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Aavas reported its Q4FY25 results, which came in below our estimates, with disbursement in HL declining YoY for the first time since Covid. Overall disbursements for the quarter increased by 7% YoY, driving an 18% YoY expansion in AUM to Rs204bn (lower than our estimate). Notably, reported spreads dropped by 5bps QoQ to 4.89%. The compression in spreads in Q4FY25 can be attributed to lower yields as the CoB remained stable at 8.24%. As a result, NII growth of 15% YoY and 9.5% QoQ trailed AUM growth. Further, the CTI came in higher at 46.1% (PY: 44.1%, PQ: 42.7%) due to the opening of 24 branches during the quarter, which spiked manpower costs and led to higher expenses. Consequently, operating profit increased by 10.4% YoY and 3.2% QoQ. Credit costs (cal.) rose to 19bps from 16bps PQ. Net profit for Q4FY25 came in at Rs1.6bn, up 12% YoY/7% QoQ. Looking ahead, given the moderation in disbursement trends—particularly within the Housing segment—and the significant stock price appreciation (~25% rise) since the previous quarter, we believe the scope for further upside is limited. Relative to peers, Aavas offers lower growth and inferior return profile. Accordingly, we continue to assign a relatively lower valuation multiple to the company and prefer to wait for a sustained improvement in disbursements and spreads before considering an upgrade from ADD to BUY. We are building in AUM/NII/PAT CAGR at 19%/20%/20% over FY25-FY27E and expect RoA/RoE of 3.3%/15.0% in FY27E. Aavas is currently trading at 3.4x/2.9x FY25E/FY26E ABV, which captures all growth parameters and offers limited upside from our target price of Rs2,021 (2.8x FY27E P/ABV). We maintain ADD on Aavas given our positive outlook on the sector.

FY25 growth guidance missed but re-iterated for FY26

Aavas reported AUM of Rs204bn, up ~18% YoY and 6% QoQ. However, disbursement growth was subdued at 9.7% for FY25. Home Loan AUM grew ~16% YoY and 4.6% QoQ while Non-HL AUM grew 23% YoY and 9.6% QoQ. Disbursements growth for the quarter in HL/Non HL portfolio was -3%/27% YoY. The management attributed the subdued performance in the HL segment to cautious underwriting approach, with the conventional login-to-sanction conversion rate declining from 42% to 38%. We are baking in miss on growth guidance similar to FY25 given its inconsistent delivery on the disbursement front.

Spread inches down as yields decline

Aavas reported spreads of 4.89%, down 5bps QoQ, driven by a 5bps QoQ fall in yields to 13.13%. However, the CoB remained stable at 8.24%. Notably, in a rate-cut scenario, 36% of bank borrowings are linked to EBLR (T-bill, Repo & MIBOR) and 23% to a 3m MCLR, which should help mitigate pressure on CoB in the medium term.

Opex/AAUM decline QoQ

Aavas improved its opex-to-assets ratio by 11bps in FY25 to 3.32% and aims to reduce it by 20bps annually, targeting sub-3% levels through cost optimization. Operating leverage will be driven by tech integration, reduced manpower for sourcing and collections, and enhanced productivity, where Aavas currently lags peers.

Asset quality remains pristine

1+dpd declined 46bps QoQ to 3.39% while Stage 2/3 assets stood at 1.47%/1.08% (vs. 1.54%/1.14% in Q3FY25). Asset quality remains pristine and best in the industry. Stage 3 PCR increased to 32.4% due to a shift in new system (PQ: 29.8%, PY: 28.8%), with total asset provisions inching up by 4bps to 0.66%.

Valuation

We are buildin in AUM/NII/PAT CAGR at 19%/20%/20% over FY25-FY27E and expect RoA/RoE of 3.3%/15.0% for FY27E. Aavas is currently trading at 3.4x/2.9x FY25E/FY26E ABV, which captures all growth parameters and offers limited upside from our target of Rs2,021 (2.8x FY27E P/ABV). We maintain ADD on Aavas given our positive outlook on the Housing sector

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SEBI Registration No.:- INZ000205331