Resilience instils confidence; deserves premium
Aavas Financiers' (Aavas) FY21 performance demonstrated resilient and best-in-class portfolio quality as indicated by stage-3 assets at 0.98%, 60bps credit cost, 1+ dpd pool at 6.4%, and zero restructuring. Despite running tight filters in self-employed and LAP segments, disbursements were down only 10% in FY21 while AUM growth was >20%. Investing into franchise (adding branches and employees) during a challenging macro instills our confidence in its ability to sustain 25% AUM growth in FY23E and beyond. Core spreads improved through FY21 and can be maintained. Consistency and resilience in FY21, well-contained stress (with 20bps buffer) and franchise investment, enhances visibility towards 3.6% RoAs and 13-15% RoEs by FY22E/FY23E. Valuation premium can expand further to 6.5x FY23E book with greater confidence emerging. Maintain BUY with a revised target price of Rs2,668 (earlier: Rs2,205). Key risks: 1) stress unfolding higher due to covid resurgence; and 2) rising competition, which can weigh on yields or growth.
- Portfolio quality - resilient and comfortably best-in-class; stage-3 sub-1%: Despite the covid-led disruption, the company ended FY21 with a mere 60bps credit cost (on lagged on-book advances) - we can comfortably say this would be amongst the lowest in entire financial space. Compared to 0.5-0.6% stage-3 assets over past few years (0.46% in FY20), it increased in these challenging times to 0.98% (almost flat QoQ) - yet commendable especially when read along with zero restructuring for FY21 and the high-yield nature of portfolio (>13%). 1+ dpd however settled at higher than the normalised level of 6.37% (after a rise in Q3FY21 to 8.2%). Nevertheless, this seems captured to a large extent in stage-3, into which flows were at the usual trend of 10-15%. Management highlighted that it will bring it down to 5% over a couple of quarters through collection efforts. We remain conservative and build-in stage-3 of 1.2-1.3% for FY22E/FY23E.
- Credit cost at 60bps for FY21; carries 20bps contingency buffer: Credit cost too came in much lower at Rs70mn for Q4FY21 (mere 36bps run-rate) taking cumulative credit cost for FY21 to 60bps (on 1-year lagged on-book AUM) - still lower than our expectations. No additional provision has been made towards covid resurgence, which demonstrates the confidence gained from the first wave. This suggests that the existing contingency buffer of Rs190mn (20bps of AUM) should be good enough to manage incremental stress if any. We are building-in 0.4%/0.4% credit cost for FY22E/FY23E.
- Running tight filters in self-employed segment, yet disbursement growth down <10% in FY21: Disbursement growth picked pace in Q4FY21 - up 17% YoY / 32% QoQ to Rs10.1bn. Even with higher repayment run-rate (reflecting better collections), AUM was up 7% QoQ at Rs94.5bn (21% YoY on a higher base). In FY21, Aavas ran tight filters for self-employed customers and was cautious in the LAP segment. Proportion of self-employed in AUM was down from 65% in FY20 to 60.4% in FY21. In fact, turnaround time amidst covid has increased from 10.6 days in FY20 to 13.1 days for FY21. Yet, disbursements were down by <10% in FY21. Anticipating disbursement growth of >35%, we build-in 22-26% of AUM growth over FY22E/FY23E.
- Further investment into franchise in H2FY21 instils confidence: Company is working consistently into building distribution franchise and increasing people capacity. It added 17 branches during the quarter to take the total tally to 280 branches (seven in Rajasthan, four in Uttar Pradesh, two each in Gujarat and Chhattisgarh, and one each in Madhya Pradesh and Punjab/Haryana. In FY21, it has increased employee base by 22% to 4,336. Consequently, employee expenses and other operating expenses were up 16% and 12% respectively in Q4FY21. Franchise investment is intended to prepare and optimise growth opportunities when normalcy sets in. It will remain conservative in underwriting standards but consistent on disbursement momentum. It has also strengthened leadership in technology as that will be the key driver to make it competitive and bring in efficiency.
- Yields have elements of one-offs; core spreads stable: Calculated yield is lower due to some fair value adjustments in the existing securitised pool (Rs40mn impact) and interest income reversal on stage-3 assets (Rs100mn) on a prudent basis However, reported yields during the quarter were down by only 26bps (lending rate was cut 10bps w.e.f. from 1st Jan'21 and further 15 bps w.e.f. from 1st Apr'21), which was offset by 28bps decline in borrowing cost leading to stable spreads at 5.76%. Company securitised Rs1.6bn during the quarter on which it booked Rs274mn securitisation income. Earnings were further buoyed by fee income (up 53%YoY / 46% QoQ). We expect NIMs to be sustained at 6.8-7.0% for FY22E/FY23E.
Shares of AAVAS Financiers Ltd was last trading in BSE at Rs.2268.25 as compared to the previous close of Rs. 2292.95. The total number of shares traded during the day was 3679 in over 906 trades.
The stock hit an intraday high of Rs. 2301.6 and intraday low of 2200.8. The net turnover during the day was Rs. 8254212.