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Strong pickup in disbursements; asset quality healthy

* Aavas Financiers (AAVAS)’s 4QFY21 PAT grew 46% YoY to INR876m (16% beat). While operating profit missed our estimates by 8% (due to one-offs), lower-than-expected credit costs and tax rate led to the PAT beat.

* Contrary to initial expectations, AAVAS had a healthy FY21, with 21% YoY AUM growth, only a ~50bp increase in the GNPL ratio, and healthy RoA of 3.5%. NII/PAT grew 20%/16% YoY in FY21.

Sharp uptick in disbursements; AUM mix stable

* Disbursements surged 32% QoQ and 17% YoY to INR10.1b in 4Q. As a result, AUM grew 7% QoQ / 21% YoY to INR95b.

* The AUM mix remained stable, with the share of LAP at 27%. The share of salaried customers was also stable at 40%.

* AAVAS sold down INR1.6b worth of loans in the quarter (v/s INR2.4b in 3QFY21) and recorded upfront income of INR274m.

* The company opened up 17 branches in the quarter, seven of which are in Rajasthan.

Asset quality stable; 1+ dpd ratio improves

* The GNPL/NNPL ratio remained sequentially stable at 1%/0.7%. The company did not restructure any loans during the quarter. ECLGS disbursements were negligible.

* On a positive note, the 1dpd+ ratio improved 180bp QoQ to 6.4%. The management expects this to revert to sub-5% levels after 2–3 quarters.

Sharp decline in yield; reduced liquidity on balance sheet

* The calculated yield on loans declined 130bp QoQ and 75bp YoY to 13.8%, driven by a) a 10bp cut in home loan rates in Jan’21, b) an impact of ~INR40m from an assignment-related accounting, and c) interest reversals on NPLs taken by management as a prudent measure (INR100m impact). Adjusted for these, yield would have been largely in-line. Note that the company cut interest rates by 15bp in Apr’21.

* At the same time, AAVAS continues to reap benefits on the liability side – it borrowed INR7.3b at 6.3% in 4QFY21. Overall CoF declined 30bp to 7.2%.

* AAVAS reduced liquidity on the BS from INR18b to INR11b on a sequential basis. Liquidity now amounts to 18% of borrowings.

Valuation and view

We believe AAVAS has built a sustainable business model to scale up profitably across geographies over the long term. Its technology adoption and relentless focus on asset quality have made it a standout among peers.

This is evident in the healthy asset quality performance in FY21. On the business front, disbursements have now exceeded YoY levels – we expect the company to deliver a 23% AUM CAGR over the medium term. With operating leverage playing out, we expect the expense ratio to reduce 50bp to 2.5% over FY21–24E, on account of stronger growth. We upgrade our FY22/FY23E EPS estimates by 5–10%. However, given rich valuations, we maintain a Neutral rating, with TP of INR2,400 (6x FY23 BVPS).

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