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Strong underwriting is the wall
The recent carnage in broader markets has spared none. Even with the current nationwide lockdown till 14th Apr’20 (and its likely aftereffects), we have reason to believe that Aavas Financiers (Aavas) will be a relative outperformer in India financials space. Balance sheet strength, strong ALM, sufficient liquidity and superior asset quality as an outcome of its robust credit underwriting will help Aavas navigate the current uncertainty and emerge winner. Aavas, we feel, can deliver sustainable RoAs of >3% in the medium term even if we factor-in the disruption from current lockdown and the likely lag in housing demand revival in subsequent quarters. Our target multiple of 3.9x (earlier: 4.8x) FY21E P/BV leads to our new target price of Rs1,400 (earlier: Rs1700). Upgrade to BUY.
* Asset quality faces no major risk: 65% of Aavas’ customer mix is self-employed – which by its very nature is vulnerable to the countrywide lockdown. However, within the self-employed segment, Aavas caters to 60 different customer profiles and its exposure to the most-affected hospitality segment (restaurants, travel, tourism and likes) and daily wage earners is less than 4% of the loanbook. ~95% of the EMI collections are made through digital payment modes and only ~5% is collected in cash. Notably, the 1+dpd (Dec’19: 3.4%) could increase in the short term because of customer default on one or two EMIs. However, we are confident that, given the strong underwriting and credit filters of the company, 1+dpd should come down to normalised levels (<5%) within the next couple of quarters
* Collateralised lending and conservative underwriting will save the day: Average ticket size of Aavas’s home loans is
* Liquidity remains comfortable with lower incremental cost of borrowings: Aavas has ~Rs10.9bn in cash and cash equivalents and sanctioned undrawn lines of ~Rs14.8bn. This is equivalent to around eight months of disbursements (assumed monthly run-rate of ~Rs3bn) even if we do not factor-in any repayments (monthly run-rate of ~Rs1bn). Aavas has activated business continuity planning (BCP) across 150 locations and its digital platform is equipped to make disbursements and accept repayments even amid a complete lockdown. Company’s incremental cost of funding has trended lower even with longer-tenured and ALM-matched borrowings.
Valuations and risks:
We now model NII / PPoP / PAT CAGRs of 21% / 25% / 31% over FY19-FY22E. Aavas is currently trading at 3.1x FY21E P/BV. Our reduced target multiple of 3.9x (earlier: 4.8x) P/BVPS leads to a target price of Rs1,400 (earlier: Rs1,700). Upgrade to BUY. Key monitorables in the short term will be: 1) the company’s collection efficiency on the fifth day of every month when majority of the EMI presentations are made, and 2) the collection efforts made by the company to improve its 1+dpd number when a semblance of certainty comes back.
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