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Stress pool moderates sharply; securitisation income aids earnings

Aavas Financiers’ (Aavas) earnings were in line with our expectations with PAT of Rs891mn (up 4% YoY, down 3% QoQ). Encouragingly, 1+dpd pool moderated sharply to 6.45% (vs 8.88% QoQ) thereby lowering the stress pool (stage-2&3 at 5.76%). Nonetheless, stage-3 edged 76bps higher QoQ to 1.72% as 89bps with less than 90 dpd was classified as stage-3 due to revised classification norms. Broadly retaining provision coverage across buckets, credit cost settled at 54bps (higher than I-Sec estimate of ~40bp). Earnings were supported by Rs244mn of securitisation income. AUM growth at 20% YoY and 5% QoQ to Rs106bn lagged peers. However, with investments in building capacities and improvement in productivity, disbursement growth is expected to catch pace and support AUM growth of 25% in the medium term. With sustained NIMs, Aavas is likely to deliver ~3.5% RoA and ~15% RoE by FY23E/FY24E. The stock trades at 6.5x FY24E book and 45x earnings. Maintain HOLD with a revised target price of Rs2,936 (earlier: Rs2,668) assigning 6.75x Sep23E BV. Key risks: 1) stage-3, post revised classification, taking longer to normalise; 2) better than expected AUM growth.

Stage-3 assets rise 76bp QoQ to 1.72% (89bp rise due to revised asset classification norms), 1+ dpd moderated sharply to 6.45% vs 8.88% QoQ: Management had indicated earlier that regular interactions with borrowers and their loan repayment behaviour suggest 1+ dpd spike would be transitory in nature. True to this, Aavas witnessed a steep decline in 1+ dpd to 6.45% (vs 8.88% in Q2FY22, 12.67% in Q1FY22) and closer to FY21 level of 6.37%. Pace of decline in 1+ dpd was better than anticipated, which speaks of the company’s collection capabilities. However, gross stage-3 spiked to 1.72% from 0.96% QoQ, as 89bps with less than 90 dpd was classified as stage-3 due to revised classification norms. Excluding this impact, stage-3 would have fallen by 13bps QoQ. In terms of segment, stage-3 for home loans was up 72bp QoQ to 1.70%, while it was up 85bp QoQ to 1.77% for mortgage loans. More importantly, stage-2&3 assets moderated QoQ from 7.07% to 5.76%. Also, stage-3 has already improved 20bps in Jan’22. Restructuring remained at Rs1.5bn (1.4% of AUM) vs Rs1.48bn QoQ. Overall, we estimate stage-3 at 1.45%/1.20% for FY22E and FY23E.

Credit cost of 54bp at 8-quarter average; covid buffer at Rs101mn: Despite flowthrough into stage-3 pool due to revised norms, Aavas continued with coverage of 23.4% on stage-3, 7.3% on stage-2 and 25bps on stage-1 assets. Stage-3 classified assets for higher provisioning of Rs167mn and interest was reversed to the extent of Rs50mn. Overall, ECL provisions were increased to 93bps (vs 85bps QoQ). Credit cost thereby came in at 54bp, equivalent to past 8-quarter average. We expect it to settle around 50bp for FY22E. Aavas has dipped into covid buffer, which now stands at Rs101mn vs Rs148mn QoQ (excluding restructured provisions). Overall, considering the traction seen in 1+ dpd, we maintain our credit cost estimate at 46bps/34bps/32bps for FY22E/FY23E/FY24E.

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