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A good quarter, but need to watch out for any impact after Founder MD’s resignation

Aavas delivered an 8% beat on our earnings estimate despite incurring higher credit cost to improve ECL coverage. The asset quality improved significantly with 7-12% qoq reduction in Stage-2 and Stage-3 assets. The reported PPOP was 10% higher than our expectation on stronger-than-expected disbursements/AUM growth, resilient NIMs

Aavas’s Founding Promoter & Managing Director, Mr. Sushil Agarwal, has tendered resignation, and Mr. Sachinder Bhinder, recently appointed CEO, has been elevated as MD & CEO. Key Management commentary was 1) sustenance of AUM growth between 22-25%, 2) LAP/MSME contribution remaining at 25-30% 2) maintenance of Spread around 5.5% aided by pricing actions taken, 3) going live on the new LOS/LMS platforms raising business productivity and cost efficiencies, and 4) high confidence
about maintaining strong asset quality and low credit cost. The management also assured about senior management remaining committed to Aavas, attrition not increasing in other important functions/positions and the financial promoters not
having any intention to pare stake in next couple of years. While our estimates haven’t undergone any significant change (assuming operations largely running as usual), we remain wary of undue increase in attrition (across organizational layers) impacting company’s intended execution on growth and asset quality. This risk will remain a key overhang for the stock. Though Aavas’s valuation has corrected substantially over the past six months, it is still in-line with peers Home First and Aptus. We expect relative underperformance to continue till investors’ confidence strengthens on long-term growth path. We downgrade rating from BUY to Reduce with lowered 12m PT of Rs1370.and lower employee cost (ESOP cost reversal).

Strong growth, NIM and asset quality delivered in Q4 FY23

Aavas’s disbursements grew by 31.5% qoq/23% yoy, and along with lower portfolio run-off (lower CLSS subsidy credit and presumably restrained BT Out) drove a strong growth in AUM of 8% qoq/25% yoy. Adjusted for higher CLSS subsidy received during the year (Rs2.1bn v/s Rs1.1bn in FY22), the AUM growth was 26% yoy. Growth continued to improve in Home Loans (up 8% qoq/23% yoy) and traction in Other Mortgage Loans further accelerated (up 9% qoq/35% yoy). Within the latter portfolio,
MSME loans continue to grow at much faster pace than LAP. The ATS remains unchanged across all products, depicting a consistent volume-led growth. The improvement in portfolio yield is running non-commensurate with rate hikes taken
due to 40% AUM on fixed rate and benefits from rate hikes being utilized for retaining BT requests and to competitively price new/fresh loans. After taking 160 bps rate hike in FY23, Aavas has taken another 40-bps hike effective April first week. For about 90% of customers, the rate hikes have been adjusted through tenor extensions and in remaining cases the EMI has increased by Rs500-1000 (avg EMI prior to rate hike cycle was Rs12000). Delinquency levels continue to improve with 1+ dpd declining to 3.3% from 4.1% qoq. The 1-90 dpd bucket declined from 2.9% to 2.4% and Stage-3 assets improved from 1.1% to 0.9%. The trends in Stage-2 and Stage-3 assets points towards continuance of low credit cost.

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