Using a two-stage Gordon Growth model, we arrive at a target price of Rs565 per share for Aadhar assuming CoEs of 13.0%, medium-term RoEs of 17%, and high growth phase of 10 years with expected growth of >20%. We assign price-to-book of 3.2x +2Y BV.

Our quant risk-rating system typically assigns a High Risk rating to stocks with less than 12 months of trading history (Aadhar Housing Finance IPO was in May 2024). However, we believe a High Risk flag is not appropriate for Aadhar shares given: i) it is a leading player operating in the most secured mortgage segment where Loss given default risk is minimal; and ii) has excess capital position with Tier-1 of >45%, AA/Stable credit rating and RoA/RoE of >4.5%/16.5%. Key risks that could impede the shares from reaching our target price include: i) Certain ongoing regulatory investigations by enforcement agencies of the erstwhile Promotors; ii) Current Promotor may sell shares to dilute its stake over the medium to longer term; iii) Balance transfer risk & competition – As Aadhar has early-mover advantage in many of the unentrenched locations, this exposes it to risk of its well-performing loans being taken over by competitors at low rate, as there is no penalty on pre-closure of floating-rate loans; iv) Rising proportion of self-employed segment and that too informal segment may pose some asset quality risks, as they are susceptible to volatile cash flows; and v) Agreements with DSAs or Aadhar Mitras typically do not provide for any exclusivity, and accordingly, such DSAs and Aadhar Mitra’s can work with other lenders, including its competitors.