Aavas Financiers - Pristine quality, affordable premium - ICICI Securities

Aavas Financiers' (Aavas) gross stage-3 assets including standstill accounts at 0.47%, sub-40bps provisioning for H1FY21, 1+ dpd pool at 6.2%, only depicts and reinforces the resilience of its portfolio. Collection efficiencies at 95% (compared to 96-97% pre-Covid levels) are noteworthy especially given 65% of customer mix is self-employed. Basis its engagement with customers, the management guided that it does not foresee any restructuring request. Even on growth, it seems BAU much quicker than others - disbursement growth of 3% YoY, almost 3x QoQ, 24% AUM growth, sourcing 9-10k applications (similar pre-Covid). Aavas trades at 4.3x FY22E P/BV - not inexpensive, but premium is likely to sustain with greater confidence in collections. Maintain BUY with target price of Rs 1,650.

- Pristine asset quality even in challenging times: Gross stage-3 assets were flat at 0.47% - this is despite including standstill accounts of merely Rs24mn - recognised and provided for. Post moratorium, doing away with the benefit of DPD freeze, 1+dpd spiked to 6.2% (from delusionary lower level of 1.5%). Commendably, the spike was contained at 6.2% in September itself (much earlier than anticipated). In fact in October, 50% of these overdue customers have met their obligation. This lends comfort to the fact that 1+dpd should retrace soon to pre-Covid average of sub-4% (suggesting not much of stress arising from Covid). Generally, 10-20% of 1+dpd slips into delinquent accounts that might push stage-3 assets from current 0.47%. However, all efforts are directed towards containing stage-3 assets sub-1%.

- Credit cost risks set aside: Critically evaluating the customers across high, medium and low risk categories, it made Rs57mn of Covid provisioning taking cumulative buffer to Rs147mn (20bps of advances). Including this too, credit cost continued to be at low levels - hardly Rs80mn - running sub-40 bps even post lifting of moratorium - suggestive of resilience of its portfolio. Expecting stage-3 assets at 1.3% in FY21E, we are building in 0.6%/0.2% credit cost for FY21/22E.

- Back to BAU quicker than peers: Disbursements witnessed YoY growth of 4% to Rs6.67bn thereby, supporting AUM growth of 24% to Rs83.7bn. The company has invested for future growth in H2FY20 itself and kept sufficient bench strength that is now supporting it to source 9-10k loan applications per month - similar to that of pre-Covid levels. Even after 30% approval rate and lending to customers qualifying on its positive list, it has surpassed disbursement trend of Q2FY20. This suggests AUM growth of 25% and above is feasible and more realistic.

- Core spreads further improved to 5.6%: Average borrowing cost further declined (20bps) to 7.9% against the portfolio yields of 13.5%. In fact with credit rating upgrade in August, outlook is favourable as it raised Rs5.2bn of >10 years borrowings at 7%. It intends to pass on the cost benefit by cutting lending rates by 10bps. It also securitised Rs1.5bn thereby, recognising a gain of Rs184mn that led to earnings beat. We expect NIMs to be sustained at 7.0%/6.5% for FY21E/FY22E, respectively.

Shares of AAVAS Financiers Ltd was last trading in BSE at Rs.1446.55 as compared to the previous close of Rs. 1467.85. The total number of shares traded during the day was 2296 in over 496 trades.

The stock hit an intraday high of Rs. 1495.45 and intraday low of 1388.8. The net turnover during the day was Rs. 3294164.

Source : Equity Bulls

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