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Disbursements weak; NIM compression continues

Major tech transformation completed; unlikely to impact business ahead

* AAVAS Financiers (AAVAS)’s 2QFY25 PAT grew 22% YoY to ~INR1.48b (in line). 1HFY25 PAT grew 18% YoY to ~INR2.74b and we expect 2HFY25 PAT to also grow by ~18% YoY. 2Q NII grew 9% YoY to ~INR2.42b (in line).

* 2Q core NIM (calc.) declined ~25bp QoQ to ~6.6%. Reported spreads declined ~10bp QoQ to 4.9% (vs. ~5% as of Jun’24).

vManagement shared that it has raised its prime lending rate (PLR) by ~25bp, effective Oct’24. The company guided for spreads of ~4.8%-5.0% in FY25. It aims to improve the disbursement yield by increasing the proportion of lower ticket size loans and self-employed customers/self-construction properties.

* The company exhibited operational efficiency with opex rising only ~5% YoY to INR1.4b (~7% lower than MOFSLe). The opex-to-avg. AUM declined to ~3% (PY: 3.5% and PQ: 3.1%). Employee expenses declined QoQ because of the reversal of ESOP expenses. Management shared that it will continue to optimize its cost ratios by ~20-30bp over the next few years to reach the steady state of ~3%. We estimate the opex-to-avg. assets ratio to decline to ~3.0% by FY27 (vs. ~3.6% in FY24).

* We estimate ~22% CAGR each in AUM and PAT over FY24-27, with RoA/ RoE of 3.4%/16% by FY27E. AAVAS trades at 2.7x FY26E P/BV. We believe that the valuations largely reflect the key positives and the company’s preparedness to accelerate disbursements/loan growth and achieve operating efficiencies, now that all the major technology transformations have been completed. Maintain Neutral with a TP of INR1,880 (based on 2.7x Sep’26E BVPS).

AUM rises ~20% YoY; disbursements weaker than expectations

* AUM grew ~20% YoY to ~INR184b. Disbursements rose ~3% YoY to ~INR12.9b. Share of HL in 2Q disbursements stood at ~65%. The annualized run-off in the loan-book stood at ~16.6% (PY: ~16.1% and PQ: ~15.8%).

* Disbursements were weak during the quarter because of 1) elongated monsoons which impacted the construction activities, 2) regulatory change in terms of how lenders need to treat disbursements, and 3) go-live of loan management system (LMS) which temporarily impacted business activities in the quarter.

* Securitization during the quarter amounted to ~INR4.3b (PY: ~INR3.3b) and securitization margins rose ~20bp QoQ to 13.5%.

Highlights from the management commentary

* Management shared that its disbursement yield in 1HFY25 was ~30bp lower than the portfolio yield. This compares to last year when the disbursement yield was ~50bp lower than the portfolio yield.

* AAVAS is making consistent efforts to optimize costs. This, along with operating leverage, will resulted in sustained improvement in cost ratios.

Valuation and View

* AAVAS reported RoA/RoE of ~3.3%/~14% in 2QFY25. The company’s efforts to improve its technological edge and focus on asset quality have made it a standout player among peers. Notably, its 1+DPD remains within the guided levels, driven by its prudent underwriting process and efficient collection efforts.

* Now that the company has completed all the major tech transformations with the go-LIVE of its loan management system, we expect no disruptions to business activities in the future. Moreover, the improvement in TAT, should translate into stronger disbursement growth trajectory in the subsequent quarters.

* The stock trades at 2.7x FY26E P/BV and any re-rating in valuation multiples will depend on stronger AUM growth and delivery of operating efficiencies to further improve the RoA profile. Maintain Neutral with a TP of INR1,880 (based on 2.7x Sep’26E BVPS).

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