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2025-09-05 11:12:33 am | Source: Motilal Oswal Financial Services Ltd
Neutral Aavas Financiers Ltd For Target Rs. 1,900 by Motilal Oswal Financial Services Ltd
Neutral Aavas Financiers Ltd For Target Rs. 1,900 by Motilal Oswal Financial Services Ltd

Operationally weak; seasonal deterioration in asset quality

One-time impact on disbursements due to a change in the recognition model

  • AAVAS Financiers (AAVAS)’s 1QFY26 PAT grew 10% YOY to ~INR1.4b (in line). NII in 1QFY26 grew 14% YoY to ~INR2.8b (in line). Other income grew 26% YoY, aided by higher assignment income of ~INR475m (PY: INR305m).
  • AAVAS’s 1QFY26 core NIM (calc.) was stable QoQ at ~6.85%. Reported spreads rose ~20bp QoQ to 5.1% (v/s ~4.9% in 4QFY25).
  • Opex rose ~21% YoY to INR1.7b (in line). Opex to avg. assets stood at ~3.5% (PY: 3.3% and PQ: ~3.8%). Opex was higher YoY because of an increase in ESOP costs. We estimate an opex-to-assets ratio of 3.4%/3.3% in FY26/ FY27 (vs. ~3.4% in FY25).
  • Management highlighted that recent demand trends have been encouraging, with disbursements growing ~16% YoY in Jul’25. The company expects AUM to grow ~18-20% in FY26 and ~20-25% from FY27 onwards.
  • Asset quality exhibited seasonal deterioration, with GS3/NS3 rising ~15bp/ 10bp QoQ to 1.2%/0.85%. AAVAS’s 1+dpd rose ~75bp QoQ to 4.15%. Management shared that the rise in 1+dpd was due to seasonal factors, and the company has already seen normalization trends in Jul’25 (1+dpd < 4%), reinforcing its confidence in the stability of the portfolio.
  • The company shared that a seasonal spike in asset quality was seen in a few pockets of Maharashtra, MP, and Karnataka, prompting tighter credit underwriting in those regions. This was also primarily in loans with a ticket size of less than INR500K. Outside of these affected pockets, AAVAS did not observe any broad-based credit quality concerns and expects AUM growth to pick up in the coming quarters.
  • We estimate an AUM and PAT CAGR of ~18% each over FY25-27, with an RoA/ RoE of 3.4%/15% by FY27. AAVAS trades at 2.4x FY27E P/BV. We believe the company will need to deliver on its guided loan growth and operational targets to sustain current valuations. Reiterate Neutral with a TP of INR1,900 (based on 2.6x Mar’27E BVPS).

AUM rises ~16% YoY; the share of HL in disbursements at ~57%

  • AUM grew 16% YoY and ~1.6% QoQ to ~INR207b. Disbursements declined ~5% YoY to ~INR11.5b. Share of HL in 1QFY26 disbursements stood at ~57%. Disbursements in 1QFY26 were muted because of the one-time impact of transitioning to a realization-based disbursement recognition model. Management shared that, adjusting for the impact of this change, disbursements in 1QFY26 would have grown by double digits YoY.
  • Annualized run-off in the loan book stood at ~16.2% (PY: 15.8% and PQ: ~17.5%). Securitization during the quarter amounted to ~INR3.8b (PY: ~INR2.3b), and securitization margin dipped ~175bp QoQ to 12.6%.

Highlights from the management commentary

  • The company is starting to see positive results from its partnerships with CSC, EMitra, and India Post Bank. It is receiving over 1,000 monthly logins through the CSC tie-up. It has also added staff to manage digital channels and handle leads generated from these partnerships.
  • Management shared that the company is well-positioned for a credit rating upgrade. The company is engaging with its existing credit rating agencies, and it is hopeful that they will take up AAVAS's case positively.

Valuation and view

  • AAVAS reported an operationally weak quarter, with weak AUM growth and disbursements impacted by the one-time shift to a realization-based recognition model. Asset quality saw seasonal deterioration, with a sequential rise in GS3 and 1+dpd levels.
  • The company posted RoA/RoE of ~2.9%/~12.6% in 1QFY26. Its continued investments in technology and unwavering focus on asset quality have helped it stand out among peers. Notably, 1+ dpd levels remain well below guidance, supported by prudent underwriting and efficient collections.
  • Now that the company has completed all major tech transformations, we expect no disruptions to business activities in the future. Moreover, the improvement in TAT (down to 6 days from its peak of 13 days earlier) should translate into a stronger disbursement growth trajectory in the subsequent quarters.
  • The stock trades at 2.4x FY27E P/BV, and the sustenance of these valuation multiples will depend on stronger AUM growth and delivery of operating efficiencies to further improve the RoA profile. Reiterate Neutral with a TP of INR1,900 (based on 2.6x Mar’27E BVPS).

Seasonal deterioration in asset quality; 1+dpd rises ~75bp QoQ to ~4.15%

  • Asset quality exhibited seasonal deterioration, with GS3/NS3 rising ~15bp/10bp QoQ to 1.2%/0.85%. 1+ dpd rose ~75bp QoQ to 4.15%.
  • Management shared that the increase in 1+ dpd during the quarter was due to seasonal factors, and the company has already seen normalization trends in Jul’25 (with 1+ dpd < 4%), reinforcing its confidence in the stability of the portfolio.
  • Credit costs stood at INR113m (v/s est. of ~INR90m) and translated into an annualized credit cost of ~22bp (PY: ~20bp and PQ: ~15bp). We model credit costs of ~20bp each in FY26-27.

Spreads rise ~20bp QoQ; CoB dips ~20bp sequentially

  • The reported spreads rose ~20bp QoQ to 5.1% (v/s ~4.9% in 4QFY25), while CoF declined ~22bp QoQ at ~8.02%. Management shared that CoB will continue to trend downwards in the coming quarters.
  • 1QFY26 Core NIM (calc.) was stable QoQ at ~6.85%. We model NIMs (as a % of AUM) of 5.2%/5.3% in FY26/FY27E.
  • Within AAVAS’s bank borrowings, ~38% is linked to EBLR, 40% is linked to MCLR (within which ~24-25% is linked to up to 3M MCLR), and ~22% is fixed-rate.

Highlights from the management commentary Guidance

  • Management guided an 18-20% AUM growth in FY26 and 20-25% AUM growth from FY27 onwards.
  • Impact on disbursements can be covered up in 2Q and 3Q ? Guided a continued downward trend in its cost of borrowings Disbursements and the one-time impact from the change in the realization model
  • The primary reason for the impact on disbursements is because of the change in the realization model. Now the disbursements are booked only when the funds are credited to the account of the customer.
  • LAP and MSME segments were not impacted because they are primarily RTGS disbursements
  • Categories like Builder purchase and Home re-purchase were impacted because of the cheque disbursements.
  • Adjusted for this change in the disbursement realization, disbursements in 1QFY26 would have grown double-digit YoY.
  • Recent demand trends have been encouraging, with disbursements growing ~16% YoY in Jul'25. Disbursement run-rate (cheque realized) stood at INR5.5- 6.0b in Jul'25 (which was up 16% YoY)

Asset Quality

  • AAVAS observed some seasonal uptick in delinquencies. 1+dpd has already shown normalization trends in July, reinforcing its confidence in the stability of the portfolio
  • Ticket-size of more INR500k has 1+ dpd <4% and GNPA <1% of AUM
  • Rajasthan and its Northern States have 1+dpd <4%
  • GS3/GNPA rose by ~15bp QoQ to 1.22% and this is largely seasonal in nature. 1+dpd rose by ~75bp QoQ and ~50bp YoY to 4.15%
  • 1+dpd stood at 4.15% in Jun'25 but fell below ~4% in Jul'25
  • Aavas highlighted a few markets where there was a seasonal spike, and it has tightened the credit underwriting in those markets. Barring a few isolated pockets, it is not seeing any broad-based credit quality concerns, and it expects AUM growth to start picking up in the coming quarters.
  • Pockets in states of Maharashtra, MP, and Karnataka have exhibited some stress. This was particularly pronounced in ticket sizes below INR500K.

Liabilities

  • Within its Bank borrowings, ~38% is linked to EBLR, 40% is linked to MCLR (within which ~24-25% is linked to up to 3M MCLR), and ~22% is fixed-rate
  • Received a fresh sanction from NHB in the quarter and completed a drawdown of INR2b in the quarter ? Borrowing Mix: Term Loans: 49% | Assignment: 25% | NHB: 14% and Debt Capital Markets: 11%
  • ~58% of its total borrowings will exhibit faster re-pricing in line with the decline in the policy repo rates Credit rating discussions
  • Management shared that the company is well-positioned for a credit rating upgrade. The company is engaging with its existing credit rating agencies, and it is hopeful that they will take up AAVAS's case positively. Opex
  • Aavas has a direct distribution model and its employee on rolls will be higher under this model compared to an intermediary-led or channel-led distribution model.
  • Beginning to see positive results in its partnerships with CSC, E-mitra, and India Post Bank. The company is receiving 1000+ monthly logins through the CSC partnership. There have been staff additions to handle the digital channels and fulfill leads originated through these channels. Others
  • AUM grew 16% YoY and ~2% QoQ to INR207.4b ? Aavas has not made any PLR changes in FY26-YTD. It will decide on making any changes to the PLR by the end of 2Q or early 3Q.
  • Remains well-capitalized with a networth of INR45b and CRAR of 43.2%
  • Aavas remains focused on self-employed segments where it sees a better riskreward
  • Over 450 Aavas customers have benefited from PMAY 2.0 and have received a total subsidy of INR15m
  • Branch openings will be front-ended in 1H of this fiscal year(unlike in the prior years). The company will be entering a new state, Tamil Nadu, and all 10 new branches will be located there.
  • Aavas (relative to its peers) has the lowest BT-OUT rate of ~4.9%

 

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