ICICI Prudential MF, Axis MF and Quant MF participated in the anchor round for the Rs 3,000 crore IPO.

With assets under management (AUM) of Rs 19,900 crore, as of December 2023, Aadhar Housing stands as the leading player in the affordable housing finance sector.

The housing finance company, which primarily serves retail customers, is confident about its ability to address the unique needs of its target demographics across various regions, encompassing both urban and semi-urban areas.

In an interview to Moneycontrol, MD & CEO Rishi Anand explains the rationale behind the fund-raise and about the potential for expansion. He also highlights that eventually the industry will narrow down to a two-horse race, with its closest competitor Aavas Financiers.

Edited excerpts:

What was the rationale behind reducing the size of the IPO?

Back in 2021-22, both the selling shareholders and the management thought it was the right size and we got the approval from the regulator for the same. Despite obtaining regulatory approval, we decided to wait for about a year, holding onto the approval card, as we believed that the market conditions were not favourable to our needs at that time.

We chose not to go to the market then, opting instead to wait for more conducive conditions. This decision stemmed from the understanding that the private equity fund involved, one of the strongest globally, had a lengthy fund life ahead. Thus, there was no rush. This stance communicated to the market that the current selling shareholders were not in a hurry to divest a significant portion of their shares.

Today, with an IPO size of Rs 3,000 crore, Rs 2,000 crore are allocated for OFS (offer for sale) and Rs 1,000 crore for the company's primary benefit. It's a positive sign. It indicates that the current selling shareholders are not in a hurry, given the fund's remaining 6-7 years of life. That's how it is positioned.

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That means the promoters will be exiting their stake entirely in 6 -7 years?

Private equity funds operate within a set fund life. In our case, that extends until around 2030, providing us with approximately six more years. It's important to note a couple of key aspects regarding the lock-in period regulated by the Securities and Exchange Board of India (Sebi).

Our shareholders have provided an additional comfort by extending the lock-in period by an extra six months. Additionally, once our shareholding reaches around 50 percent, we'll need to pause and carefully strategise our next steps. This will involve obtaining approvals from regulators and from all of our 37 banking relationships. It's going to be a well thought-out and slow process.

You have seen 20% AUM growth in the first 9 months of FY23. Is it sustainable?

Over the past three years, we've consistently maintained an impressive AUM growth rate of around 20 percent. However, in 2023, there was a slight dip, showing a growth rate of 16 percent. This deviation was primarily due to the closure of the government's Pradhan Mantri Awas Yojana subsidy scheme.

Previously, on a yearly basis, we used to receive an annual subsidy of Rs 250 crore. In the final year of the scheme, we received an additional Rs 500 crore, totaling Rs 750 crore. Adjusting for this extra subsidy, our growth rate remained at 20 percent.

Our sustained AUM growth is indicative of the substantial demand in the market. Currently, there's a shortage of over 10 crore housing units nationwide, with a shortfall of 9.5 crores specifically in the economically weaker sections (EWS) and low-income groups (LIG) segment, which constitutes 75 percent of our focus book.

This underscores the significant demand, supported by various government initiatives such as favourable risk weightages and other policies. Overall, our growth trajectory aligns closely with the market demand and government initiatives.

Would you be aiming for double-digit margins in FY25?

In the first nine months of FY23, we clocked a net interest margin (NIM) of 9 percent. The major contributor happens to be the spread plus treasury income. Over the past three years, our spreads have consistently remained within the range of 5-5.7 percent, which is the typical operating range for Aadhar.

This range has proven to be quite comfortable for us. However, in the first nine months of FY23, the reported NIM of 9 percent reflects an increase in the cost of funds, which was anticipated.

This was passed on to the customers one quarter in advance, and the cost of fund increase was seen in the subsequent quarter. This anomaly accounts for the deviation seen in the figures. At the management level, we find maintaining an NIM of close to 8 percent to be a comfortable benchmark.

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How have you managed to keep your cost of funds in check?

There have been several positive developments at the organisational level. Firstly, we've consistently placed emphasis on securing long-term funds for borrowing, leading to a well-balanced funding structure. To illustrate, approximately 25 percent of our current borrowings is sourced from the National Housing Bank (NHB), which also serves as our regulator.

Another 18-20 percent comes from Non-Convertible Debentures (NCDs), with the remaining around 55 percent obtained from banks. This diverse mix ensures stability and longevity in our funding sources.

Furthermore, our strategy has yielded promising results, with a notable increase in our exit number for the first nine months of FY23, reaching 7.9 percent incrementally. We intend to maintain this borrowing strategy, moving forward.

Will operating expenses settle at current rate?

Yes, I would say so. We are right where we need to be. Our operating expenses (opex) have even experienced a slight decline, which aligns well with our comfort level. The rationale behind this lies in the nature of our customer segment. We are operating in a high-opex business, particularly due to the extensive branch network required to reach our customers.

With nearly 500 branches in operation, we conduct in-house technical property evaluations and manage collections in-house with a team of around 1,000 employees. Given these operational demands, our current opex figures for the first nine months are deemed satisfactory.

Was it a conscious decision to increase focus on the self-employed segment vis-a-vis the employed category?

The transition towards catering more to self-employed individuals isn't a deliberate shift in strategy. Rather, it's a natural progression influenced by our distribution strategy. Initially, when we operated in larger states, our customer base consisted predominantly of salaried individuals. However, as we expanded our reach to smaller locations, talukas, and districts, we naturally encountered more self-employed individuals.

This diversification in our distribution channels has led to a gradual increase in the proportion of self-employed customers over the years. It's not a sudden or significant shift, but rather a gradual evolution, with approximately 57-58 percent of our current customer base still comprising salaried individuals.

Expansion plans going forward?

Currently, we've established a network of 487 branches spanning across 20 states and Union Territories. With no further states to expand into, the next step involves delving deeper into the existing districts and pin codes. At present, we've penetrated 533 out of 806 districts nationwide and have reached 11,000 out of the 18,000 possible pin codes within the states we operate.

To illustrate with an example, in Rajasthan alone, where we currently operate 46 branches, there's ample potential to expand our presence to approximately 70-80 branches. This expansion will primarily focus on reaching smaller talukas and districts, which we term as "deeper impact" strategy. In phase one, we'll prioritise deepening our presence in 5 or 6 key states, which will be pivotal for driving future growth.

Who do you see as your closest competitor and what could be a potential risk to the business?

Our closest competitor, Aavas Financiers, operates with a book size of over Rs 16,000 crore, whereas we stand at Rs 40,000 crore. Both companies embarked on this journey around the same time, obtaining licences in 2010.

While we cater to the same segment and profile, the key distinction lies in our distribution reach. With a presence in 20 states compared to their 13, bridging the gap from 13 to 20 states typically takes 3-5 years. However, in the long run, we anticipate the competition within the industry to narrow down to a two-horse race between Aavas and us. While there are other players in the market with AUM sizes ranging from Rs 8,000-10,000 crore and below, most are below the Rs 5,000-crore mark.

Despite the competition, both Aavas and our company have consistently delivered strong performances. As the largest player in the field, we are well-positioned for continued success amidst this competitive landscape.

In terms of asset quality, are you comfortable around the 1.2-1.5 percent level?

In the customer segment we cater to, the asset quality for the first nine months of FY23 improved to 1.4 percent from 1.8 percent in FY22. However, historically, our asset quality has consistently remained within the range of 1.1 to 1.2 percent in March over the past three years. This demonstrates our strong and comfortable position in terms of asset quality.

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