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PAT beat driven by efficiencies; growth yet to pick up

Aavas reported a healthy quarter with PAT at INR 1.5bn (+21.5% YoY, +17.3% QoQ, +15% JMFe), led by a) moderation in opex growth (-1% QoQ, +4.6% YoY) and b) lower credit costs (0.1% vs 0.2% QoQ). While partial moderation in costs was driven by a one-off ESOP reversal, the primary driver was realization of green shoots from previous tech spends. As a result, C/I ratio saw a meaningful improvement to 41.2% (vs 44.8% QoQ). Growth remained relatively subdued (+20.1% YoY, +3.1% QoQ) led by muted disbursements (+2.8% YoY, +6.8% QoQ). Slower pace of disbursements was largely due to the extended monsoon and a temporary shutdown of the LMS platform as the company transitioned to a new system. Despite these short-term challenges, mgmt. is optimistic about a recovery in growth, with expectations for a stronger H2. Mgmt. guides for 20%+ AUM growth for FY25. Spreads narrowed to 4.89% (vs 5% QoQ) due to a slight dip in yields (-4bps QoQ) and a subsequent inch up in CoBs (+7bps QoQ). However, mgmt. is addressing this by passing on the higher CoBs to customers, and has thereby raised lending yields by 25bps starting Oct’24. Meanwhile, headline asset quality metrics remained largely steady with GS3/NS3 at 1.08%/0.77% (+7bps QoQ, +5bps QoQ). 1+ DPD edged up to 3.97% (vs 3.65% QoQ) due to the effect of extended monsoon and festive season. However, early signs of improvement are already visible, with 1+ DPD for Oct ’24 at 3.84%. While Aavas continues to deliver strong return ratios, we believe further re-rating will hinge on a) a pick-up in growth momentum in H2, b) ability to sustain spreads at current levels despite rising CoBs, and c) continued realization of operational efficiencies from earlier, front-loaded tech investments. We expect RoA/ROE to reach 3.7%/17% by FY26E. Maintain BUY with a TP of INR 1985 (valuing it at 3x FY26E BVPS)

*  Growth remains tepid; H2 expected to be better: AUM for the quarter stood at INR 184bn (+20.1% YoY, +3.1% QoQ) as disbursements remained muted at INR 12.9bn (+2.8% YoY, +6.8% QoQ). The slower pace of disbursements was primarily due to the impact of extended monsoons and a temporary shutdown of the LMS platform as Aavas transitioned to a new system. Mgmt. has indicated that these temporary disruptions are largely behind them, and guides for a 20%+ AUM growth for FY25, underpinned by a favourable outlook and resumption of stronger disbursements. Additionally, Aavas’s strategic co-lending partnership with PSU Banks should provide further impetus to growth. We build in an AUM CAGR of 22% over FY24-26E.

*  Moderation in opex drives PPoP beat: Operating profit was robust at INR 1.9bn (+19.5% YoY, +14.9% QoQ, +12% JMFe) driven by a) healthy NII (+11.7% YoY, +9.2% QoQ) and b) controlled opex (+4.6% YoY, -1% QoQ). As a result of which cost to assets inched down to 3.2% (-6bps QoQ). While part of the moderation in costs was driven by a oneoff ESOP reversal, the primary driver was the realization of operational efficiencies stemming from earlier technology investments. Spreads narrowed to 4.89% (vs 5% QoQ) driven by a slight decline in yields (-4bps QoQ) and a subsequent inch up in CoBs (+7bps QoQ). However, mgmt. is addressing this by passing on the higher CoBs to customers, and has thereby raised lending yields by 25bps starting Oct’24. While there may be a slight lag in fully reflecting this adjustment, they remain confident in their ability to maintain spreads within 4.8%-5% range for FY25.

*  Stable asset quality metrics: Headline asset quality metrics remained largely steady with GS3/NS3 at 1.08%/0.77% (+7bps QoQ, +5bps QoQ). On a segmental basis, GS3 for home loans stood at 0.99% (vs 0.93% QoQ) while for non-home loans stood at 1.49% (vs 1.33% QoQ). Uptick in 1+ DPD to 3.97% (vs 3.65% QoQ) was due to the effect of extended monsoon and festive season. However, early signs of improvement are already visible, with 1+ DPD for Oct ’24 at 3.84%. Credit costs during the quarter moderated to 0.11% (vs 0.2% QoQ). We build in avg. credit cost of ~11bps over FY25E/26E.

*  Valuation and view: While Aavas continues to deliver strong return ratios, we believe further re-rating will hinge on a) a pick-up in growth momentum in H2, b) ability to sustain spreads at current levels despite rising CoBs, and c) continued realization of operational efficiencies from earlier, front-loaded tech investments. We expect RoA/ROE to reach 3.7%/17% by FY26E. Maintain BUY with a TP of INR 1985 (valuing it at 3x FY26E BVPS).

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