What’s the key for stock re-rating of Aavas financiers?

Even so, there is not much respite on the costs front in the near-term. In the September quarter (Q2FY23), Aavas’ operating expenses rose by 32.5% year-on-year (y-o-y) owing to spending on technology, branch expansion and investment in leadership. In the post-earnings call, Aavas’ management said operating expenses will remain elevated this year on the back of implementation of new technology.

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“Opex could stay high in FY23, but as lumpy tech capex fades and operating leverage benefits come through, opex intensity should moderate from current peak,” said analysts from Jefferies India in a report on 6 December. “That said, opex intensity will be structurally higher than peers, due to the company’s branch intensive model, but strong local presence has helped it manage asset quality better versus peers through periods of stress.” The broking firm expects Aavas to deliver 23% loan compound annual growth rate (CAGR) over FY22-25.

Over FY18-22, Aavas has clocked a CAGR of around 29% and 15% in its assets under management (AUM) and disbursements. For the half year ending September (H1FY23), Aavas’ disbursements stood at ₹2,240 crore. Outlook on disbursements for H2FY23 is healthy, led by branch expansion, boosting the AUM. Aavas has added 24 branches in 12 months, taking the total number to 321. “With 65% of FY23 disbursements emanating in H2 as per guidance, FY23 AUM can grow at about 25% year-on-year,” said Shweta Daptardar, analyst at Elara Securities (India).

Investors can take comfort on asset quality, which has been stable. A total of 57% of Aavas’ book is floating as of Q2 and this will get repriced with rising interest rates. So far in FY23, Aavas has increased its prime lending rates by 125 basis points. “Increasing competition has meant that the scarcity premium associated with affordable housing finance companies is now behind, leading to a sharp dip in valuations over the past one year. The Aavas stock now trades at a price-to-book of 4.2 times based on FY24 estimates and if the company can maintain strong AUM growth momentum at 25% and above, there stands a case for re-rating,” said Daptardar.