Kotak starts coverage on India Shelter with a 'buy' call and 17% upside

India Shelter trades at 15X earnings and 2.0X book FY2026E.

Kotak Institutional Equities initiated coverage on India Shelter with a 'buy' tag, citing the company's high-growth outlook in the affordable housing finance sector.

According to the brokerage, the housing finance company's strong visibility of near-term growth, long runway in affordable housing finance, geographically diversified loan book, and superior yields in its self-employed heavy loan book are the key drivers.

At 11.40am, shares of the company were quoting Rs 618.35, higher by 5.5 percent, compared to the previous session's closing price.

India Shelter is a small but fast-growing diversified housing finance company, recording a 35 percent CAGR during FY2023-26. It is focused on lending to self-employed borrowers that make up 70 percent of its AUM.

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The customers are based in Tier-II and III cities, which make up 90 percent of its AUM in the affordable housing segment where the average ticket size is Rs 11 lakh.

Kotak expects India Shelter to see AUM growth of 33 percent CAGR and improving operating leverage. The housing finance company recorded a profit of Rs 155.3 crore in FY23, rising 21 percent over the previous year. Revenue increased by 30.5 percent to Rs 584.5 crore.

India Shelter saw an increase in branch count in FY23, up 41 percent, which has led to skewed vintage mix; as branches mature, productivity will improve, leading to improvement in cost ratios and  reducing the impact of NIM compression, said Kotak.

Some key risks that could impact the business operations would be their ability to sustain their strong asset quality performance, while operating in the informal lending segment with an unseasoned book. Additionally, with a high concentration in three states, the firm must effectively manage execution in new geographies.

India Shelter trades at 15X earnings and 2.0X book FY2026E, but its peers, Aavas Financiers, Aptus Value Housing Finance and Home First trade higher at 15-18X earnings.

India Shelter is a relatively newer NBFC, with smaller AUM, of Rs 5,600 crore as compared with Rs 7,900-16,000 crore for its listed peers in 9MFY24. "The company reported 42 percent AUM CAGR during FY2020-23 as compared with 22-28 percent for listed peers," said Kotak.