Housing finance stocks near inflection point, Bernstein picks 2 favourites

The brokerage notes that the recent macro-led selloff has dragged down Indian banks, NBFCs and affordable housing finance companies (AHFCs) alike, but contends that “beyond now-attractive valuations, we see several compelling reasons to turn constructive on the segment, driven by an impending inflection in both growth and asset quality.”

It adds that the current correction “is a favorable entry point” and reiterates its Outperform ratings on HomeFirst, Aadhar and Aptus, while maintaining Market-Perform on Aavas and PNB Housing Finance.

Bernstein flags that AHFCs have already undergone a sharp derating over the last 6-9 months, with stock price declines steeper than those of larger NBFC peers. Current price-to-earnings multiples are now at three-year lows despite comparable or superior earnings growth.

“The sharp derating has also meant that valuations are at the lowest point in the last three years, with PE multiples now significantly lower than those of larger NBFCs despite earnings growth being comparable or superior,” the report says, highlighting the valuation gap as a key part of the upside argument.

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On fundamentals, the analysts argue that both growth and asset quality are “now approaching an inflection point,” pointing to 3QFY26 data where disbursement growth showed sequential improvement and early-stage delinquencies (1+ DPD) began to stabilise or improve across most lenders. While AHFCs had earlier faced a slowdown in disbursements and a marginal rise in credit costs, Bernstein emphasises that return on assets has stayed above 3% for the segment, supported by improving net interest margins and stable operating expenses.

The report also underlines structural advantages that could help AHFCs ride out any prolonged macro stress. In an environment of tighter liquidity and higher inflation, “AHFCs are better positioned versus their larger NBFC peers,” it says, citing the secured nature of their loan books in both home loans and loan-against-property, and a funding profile marked by longer-tenor borrowings, a high floating-rate share, and access to National Housing Bank (NHB) funding.This combination, Bernstein argues, reduces the risk of sharp margin compression and insulates asset quality relative to unsecured-focused NBFCs.

At a thematic level, Bernstein reiterates that “the long-term thesis remains intact,” anchored in India’s still-low mortgage penetration as a share of GDP and the need for an operationally intensive, opex-heavy model to serve the mass-market borrower that many banks are reluctant to adopt.

The report notes that this model has translated into healthy earnings growth of around 20% and RoAs above 3% even in recent quarters, underscoring the medium-term potential of the affordable housing theme despite near-term volatility.

Within its coverage, Bernstein’s top picks are HomeFirst and Aadhar Housing Finance, which it describes as “the best franchises in this segment” thanks to diversified geographic presence and a proven ability to scale across markets.

It values HomeFirst using a 22x FY27 earnings multiple with a target price of Rs 1,430, and Aadhar at 20x FY27 earnings with a target of Rs 600, implying strong upside from current levels.

“While valuations are attractive across the sector, we continue to prefer HomeFirst and Aadhar,” the analysts say, adding that Aptus also looks attractive on low valuations, even as structural concerns keep them more cautious on Aavas and PNB Housing for now.