Company Update

INDIA l Institutional Research l BFSI l 9th May 2022

Aavas Financiers l REDUCE l TP: 1,920

Operationally strong this quarter, directionally weak
S

Target Price 1,920 Key Data

In our initiating coverage and previous update, we had highlighted challenges Bloomberg Code AAVAS:IN
around asset growth as Aavas reached a critical scale / AUM of Rs.100bn. The risk- CMP 2,204 Curr Shares O/S (mn) 78.5
reward, therefore, did not remain favourable at those valuations. The stock is down Diluted Shares O/S(mn) N.A.
Downside 13% Mkt Cap (Rsbn/USDmn) 171.4/2,228
29% since our “SELL recommendation” breaching our earlier TP of Rs.2,300. While Price Performance (%) 52 Wk H / L (Rs) 3,336/2,111
asset quality has seen strong improvement during the quarter, we believe AUM 1M 6M 1Yr 5 Year H / L (Rs) N.A.

growth would remain in the ~20% range in the foreseeable future. Further, pressure Aavas -15.7 -21.9 -1.6 Daily Vol. (3M Avg.) 79,600
NIFTY -7.2 -9.1 9.8
on margins due to higher share of fixed loans and elevated operating expenses Source: ACE Equity, Bloomberg, MNCL Research
would further impact earnings and in turn RoE. We lower our earnings estimates
by 14% for FY24E. Valuation multiples are now getting aligned to the near-term Shareholding pattern (%)
ROEs, one of the key areas of concern. Recommend REDUCE (from SELL earlier). Mar-22 Dec-21 Sept-21 June-21
Promoter 39.2 39.2 39.2 50.1
 Disbursements pick up; AUM growth stagnates: Aavas saw highest ever
FIIs 39.9 40.1 39.8 32.1
quarterly disbursements of Rs.12.9bn during the quarter (27% YoY growth).
DIIs 9.3 7.6 10.1 8.1
AUM, however, saw growth of 20% YoY to Rs.113.5bn, as it saw higher balance
Others 11.6 13.1 10.9 9.7
transfers (6-7%). This is the fifth consecutive quarter of ~20% YoY growth in
Source: Ace Equity
AUM. We had highlighted in our thematic report that as AUM gains critical mass
of Rs.100bn, growth is expected to come down as was the case in Gruh Finance.
Although management remains confident of delivering 20-25% AUM growth Link to previous update: https://bit.ly/3J66rvp
over the long term, we, however, believe as competitive intensity increases, it
will be difficult to grow at pre-covid levels. Hence, we factor in 20% CAGR in AUM Link to IC: https://bit.ly/3lhqTjg
over FY22-24E.
 Asset quality improves; expansion leads to higher opex: Aavas saw
improvement in gross stage 3 assets mainly due to recoveries under SARFAESI.
Stage 3 assets in less than 90dpd bucket improved to 31bps (89bps in Q3FY22),
while overall stage 3 improved to 99bps from 172bps in Q3FY22. Thus, it wrote
back provisions during the quarter to the tune of Rs.104mn. Given the sharp
recovery in bad loans, we have lowered our credit cost estimates for FY23/24E.
Aavas added 16 new branches during the quarter which led to CI ratio inching to
43.8% (vs. 41.8% in Q3FY22). Management has guided that opex/AUM is
expected to improve by 30-35 bps every year as new branches scale up. We
expect opex to remain elevated in the next 2 years as branch expansion
continues.
 Outlook: Aavas reported operationally strong quarter driven by highest ever
quarterly disbursements and strong recovery in asset quality. Given that its AUM
growth has stagnated at ~20% levels and that operating expenses are expected
to remain elevated, we have lowered our EPS estimates for FY24E by 14% and
expect RoE to be in the low teen range vs. mid teens expected earlier.
 Valuation and rating: We have revised our earnings estimates for FY24E
downwards by 14% for reasons mentioned above. Further, we also lower our Pooja Ahuja
target multiples to 37x (vs. 40x earlier) given lower AUM growth. We recommend pooja.ahuja@mnclgroup.com
REDUCE (from SELL earlier) and ascribe a target price of Rs1,920 (4.3x FY24E ABV
Aalok Shah
of Rs.450). Key risks: Higher than expected AUM growth / lower operating aalok.shah@mnclgroup.com
expenses pushing RoE higher.

Y/E Mar
NII PPOP PAT YoY (%) EPS Book Value P/E (x) P/BV (x) RoE (%)
(Rs mn)
FY19 3,382 2,666 1,759 89.0 7.4 234.0 38.2 3.7 11.6%
FY20 4,304 3,174 2,491 41.6 31.7 267.2 50.2 6.0 12.7%
FY21 5,182 3,905 2,895 16.2 36.9 305.9 42.1 5.1 12.9%
FY22P 6,513 4,775 3,568 11.9 45.2 355.8 48.7 6.2 13.7%
FY23E 6,869 5,094 3,702 25.7 46.9 402.7 47.0 5.5 12.4%
FY24E 7,484 5,616 4,099 27.5 51.9 454.6 42.4 4.8 12.1%
Source: Company, MNCL Research estimates, Standalone financials

In the interest of timelines, this document is not edited

Company Update MNCL Research is also available on Bloomberg and Thomson Reuters
 Key takeaways from conference call
Loan book:

 Management has maintained its guidance of 20-25% growth in AUM in the long term.

 This quarter saw higher BT out at 6-7% vs. normalised levels of 4-5%. Management believes that it
can be brought down by 200-300bps.

 Company does not intend to move to mid income/affluent segment and will continue with its
strategy to focus on affordable housing segment.

 Customer affordability has improved over the last few years and hence do not see impact of higher
construction cost on demand for housing.

 Disbursement mix is similar to AUM mix geography wise, disbursements in Rajasthan trending down

Asset quality:

 Initiated SARFAESI on stage 3 assets less in the less than 90dpd bucket which led to the fall in the
quarter.

Operating expenses:

 Management alluded higher operating expenses to low base effect.

 Undertaking digital transformation which should be completed in the next 15 months. IT spends will
double in the next 3-4 years.

 Normally, it takes 3 years for branches to scale up meaningfully

 30-35bps of cost efficiency in opex/aum expected to see in FY23

Margins:

 Yield difference between fixed and floating loans is 275bps. Company tries to match fixed rate
borrowings to fixed rate loans.

 Based on real impact on cost of borrowings will pass on the rate hike to floating rate customers. In
the long run want to maintain 5% spreads.

RoE break up:

 All branches turn RoE positive in the first year itself.

 Expect RoE improvement of 100-150bps every year.

Aavas Financiers 2
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 Quarterly Financials and Key Performance Indicators
Exhibit 1: Quarterly Financials
Y/E March (Rs mn) 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22
Profit & Loss account
Net Interest Income 1,174 1,168 1,287 1,408 1,318 1,502 1,627 1,579 1,804
Total Income 1,376 1,218 1,560 1,932 1,761 1,592 2,095 2,178 2,416
Operating Expenses 650 526 634 665 742 673 864 910 1,059
Pre-Provision Profits 726 692 927 1,267 1,019 919 1,231 1,268 1,357
Provisions 63 60 81 162 70 170 47 113 -104
Net Profit 599 501 662 856 876 599 921 891 1,157

Y-o-Y Growth (%)

NII -5% 15% 23% 32% 12% 29% 26% 12% 37%
Operating Profit -9% 2% -3% 55% 40% 33% 33% 0% 33%
Net Profit 10% 11% -13% 26% 46% 20% 39% 4% 54%

Balance Sheet
Net Worth 20,979 21,506 22,215 23,097 24,014 24,681 25,700 26,655 28,086
Borrowings 53,520 56,762 60,262 64,810 63,454 64,859 69,055 72,291 79,725
Loans 61,808 63,564 66,873 69,697 75,233 77,594 82,075 84,775 90,534
Total assets/liabilities 76,581 80,279 84,669 90,802 89,601 91,824 97,513 1,01,595 110,204

AUM 77,961 79,353 83,669 88,226 94,543 96,156 101,481 106,126 113,502
Disbursements 8,622 2,130 6,666 7,645 10,128 4,625 9,016 9,509 12,872
Source: Company, MNCL Research

Aavas Financiers 3
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Financials
Exhibit 2: Income Statement Exhibit 4: Key ratios
Y/E March (Rs mn) FY20 FY21 FY22P FY23E FY24E Y/E March FY20 FY21 FY22P FY23E FY24E
Net Interest Income 4,304 5,182 6,513 6,869 7,484 Growth ratio (%)
Total Income 5,470 6,471 8,281 8,840 9,824 Profit & Loss
Operating Expenses 2,296 2,566 3,506 3,746 4,209 - Net Interest Income 20.1 18.3 25.7 5.5 9.0
- Employee Costs 1,471 1,721 2,322 2,385 2,643 - Net income 19.1 23.0 28.0 6.8 11.1
- Other Expenses 826 845 1,184 1,361 1,565 - Operating Profit 41.6 16.2 22.3 6.7 10.2
Pre-Provision Profit 3,174 3,905 4,775 5,094 5,616 - PAT 27.3 20.4 23.2 3.7 10.7
Provisions 153 371 226 348 361
Profit Before Tax 3,020 3,533 4,549 4,746 5,255 Balance Sheet
Taxes 529 638 981 1,044 1,156 - Loan 30.8 21.7 20.3 19.7 21.9
Tax Rate % 17.5 18.1 21.6 22.0 22.0 - AUM 31.2 21.3 20.1 19.4 21.9
Profit After Taxes 2,491 2,895 3,568 3,702 4,099 - Borrowings 46.5 18.6 25.6 22.0 25.0
Source: Company, MNCL Research Estimates
Ratios %
Exhibit 3: Balance Sheet NIM 7.9 7.6 7.9 6.9 6.2
Y/E March FY20 FY21 FY22P FY23E FY24E Spreads 5.6 5.3 6.9 6.1 5.5
Cash and Bank Balances 11,921 11,210 15,302 13,772 12,395 Cost/Income 42.0 39.7 42.3 42.4 42.8
Loans 61,808 75,233 90,534 108,401 132,165 Opex/AUM 3.3 3.0 3.4 3.0 2.8
Total Investments 45 45 675 810 876
Fixed Assets 606 587 683 769 845 Asset Quality
Deferred tax assets -317 -285 -354 -354 -354 GNPA % 0.46 0.98 0.99 0.63 0.46
Other Assets 2,508 2,812 2,656 7,501 13,565 NNPA % 0.34 0.71 0.77 0.42 0.27
Total assets 76,570 89,600 109,850 131,254 159,846
Return Ratios %
RoA 3.8 3.5 3.6 3.1 2.8
Equity Share Capital 783 785 789 789 789 RoE 12.7 12.9 13.7 12.4 12.1
Reserves & Surplus 20,196 23,229 27,297 30,999 35,097
Net worth 20,979 24,014 28,086 31,788 35,887 Per share ratio
Borrowings 53,520 63,454 79,725 97,264 121,581
Other liabilities 2,071 2,132 2,039 2,201 2,378 EPS (Rs) 36.9 39.2 45.2 46.9 51.9
Total Liabilities 76,570 89,600 109,850 131,254 159,846 BV (Rs) 306 345 356 403 455
Source: Company, MNCL Research Estimates ABV (Rs) 299 333 347 397 450

Valuation Ratios
P/E (x) 42.1 78.1 48.7 47.0 42.4
P/B (x) 5.1 8.9 6.2 5.5 4.8
P/ABV (x) 5.2 9.2 6.3 5.6 4.9
Source: Company, MNCL Research Estimates. PE and PB on average basis

Aavas Financiers 4
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Aavas Financiers 5
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Exhibit 7: Aavas Financiers’ Price Chart

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Source: Bloomberg

Analyst holding in stock: NO

Key to MNCL Investment Rankings

Buy: Upside by >15%, Accumulate: Upside by 5% to 15%, Hold: Downside/Upside by -5% to +5%, Reduce: Downside by 5% to 15%, Sell: Downside by >15%

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Aavas Financiers 6
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