Neutral Aavas Financiers Ltd For Target Rs.1,700 - Motilal Oswal Financial Services
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Disbursements yet to gain momentum even as NIM contracts
* AUM grew 22% YoY/5% QoQ to ~INR153b. Disbursements grew 10% YoY and 18% QoQ to ~INR12.6b, but were still below consensus expectations.
* 2QFY24 PAT grew 14% YoY to INR1.2b (5% beat). NII grew 18% YoY to ~INR2.2b. Other income grew 8% YoY, aided by higher assignment income of INR466m (PY: INR494m) and fee income of ~INR200m (PY: ~INR140m).
* Cost-to-income ratio moderated to ~45% (PQ: 48%), which led to the earnings beat, despite ~40bp QoQ compression in (calc.) NIM. Opex rose 14% YoY and declined 2% QoQ to INR1.3b. This was primarily because of lower employee expenses, potentially driven by lower ESOP expenses.
* We model a ~23% AUM CAGR and ~22% PAT CAGR over FY23-26E, with RoA/RoE of 3.6%/16.4% in FY26E.
* Valuations have declined over the last nine months and the stock now trades at 2.6x Sep’25E P/BV. Before turning constructive, we intend to closely monitor the execution of disbursements/AUM growth. Additionally, we will observe how the IT transformation improves productivity and operating efficiencies for AAVAS. We reiterate our Neutral stance on the stock with a TP of INR1,700 (based on 2.8x Sep’25E BVPS).
Disbursements will take another few quarters to fully recover
* AUM grew 22% YoY/5% QoQ to ~INR153b. Disbursements grew 10% YOY and 18% QoQ to ~INR12.6b, but were still below consensus expectations. Management shared that a) management transition, b) technology transformation, and c) high relationship officer attrition have all contributed to lower disbursement momentum.
* Annualized run-off in the loan-book stood at 16% (PY: 17%).
* Securitization during the quarter amounted to INR3.3b (PY: INR3b) but securitization margins were lower during the quarter (vs. earlier levels).
Highlights from the management commentary
* Disbursement were muted because there was a lagged impact of sanctions not getting converted into disbursements. Conversion of sanctions into disbursements dropped to 80% from ~90%.
* The decline in yields was driven by a) lower interest rate offered to retain existing customers and b) lower interest rate offered on new loan originations because of the competitive landscape.
Valuation and View
AAVAS reported RoA/RoE of 3.3%/14% in 2QFY24. Its constant endeavor to improve its technological edge and relentless focus on asset quality have positioned it as a standout player among peers. Notably, its 1+DPD remains within guided levels, driven by its prudent underwriting process and efficient collection efforts.
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