Affordable Housing Stocks Surge as Bajaj Housing Finance IPO Sparks Market Buzz: PNB Housing Leads the Rally

Affordable housing finance companies have seen a rise in their stock prices, partly due to the buzz around Bajaj Housing Finance’s upcoming IPO. According to Dhaval Gada, a fund manager at DSP Mutual Fund, rural housing schemes in the budget have also contributed to the strong performance of these companies. Big players like PNB Housing Finance have experienced sharp price movements in response to the IPO excitement.

Strong Demand and Government Support Drive Growth

In the past six months, stocks of affordable housing finance companies like Aadhar Housing Finance, Aavas Financiers, and Home First Finance have delivered an average return of 34%. The only exception is Aptus Value Housing Finance, which saw a 6% drop due to slower loan disbursements and lower-quality assets in the last quarter. Despite this, market experts remain optimistic about the sector’s growth potential, driven by strong demand, government support, and high returns on assets (ROA).

PNB Housing Finance has led the pack, generating a 50% return over the past six months. In the first quarter of FY25, 32% of its new loans were directed towards affordable housing, and the company plans to increase this share to 40-45% by the end of the fiscal year. With some private equity deals now settled, PNB Housing’s stock is catching up with other players in the affordable housing space. The company aims to grow its affordable housing portfolio to ₹5,000 crore by FY25 and ₹15,000 crore by FY27.

A Profitable Business Model

The affordable housing segment is attractive to finance companies because these loans have higher interest rates, leading to better returns. According to Anusha Raheja, a research analyst at Dalal & Broacha Stock Broking, affordable housing loans typically carry interest rates of 12-13%, compared to 8-11% in the prime segment, offering higher ROA.

These loans often involve physical underwriting and collection, increasing operational costs. However, they benefit from government refinancing schemes, which reduce funding costs. Additionally, government-backed subsidy programmes lower the borrower’s liability, making these loans less risky for lenders.

Dhaval Gada highlighted that PNB Housing has ramped up its affordable housing efforts because this segment offers better profitability and helps diversify its customer base.

Government Support is Key to Future Growth

The government’s renewed focus on affordable housing, particularly through the Pradhan Mantri Awas Yojna (PMAY) 2.0 scheme, provides a strong growth opportunity for companies in this sector. The government has set a target to provide 20 million additional homes over the next five years, making the affordable housing sector more promising than the prime segment.

Market experts believe that companies catering to economically weaker sections (EWS) and low-income groups (LIG) will benefit greatly from this government support. Despite the possibility of future interest rate cuts, affordable housing loans are expected to maintain healthy margins, further supporting growth.

Different Strategies for Success

While the affordable housing segment is profitable, it’s not the only way to succeed in the housing finance space. Bajaj Housing Finance, for instance, has focused on both corporate loans and affordable housing. According to an unnamed CFO of a large housing finance company, prime and super-prime segments operate on thinner margins, so companies often turn to corporate or affordable loans to boost profitability.

Bajaj Housing Finance, with assets under management of over ₹97,000 crore as of Q1 FY25, is one of the largest players in the market. The company’s revenue grew by 35% to ₹7,617 crore, and its net profit increased by 38% to ₹1,731 crore in FY24. These figures were revealed in the draft red herring prospectus filed for its IPO.

Although Bajaj Housing Finance is not heavily involved in the affordable housing sector, its strong performance and asset quality have led to a higher valuation. The company’s stocks are already trading at an 80% premium in the grey market, showing high demand for its IPO. The price range has been set between ₹66 and ₹70 per share.

Despite the differences in strategy between corporate and affordable housing loans, experts agree that companies need to excel in their chosen approach. The CFO mentioned earlier said that Bajaj Housing’s valuation is not far from that of affordable housing companies, emphasising the need for strong execution.

In summary, the buzz around Bajaj Housing Finance’s IPO and the government’s support for affordable housing has given a significant boost to the stocks of affordable housing finance companies. With strong demand and a profitable business model, this sector is set for continued growth.