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Disbursements lower than anticipated; NIMs down

Disbursements for the quarter stood at Rs12.6bn, up 10% YoY which was lower than our expectation. AUM was up 22% YoY to Rs 153.2bn. Spreads (reported) declined 31bps QoQ to 5.29% due to fall in interest yields with rise in competitive intensity and rise in CoF. CoF are expected to rise further by 15-25bps while yields are likely to remain stable. Management guided to maintain Spreads above 5.0%. NII was up 13.5% YoY and 3.7% QoQ, slightly below our expectations. Opex declined 2.3% QoQ due to reduction in employee costs, resulting in C/I ratio of 44.5% as against 47.8% in 1QFY24. Thus, operating profit improved 17% YoY and 11% QoQ ahead of our estimates. Credit costs inched up marginally by 2 bps to 0.21%, yet remain best in class. Earnings stood at Rs1.2bn, up 14% YoY and11% QoQ. AUM growth guidance remains intact at 20-25% however, it will take couple of quarters for disbursements to grow at a rapid pace as the management transition and tech transformation completes. We build in AUM/NII/PAT CAGR at 22%/21%/21% over FY23-26E and RoA/RoE of 3.6% and 16% by FY26E. We continue to value Aavas at 3.5x FYH1FY26E P/ABV to arrive at our Target Price of Rs 2060. Maintain Buy. Key risk – Slower disbursements than our expectations

Higher ticket size in Home Loans drives disbursement growth

Disbursement in Home Loans and Other Mortgage Loans was up 8%/13% YoY to Rs 8.4bn and Rs 4.2bn, respectively. Disbursements ATS in Home loans was up 19% YoY to Rs 1.31mn, indicating decline in volumes processed. Management attributed ATS growth to rise in property prices in its key markets. Mix between Home Loans and Other Mortgage Loans remained stable at 70% and 30%, respectively. Home Loans AUM was up 20% YoY and Other Mortgage Loans increased by 27% YoY. Repayment rate was stable as company renegotiated yields with good quality customers to retain them.

NIMs to remain under pressure

Increase in competitive intensity led 11bps QoQ decline in yields to 13.15%. CoB continues to remain under pressure, increasing 20 bps QoQ to 7.86%. Another 15-25bps increase in CoB is in the ambit as the incremental CoB stands at 8.2%. High competitive intensity and rising CoB should keep spreads under pressure.

Asset Quality remains prisitine

Company witnessed improvement in delinquency ratios with 1+ dpd moving down 87bps YoY and 10 bps QoQ to 3.58%. Gross Stage 2 and Gross Stage 3 stood at 1.68% and 1.04% in 2QFY24 as against 1.86% and 1.0% in 1QFY24. Stage 3 PCR stood at 27.5% (an improvement of 60bps QoQ) while total ECL provisions remained flat QoQ at 64bps of gross loans. Credit costs for the quarter was at 21bps, up only 2 bps QoQ. Write-offs in 1H were negligible at Rs20mn, reflecting its superior underwriting strength.

Opex control surprised positively

Opex decline of 2.3% QoQ was a positive surprise. Employee cost was down 13.6% QoQ as 1Q was impacted by one-offs, variable pay and appraisals. However, other expenses increased 25%. Aavas, in our view has lower productivity as compared to its peers and tech transformation, should support operating leverage to play out over medium term

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