Aavas Financiers - (Much) improved visibility on collections - ICICI Securities

Aavas Financiers (Aavas) has delivered collection efficiencies (especially noteworthy given self-employed customer mix at ~65%) that even some of its large peers would have found difficult. Important read-through from the results: 1) customers forming ~11.4% of the exposure at default (EAD) had not paid any instalments in Q1FY21. Further, Aavas has collected one/two installments from ~40% of this 'sticky' moratorium customer pool in Q2FY21-TD. 2) Aggregate Covid provisions now stand at Rs91mn (~12bps of AUM/~80bps of EAD under moratorium). 3) NIM (reported Q1FY21: 6.2%) would continue to remain under pressure, but can be offset by improvement in operating cost ratios. 4) Aavas guided that it does not foresee the need for using the RBI restructuring scheme on its loan exposures. We increase our target multiple to 4.8x (earlier: 4.7x) given (much) improved visibility on collections. Reiterate BUY.

- Expect benefit in incremental borrowing costs: NHB borrowings now comprise ~21% of the borrowing mix. Aavas has another Rs4bn in sanctioned lines from the NHB and could get newer sanctions given that the RBI again recently provided Rs50bn to the NHB. This would benefit its incremental cost of borrowings even as the liquidity position (~Rs15bn in cash/cash equivalents) remains very comfortable.

- Not having to restructure loans is suggestive of the visibility on collections and consequent lower credit costs: Aavas reported that ~17.8% of its EAD is under moratorium as of June (down from ~24% in April). Further, only about ~20% of its self-employed / other mortgage loan exposure (which we view as more vulnerable) is under moratorium. Also, the company suggested that, basis its engagement with the moratorium customer pool, it does not foresee having to use the RBI restructuring scheme (meaning no delay in recognition of post-moratorium stress and no need for making provisions of ~10% on the restructured accounts).

- 1+dpd of 1.5% under DPD freeze is a bit delusional and could spike post moratorium (largely in Q3FY21): GS3 was stable QoQ at 0.46%. Aavas improved the PCR on GS3 to ~30%, up 430bps QoQ. 1+dpd with the benefit of DPD freeze improved to 1.5%, but can exhibit temporary deterioration by Q3. Such delivery on collections has led us to model a lower credit cost assumption of ~60bps (earlier: 75bps) in FY21.

- Valuations - premium likely to sustain with greater confidence in collections: We now model NII / PPoP / PAT CAGRs of 15% / 17% / 15% over FY20E-FY22E respectively. Aavas trades at 4.1x FY22E P/BV - not inexpensive, but should be seen in context of its ability to deliver sustainable RoAs of >3% in the medium term - even as we factor-in an asset quality deterioration leading to a more than doubling of credit costs. We maintain BUY with a target price of Rs1,635 (earlier: Rs1,585) based on 4.8x FY22E P/BV. Post-moratorium asset quality behavior still remains unpredictable as there are still those ~11.4% of moratorium customers (as of June) who had not paid a single installment, and are vulnerable.

Shares of AAVAS Financiers Ltd was last trading in BSE at Rs.1395.3 as compared to the previous close of Rs. 1408.65. The total number of shares traded during the day was 617 in over 160 trades.

The stock hit an intraday high of Rs. 1435.4 and intraday low of 1390. The net turnover during the day was Rs. 873990.

Source : Equity Bulls

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