International brokerage firm Bernstein suggests that affordable housing (AFC) stocks such as Home First Finance, Aadhar Housing Finance, Aavas Financiers, Aptus Value Housing, and PNB Housing have the potential to rally up to 34%.In a report released on Tuesday, it set a target price of Rs 610 for Aadhar Housing Finance, implying an upside potential of about 28.9%. For Aavas Financiers, analysts pegged the target at Rs 1,440, indicating a modest upside of around 4.7%.Aptus Value Housing Finance is assigned a target of Rs 340, suggesting an upside of approximately 29.5%. PNB Housing Finance has a target of Rs 960, indicating a downside of 11.4%. Home First Finance has an assigned target price of Rs 1,450, implying an upside of around 34.3%.Why is Bernstein saying ‘the tide is turning’?After a period of moderation over the past few quarters, trends across the affordable housing finance (AHFC) sector are gradually turning more favourable. The 4QFY26 performance reflected improving business momentum, stable operating conditions, and continued normalization in portfolio quality, even as the macro environment remains uneven. Earlier concerns around competitive intensity and borrower stress had weighed on sentiment, but recent operating trends indicate a gradual strengthening in underlying sector fundamentals. Strong growth trendsGrowth trends improved during the quarter as business momentum strengthened. After a moderation phase in 1HFY26 driven by broader macro uncertainty and spillover effects from the microfinance stress cycle, AHFC growth picked up meaningfully in Q4FY26. Aggregate disbursement growth accelerated to 16% YoY versus 8% YoY in the previous quarter, with recovery seen across most key players. This improvement in disbursements also supported early signs of stabilization in AUM growth, even though run-off rates remained seasonally elevated. Balance transfer (BT-Out) trends remained largely stable, indicating no significant increase in competitive pressure in the sector.Improving margins Margins and asset quality trends remained broadly supportive of earnings. Portfolio yields saw a slight moderation during the quarter following PLR cuts by several AHFCs, but this was broadly offset by a corresponding decline in borrowing costs, keeping spreads and NIMs stable. Operating expenses normalized on a seasonal basis due to branch expansion and year-end activity. Asset quality continued to improve steadily, supported by easing overleveraging in the MFI ecosystem and normalization in repayment behaviour. Improvements were visible in early delinquency indicators as well as headline GNPA ratios, suggesting the sector may be past the peak of the recent stress cycle.Attractive valuationsBernstein says despite a positive outlook, valuations continue to remain near the lower end of historical ranges and at a discount to larger diversified NBFCs. The medium-term outlook for the affordable housing finance segment remains constructive, supported by low mortgage penetration in India and the structural opportunity in the underserved mass-market borrower segment. Additionally, the operationally intensive nature of affordable housing lending continues to support a competitive moat for housing players relative to larger banks.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)