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A steady quarter

Aavas delivered in-line earnings performance adjusted for the DA income. AUM growth was as per expectations; however stronger disbursements (6% above estimate) were balanced out by higher portfolio run-offs (19.4% annualized – likely higher prepayments/BT Out as 1+ dpd marginally increased). Aided by flattish CoF, the portfolio spread was stable. Opex/Assets ratio was elevated with continuing investments in distribution, employees and technology. Credit cost was benign with overall reduction in Stage 2 & 3 assets and negligible write-off

Credit cost was low; MSME/LAP grew faster than home loans

1+ dpd and GNPL levels witnessed a slight uptick to 4.7% and 1.1% respectively, but such sequential movement in delinquency levels during the first quarter has been a usual phenomenon (same experience in Q1 FY19/20). Credit cost was negligible owing to reduction in combined Stage 2 & 3 assets in absolute terms, non-meaningful writeoffs and slight decline in ECL coverage on Stage-2 assets. The reduction in Stage-2 assets and increase in Stage-3 assets largely represented forward flow of restructured assets (Rs160mn slipped from the std. OTR block of Rs1bn). Both HL and OML GNPLs witnessed marginal uptick.

AUM growth improved to 24% yoy, partially aided by a supportive base. Other mortgage loans (MSME/LAP) continue to grow much faster than home loans. Growth in both the segments remained volume-led. From customer profile stand-point, growth continues to be almost equally driven by both SE and Salaried customers.

Co. expects little spread correction and secular reduction in Opex metric from FY24

To counter the increase in CoF, Aavas raised its PLR by 25 bps from June and has announced another hike of 50 bps from August. 55-60% of loans are floating which gets almost immediately re-priced. There is a 3-year rate reset mechanism even in fixed rate loans. In case of bank borrowings (38-40% of total), almost 90% is linked to 1-year MCLR. Franchise investments will continue in the current year, thus from next year onwards the co. expects to ensue the journey of 20-25 bps pa reduction in Opex/Assets ratio

We marginally downgrade earnings estimates by moderating growth assumptions. Earnings would likely grow at 20% pa over FY22-24 and RoE is expected to reach 15% next year. We retain BUY while being cognizant that further growth acceleration would be key for re-rating

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