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Muted quarter but transitory in nature; IT transformation and management stability reinforce our view that company is likely to sustain its industry-leading position in AHFC space

The past six months have been challenging for Aavas Financiers (Aavas) mainly due to top-management change. Despite concerns over its growth trajectory due to the apex-level change as well as IT transformation and NIM compression, the company’s performance in Q1FY24 reinforces our view that it will remain industry-leader in the AHFC space. During the result call, management highlighted that employee attrition – from the perspective of senior management – is none and that it has fully rolled out the app SalesForce LMS Pan-India during Q1FY24. Management further highlighted that it expects TAT to reduce to 6-7 days’ vs 13 days currently and that the share of digital sourcing is likely to improve going ahead from 10% at present. Overall, management sounded confident about delivering 25% growth with sustainable RoA at 2.5-3% and RoE at 15-20% on steady-state basis. With improved visibility on management stability, its focus on tech-driven processes and operating leverage, we upgrade the stock to BUY (from Hold). We raise the target price to INR 1,800 (earlier: INR 1,410) as we now value it at 3.5x (vs 3x earlier) on Sep’24 BVPS.

Q1FY24 financial performance

Earnings for the quarter declined by 13% QoQ to INR1.1bn largely due to one-off ESOP expenses in Q1FY24 and 2% QoQ decline in net revenue. NII was impacted due to 30bps QoQ decline in NIM to 8% in Q1FY24 vs 8.3% in Q4FY23. While disbursements during Q1FY24 were down 32% QoQ due to IT transformation, AUM growth stood at 3% QoQ. Credit cost fell to 16bps vs 19bps QoQ. Negligible stressed asset pool as reflected in the 1+ dpd bucket at 3.7% as of Jun’23, would ensure credit cost remains within the historical average of 30-35bps.

New management will continue Aavas 3.0 journey as envisaged earlier

Aavas will continue to invest towards building infrastructure (people and technology) to deliver 20-25% long-term AUM growth. Under its digital transformation programme, it has gone live with its SalesForce application and expects its ERP system to go live by Q4FY24. This should reduce TAT from the current level of 10-12 days to 6-7 days. Aavas is also investing in building analytics capabilities to enhance customer experience. The upgraded tech-driven process is likely to improve productivity, hence the company expects 20-25bps reduction in the opex ratio every year from FY25 onwards vs current level of 3.9%. AUM mix is expected to remain broadly at the levels of 65-70% for home loans and 30-35% for non-home-loans. Key risks: 1) Elevated opex weighing on RoA improvement, 2) competitive pressure on yields.

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