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Lower-than-expected disbursements and NII/PPOP; asset quality was strong

Aavas delivered 3%/6% miss on NII/PPOP (adjusted for assignment income) in Q2 FY24 on account of lower-than-estimated disbursements (8.5% miss) and a larger-thanexpected decline in portfolio spread (compressed 30 bps with unanticipated 10 bps decline in yield). While employee cost was lower (Q1 had significant ESOP cost), the other opex was higher due to system/tech changes (new LOS, LMS & ERP) being implemented. Asset quality trends remained strong with incremental improvement seen in 1+ dpd and 30+ dpd which moved lower to 3.6% and 2.5% respectively. Writeoffs were only Rs20mn in the first half of the year and credit cost has been trending below 20 bps. With some softening in RoA in the past two quarters, the pace of RoE improvement has slowed.

Confident of 20-25% AUM growth, even as incremental tech changes are implemented

While Aavas’ disbursements improved sequentially (Q1 impacted by LOS implementation), the extent of business recovery was below expectations. Co. has started the implementation of new LMS and ERP which would be completed by the year-end. This second phase of tech/system changes would be significantly less disruptive from originations standpoint. Hence, management expects disbursements momentum to keep improving. These tech changes are being done with the objective of raising efficiency & productivity, driving scalability, and enhancing the customer experience. The concomitant benefits would significantly manifest from the next fiscal. BT Out has been stable and is being controlled through reduction of rates. Management remains confident about delivering 20-25% AUM growth. In our view, Aavas needs to disburse Rs30bn+ in H2 to deliver portfolio growth in the guided range. Increase in HL origination ATS (property price inflation + new market growth) and significant branch addition (25 in H2 v/s 4 in H1) would aid disbursement growth.

Spread management would be key

The 20-bps increase in CoF was on expected lines; being driven by some repricing of bank loans and reduction in share of NHB borrowings. However, the slight reduction in portfolio yield came as a negative surprise and was caused by rate reduction for existing customers (BT requests) and competitive pricing of new loans across markets. CoF is expected to marginally move up in H2 FY24 with some mitigation from availment of NHB borrowings (Rs10bn sanction in hand). Portfolio yield could remain under pressure in the absence of rate increases for new loans. Management believes that spread would be maintained above 5%.

Maintain Neutral rating; growth and spread management would be key

While there are no significant changes in earnings estimates, the recovery in disbursement growth and sustaining spreads around the current level would be closely watched in the next couple of quarters. We estimate CAGR of 23% in AUM and 20% in earnings with RoE reaching 15%+ in FY25. Valuation at 2.8x P/ABV and 19x PE is palatable after the recent price correction, but any significant re-rating would only get triggered by an acceleration in loan growth and easing of the pressure on spreads. We expect relative underperformance to continue and assign Neutral rating with a 12m PT of Rs1650.

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