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Disbursements impacted by RBI circular; persistent pressure on portfolio yield

Aavas’s PPOP/PAT were in-line with our expectations, wherein the core NII miss and lower assignment income were offset by better fees and lower employee cost (lower disbursements and lesser ESOP-related provisions). Even though sanctions grew by 25% yoy in the quarter, the disbursement growth was modest at 13% yoy due to alignment of operations with RBI’s April-end circular on interest charging from actual disbursement.

Portfolio spread fell by 6 bps qoq to 5%, despite nearly stable CoB, with 5 bps contraction in the portfolio yield. Persistent pressure of managing new loan pricing and foreclosure requests (both reflective of competition) has been weighing on portfolio yield/spread for the past many quarters. The portfolio yield is down ~20 bps in the past 12m after absorbing a 25 bps PLR hike. Notwithstanding an increase in the cost of incremental borrowings (8.31% v/s 8.14% in Q4 FY24 - due to absence of NHB funds), the stock CoB was stable implying no significant adverse repricing in existing borrowings.

1+ dpd increased to 3.7% from an all-time low of 3.1% as of March’24, which is in-line with the movement seen during the first quarter of a fiscal. Accordingly, there was an increase in Stage-2 and Stage-3 assets and consequently, credit cost was a little elevated at 20 bps. Write-offs continue to be marginal at ~Rs30mn and ECL coverage was largely maintained across buckets

Management looking at 22% growth and restricting further spread fall

Aavas is reasonably confident about delivering 22% AUM growth for the year. Management does not expect any significant business loss or a rebasing of structural disbursement run-rate due to the RBI’s April-end circular. Sanctions’ growth is expected to say strong, and the disbursement-to-sanction ratio is expected to normalize soon. Logins/Sanctions growth would continue to be driven by 1) efficiencies emanating from LOS and ERP implementation, 2) branch addition (co. plans to grow branch network by 10% every year) and 3) enhanced sourcing from non-branch channels like digital, eMitra, connectors, etc. and 4) reenergization of the core product of low-ticket highyielding Home Loans

The flow of BT requests has stabilized over the past couple of quarters and the actual BT Out has been hovering around the 6% mark (annualized basis) with the company focused on controlling foreclosures. The peaking out of CoB and subtle improvements in new loan pricing are expected to help Aavas in delivering portfolio spread around the 5% mark over next couple of quarters. In the longer term, the spreads can recover to some extent aided by a) ~33% AUM being on fixed rate, b) retention of some benefit after turning of funding cost cycle or intended lag in passing to the customers and c) availability of larger funds from NHB. Management expects to prune Opex/Asset ratio to near 3% in the medium term, aided by productivity/efficiency benefits and emphasis on non-branch sourcing.

Cut earnings estimates; continue to rate ADD

We have lowered FY25/26 earnings by 4-6% on revision of growth and spread estimates. We estimate 22.5%/21% AUM/Earnings CAGR over FY24-26 with RoE improving to 15% on the back of sustained growth, spread recovery in FY26 and improvement in operating cost metrics. Key near-term monitorables would be catchup in disbursements growth (with sanction growth) and stabilization of portfolio spread. On the revised estimates, Aavas’ valuation at 20x FY26 P/E is at marginal premium to Home First and Aptus, but its growth and RoE have been lower. Hence, continue with ADD rating on the stock with relative preference for Aptus followed by Home First.

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