Buy Aavas Financiers Ltd For Target Rs.3,130 - Yes Securities
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‘Strong operational delivery’
Our view
Key positive highlights of Aavas’s performance in Q2 FY22 were strong disbursements (15% higher than estimate) and material reduction in the delinquent pool (incl. GNPLs). AUM growth came in ahead of expectations at 5.5% qoq/21% yoy, partly aided by portfolio run-off remaining constricted due to lending rate reduction effected before the second wave. While Home Loan growth recovered (up 4% qoq), the traction in other mortgage loans (OML) continued to be stronger driven by significant acceleration in MSME loans disbursements (formed 1/3rd of segmental disbursements). Growth in salaried profile customers also continued to be strong, supported by the persistent reduction in funding cost.
Portfolio spread was stable at 5.7% as both portfolio yield and cost of funds declined by 10 bps qoq. The DA income was higher at Rs331mn with the assigned pool being large at Rs1.75bn and mainly comprising of LAP and MSME loans which was securitized at higher spreads of 7.5-8%. There was a steep increase in overall Opex due to higher ESOP charge, normal increments and 17 branch openings in H1 FY22. The delinquent pool (1+ dpd) corrected by nearly 400bps qoq (now at 8.9%), which also included 20 bps reduction in Gross NPLs (back to March levels). Increase in total OTR pool (stood at Rs1.48bn – 1.5% of AUM) was limited during the quarter. Consequently, credit cost was lower at annualized 20 bps
Key Management comments were 1) reaching Rs120bn AUM by end FY22, 2) correction in 1+ dpd to March 2021 level by March 2022, 3) consistent 20-25bps pa reduction in Opex/AUM notwithstanding sustained investments in distribution, 4) some compression in spread over the longer run and c) reversion of credit cost to historical range of 20-25 bps.
We forecast 25-27% AUM CAGR, 25-30% earnings CAGR, 40-50 bps RoA expansion and 4-3 ppt RoE improvement for Aavas over FY21-24. With further capital raise unlikely, Aavas’ RoE could start matching growth from FY25 thus making it a selfsustaining growth story. The stock offers compounding at the rate of RoE (15-20% pa). Retain BUY with 12m PT of Rs3130.
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