Rationale

 The ratings factor in Aadhar Housing Finance Limited's (AHFL) healthy scale and geographically diversified operations. As on March 31, 2022, the company had assets under management (AUM) of Rs. 14,778 crore spread across 341 branches and offices in more than 15,000 locations in 20 states/Union Territories (UTs). Further, AHFL's operations are focused on the low-income housing segment with home loans comprising 83% of the AUM as on December 31, 2021 (85% as on March 31, 2021). Given the low penetration level and the Government of India's (GoI) thrust on the segment, there are good growth opportunities for small ticket size home loans. However, competition has intensified with the entry of new players and the company's ability to manage the pressure on its business growth and asset quality will remain a key monitorable, given the Covid-19-induced disruptions. The ratings also take into account AHFL's experienced management team and adequate internal controls and systems. Post equity infusion in FY2020, AHFL's capitalisation profile improved significantly, and the gearing (reported)1 remained low at 3.4 times as on March 31, 2022. Over the medium term, AHFL plans to operate at net leverage levels in the range of 5-6 times. It is in the process of launching its initial public offering through which it plans to raise ~Rs. 1,500 crore of fresh equity capital, which would help in supporting its growth plans while maintaining a prudent capitalisation profile. The rating also factors in the company's fairly diversified funding profile, which comprised loans from banks (47%), refinance from National Housing Bank (NHB; 18%), non-convertible debentures (NCDs; 13%), subordinated debt (1%), assignment (20%) and others as on March 31, 2022. Despite improving, AHFL's profitability profile remains moderate compared to peers. It reported a net profit of Rs. 445 crore, translating into a return of 2.6% on average managed assets (AMA2 ; return of 3.2% on average total assets) and 15.2% on average net worth in FY2022 (Rs. 340 crore, 2.2% and 13.5%, respectively, in FY2021). Given the relatively riskier borrower profile of the low-and-assessed-income segments, the asset quality indicators could exhibit more volatility. The company has a good credit appraisal and collection mechanism, which has helped it maintain comfortable asset quality indicators with gross non-performing assets (NPAs) of 1.52%3 and net NPAs of 1.07% as on March 31, 2022 (1.21% and 0.81%, respectively, as on March 31, 2021). However, it remains exposed to volatility in the asset quality as witnessed during the Covid-19 pandemic, given the risk associated with the target borrower segment. Moreover, it had a standard restructured portfolio of 3.6% on its balance sheet as on March 31, 2022. A part of this portfolio was under moratorium till March 2022 and the performance of the same will be a key monitorable. Going forward, AHFL's ability to maintain the asset quality as it scales up its operations will be important for its credit profile.