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Aavas has underperformed its peers/indices in the last 1 year driven by management/promoter transition and moderation in AUM/RoE profile. We believe its performance in 1Q has bottomed out and should improve from hereon, driven by a) pick-up in disbursement growth as accounting/tech related changes are now complete; b) focus on external sourcing channels and earlier investments in branch/employees should lead to improvement in growth/operating leverage; c) spread should improve as CoF comes down; and 4) benign credit cost as stressed asset pool remains the lowest amongst peers. We expect EPS CAGR of ~17% during FY25-27F with avg. RoA/RoE of ~3.3%/14% during FY26/27F. Current valuation of 2.5x 1-year Fwd P/B is at ~44% discount to the LT average and lowest amongst peers. We maintain BUY on the stock with a revised TP of INR 2,000 (INR 1,990 earlier), valuing it at 2.7x FY27E BVPS.

* Aavas has underperformed other AHFCs in last 1 year:

In the last 1 year, the stock price of Aavas has corrected ~10% as compared to mid-teen price growth for Aadhar and IndiaShelter and muted NIFTY growth. Even on 1M/3M/6M basis, the stock has underperformed compared to NIFTY and other peers (Exhibit 1).

This underperformance in the last few years (stock down ~24% in the last 3 years) was driven by issues surrounding its founder’s exit and consequent change in promoter from Kedaara Capital/Partners group to CVC Capital Partners and deterioration in financial performance. AUM growth moderated from 25% YoY in FY23 to 16% YoY in 1QFY26 and RoE fell from 14.1% in FY23 to 12.6% in 1QFY26 (Exhibit 5). As a result, the stock is currently trading at 2.5X 1 Year Forward P/B vs. 3.4X 1 Year Forward P/B in Mar’23 (~44% discount to the LT average) (Exhibit 2).

* Operating performance bottomed out in 1QFY26, improvement expected from 2Q onwards:

After a series of events (Exhibit 3), in Jul’25, both Kedaara Capital and Partner’s group exited from the company completely and CVC Partners is now a major stakeholder with ~49% stake. This provides much-needed stability at the promoter level. We also expect financial performance to improve from 2Q onwards driven by: i) Normalisation in disbursement run-rate, ii) Focus shifting to other sourcing channels, iii) Increasing operating leverage and geographical diversification, iv) Possibility of NIMs expansion, and v) Best-in-class asset quality. (Details inside).

* Valuation and view:

We believe that the ~10% correction in stock price over the past 1 year is just a reaction to a multiple sequence of events and the seasonality effect in 1Q. We expect 2H to be stronger, led by a) pick-up in disbursement growth momentum, b) margin stabilisation/expansion with CoFs re-pricing and c) improvement in asset quality. We have upgraded our FY26-28F EPS estimates by ~13%-26% and maintain BUY on the stock with a revised TP of INR 2,000 (INR1,990 earlier), valuing it at 2.7x FY27E BVPS in return for avg. RoA/RoE of ~3.3%/14% over FY26E/FY27E.

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