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Quality intact; premium to sustain

Aavas Financiers’ (Aavas) asset quality performance reinforces resilience with stage-3 assets (including standstill accounts) at 1%, sub-50bps provisioning for 9MFY21 (75bps in Q3FY21), collection efficiency at 98.8% (December), 1+ dpd pool at 8.2% and zero restructuring. AUM growth of 23% YoY (5% QoQ), sequential uptick (of >10bps) in spreads, cost containment (5-6% rise in opex) supported core operating earnings further buoyed by securitisation income of Rs405mn. Consistency and resilience during challenging times, coupled with stable operating metrics and well-contained stress, enhances visibility towards 3.7-3.8% RoAs and 13-15% RoAs by FY22/23. Aavas trades at 4.6x FY23E P/BV – not inexpensive, but premium is likely to expand with greater confidence emerging. Maintain BUY with a revised target price of Rs2,205 (earlier: Rs1,650) now assigning 5.5x multiple to FY23E book. Key risks: 1) stress unfolding higher than anticipated levels; 2) rising competition can weigh on yields.

* Best-in-class asset quality metrics in challenging times: In Q2FY21, it highlighted 1+dpd was contained at better levels of 6.2% (much earlier than anticipated) and expectedly rose to 8.2% in Q3FY21. This was on account of customers missing second or third installments. However, it is seeing collection efficiency improvement (98.8% in December) and 1+ dpd should normalise to ~5%. Slips from 1+dpd into delinquency bucket, pushed stage-3 assets higher - came in at 1% (0.47% in Q2FY21) and for FY21/22 we expect it to range between 1.2-1.5%.

* Credit cost risks set aside: Critically evaluating the customer profile across risk categories, it made further Rs43mn of Covid provisioning taking cumulative buffer to Rs190mn (22bps of advances). Including this, too, credit cost was contained sub-50 bps in 9MFY21. We are building in 0.6%/0.2% credit cost for FY21/22E.

* Filtering self-employed into positive list; disbursements skewed towards salaried: Compared to earlier approach of drawing a negative list, now it is filtering self-employed customers into a positive list and lending is limited only to this category. Consequently, disbursements are more skewed towards salaried customers. During Q3FY21, we saw a shift in mix by almost 420bps in favour of salaried customers to 39% of which 2.0-2.5% was disbursement-led and 1.5% due to customer reclassification (based on occupation of primary earnings member rather than applicant). Overall disbursement momentum was intact - flat YoY (up 15% QoQ), this is despite cautious stance in LAP/self-employed (down 6% YoY). Also, it resorted to securitisation of Rs2.4bn and off-book AUM rose to 23% of AUM (compared to average of 20%). We believe 20-25% is feasible and more realistic over FY21/22/23.

* Core spreads further improved to 5.7%: Average borrowing cost further declined (22bps) to 7.68% against the portfolio yields of 13.4%. Higher yield on securitised portfolio led to recognising a gain of Rs405mn that led to earnings beat. We expect NIMs to be sustained at 6.8-7.2% for FY21/22/23E.

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