Neutral AAVAS Financiers Ltd For Target Rs. 2,070 by Motilal Oswal Financial Services Ltd
Tech transformation benefits likely to materialize from FY26
Earnings in line; AUM growth weaker than guidance even as NIM expands
* AAVAS Financiers (AAVAS)’s 4QFY25 PAT grew ~8% YOY to ~INR1.54b (in line). FY25 PAT grew ~17% YoY to INR5.7b. NII in 4QFY25 grew 14% YoY to ~INR2.7b (in line). Other income grew 16% YoY, aided by higher assignment income of ~INR652m (PY: INR551m).
* 4QFY25 NIM (calc.) expanded ~10bp QoQ to ~6.9%. Reported spreads declined ~5bp QoQ to 4.9% from ~4.95% as of Dec’24.
* Opex rose ~20% YoY to INR1.7b (~10% higher than MOFSLe). The opex-toavg. AUM stood at ~3.5% (PY: 3.4% and PQ: ~3.1%). We estimate the opexto-avg. AUM will decline to ~2.9% by FY27E from ~3.1% in FY25.
* Aavas continues to strengthen its distribution network and added 24 branches in 4QFY25. The company will front-end its branch expansion strategy and accelerate new branch additions in 1HFY26. AAVAS will continue to focus on INR1m ticket-size loans, where it can command better risk-adjusted yields.
* We estimate ~18%/19% CAGR in AUM and PAT over FY25-27E, with an RoA/ RoE of 3.4%/15% by FY27E. AAVAS trades at 2.8x FY27E P/BV. Valuations factor in the company’s readiness to demonstrate operating efficiencies, now that all major technology transformations have been completed. Reiterate Neutral with a TP of INR2,070 (based on 2.8x Mar’27E BVPS).
AUM rises ~18% YoY; share of HL in disbursements stands at ~61.5%
* AUM grew 18% YoY to ~INR204b. AUM growth in FY25 was lower than the guidance due to the caution exercised by the company in certain states in western India and in lending to customers who were overleveraged.
* Disbursements rose ~7% YoY and ~27% QoQ to ~INR20.2b. Share of HL in 4QFY25 disbursements stood at ~62%. The annualized run-off in the loan book was slightly elevated at ~17.5% (PY and PQ: ~16.4%).
* Management has guided for ~20% growth in disbursements in FY26 and targets an AUM CAGR of ~20% in the medium term. The company exhibited strong momentum in customer logins and disbursements, suggestive of an improvement in the business activity.
* Securitization during the quarter amounted to ~INR4.5b (PY: ~INR4.0b) and the securitization margin improved ~120bp QoQ to 14.4%.
Highlights from the management commentary
* The company remains cautiously optimistic in the MSME segment. In light of ongoing stress in the unsecured lending space and potential spillover effects, it has adopted a cautious approach towards the MSME segment.
* The company does not anticipate any compression in spreads, even in a declining interest rate environment.
* With ~36% of its borrowings tied to EBLR and ~21% linked to the 3M MCLR, Aavas is well-positioned for a faster repricing of its liabilities in a declining interest rate environment, which will lead to a decline in its CoB.
Valuation and view
* AAVAS reported an RoA/RoE of ~3.3%/~14.1% in 4QFY25. The company’s continuous efforts to improve its technological edge and relentless focus on asset quality have positioned it as a standout player among its peers. Notably, its 1+DPD remains well below the guided levels, driven by its prudent underwriting process and efficient collection efforts.
* 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 7 days from 11 days earlier) should translate into a stronger disbursement growth trajectory in the subsequent quarters.
* The stock trades at 2.8x 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 INR2,070 (based on 2.8x Mar’27E BVPS).
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