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Aavas Financiers – Affordable HFC play

Updated: Sep 21, 2023

Company Name – Aavas Financiers Ltd (Aavas)

Current Share Price – INR 1,477 (May 8, 2023)

Market Cap – INR 11,677 cr


1. What is interesting about the stock?

As we had seen while analyzing Aptus, a home loan is the least risky product for any finance company as can be seen by a couple of facts:

  • Post-COVID-19, home loan collection rates were 95-98% in June 2021 vs unsecured loans at 80-85% and auto loans at 85-90%

  • The average credit cost (a proxy for riskiness) for housing finance companies was 0.9% (average FY19-21) vs auto finance companies at 1.7% and micro-finance companies at 2.9%

So, this makes the housing finance sector quite lucrative for finance companies, leading to higher competition and lower rates vs. other kinds of loans.

Investors have been searching for the next HDFC or HDFC Bank for the last 20-25 years. Unique levers of HDFC/HDFC Bank have been:

  • The consistent growth of ~20% on a YoY basis

  • Low NPA – good quality asset book

  • Sound corporate governance/experienced management team which partly results in the first two levers

The trick of the trade (financial services) is to balance all these three levers.

Over the years, I have seen the multiple cycles (not in any order) in Indian financial services:

  • The extraordinary growth of personal finance – Citi and Fullerton

  • Indiabulls – nothing can go wrong with this one!

  • Microfinance – High spread, RoA, etc can sustain forever

  • Yes Bank, RBL, DCB, or Lakshmi Vilas Bank will be the next HDFC Bank (currently we are placing a bet on IDFC First)

  • Housing finance is the story – DHFL, LIC Housing, PNB Housing, and Repco Home Finance were flying high

  • Infrastructure finance will do well – ILF&S and IDFC

However, none of them was able to balance all three levers in the long term. The current bull market believes that affordable housing finance will be able to achieve these levers and stocks are pricing this expectation!

One such player is Aavas.

Aavas Financiers Ltd, a housing finance company, was incorporated in February 2011 as a subsidiary of AU Small Finance Bank (AU SFB). It commenced operations in March 2012. In June 2016, to comply with the RBI guidelines, AU SFB divested the majority of its shareholding to two private equity players – Kedaara Group and Partners Group. As on March 31, 2023, the Kedaara group holds ~24% stake in Aavas, the Partners Group holds ~16% stake, and the remaining 60% is held by the public, including the management team (~4%) of Aavas. Sushil Kumar Agarwal resigned as MD in May 2023 - he sold a 1.8% stake in the last quarter.

Aavas is engaged in providing retail home loans with a focus on the affordable housing segment to customers in semi-urban and rural regions. As on March 31, 2023, the company operates through a network of 346 branches in 13 states – Rajasthan, Maharashtra, Gujarat, Madhya Pradesh, Delhi, Haryana, Punjab, Chhattisgarh, Uttar Pradesh, Uttarakhand, Himachal Pradesh, Odisha, and Karnataka.

The Company got listed on the stock exchanges on October 2018.

Home loan contributes to ~ 70% of AUM which was ~INR 14,200 cr as of September 2022. Its target borrowers are from the low to middle-income segments, with an average ticket size of less than INR 10 lakh. The non-housing loan comprises loans (30% of AUM) backed by mortgages with an average ticket size of about INR 7 lakh. The management aims to keep non-housing loans at around one-fourth of the total loan book in the medium term but the non-housing loan was ~34% of disbursement in FY23 which seems contradictory.

Aavas is primarily focused on self-employed customers (60%) with limited or no documentary evidence of their income and with limited access to funding from banks and larger. Company is a rural-focused player with 75% branches in Tier III or below towns.

The value proposition that differentiates Aavas are:

  • Focus on customer profile – low-income, self-employed, new-to-credit customers in rural markets: Aavas has a higher yield (~13%) vs other housing finance companies as this segment is largely untapped

  • 100% in-house sourcing and evaluation: Key to managing the NPL ratio in the untapped market

  • Contiguous expansion in north, west, and central states – helps in managing the cost-to-income ratio as the penetration level at each branch improves

  • High yield on loans at ~12% driving RoA (3.5%)

Why invest in Aavas?

  • Experienced management team – backed by private equity investors

  • Focus on the untapped market segment

  • Loan-to-value (LTV) ratio of ~55% (a lower ratio would lead to lower delinquency) vs a typical level of 70-80%

  • High spread and RoA even when Company income was growing at a CAGR of 27% in the last 5 years

2. Key Historical Financials

  • Revenue is growing 18-23% since FY20 vs 27% CAGR over the last 5 years, which implies revenue growth is slowing down. Management is guiding towards 20-25% growth in the near future

  • Cost-to-income ratio of ~40% - in line with large banks

  • RoE of 14% - can improve as the Company deploys a cash balance of ~ INR 1,400 cr

  • Gross NPA of ~1% and Net NPA of ~0.8%

3. What is my view on company valuation?

Aavas IPO was subscribed 0.97x – barely making through! Company issued shares at INR 821 and opened trading at a 9% discount. However, the post-listing share price jumped to INR 3,050 (3.7x issue price) by February 2022 on the euphoria linked to affordable housing finance companies. Since then the share price has corrected by more than 50%.

Company trades at a P/BV of 3.6x and a P/E (TTM) of 27x. Aptus trades at a P/BV of 3.9x and P/E (TTM) of 26x & Home First trades at a P/BV of 3.4x and P/E (TTM) of 27x. Aavas’ valuation is in line with other retail-focused housing finance companies.

However, on a fundamental basis, a P/BV valuation of 3.6x is very high for any financial services company as it assumes the following:

  • Growth of 20% for at least the next 20 years – history goes against this assumption for a long period like 20 years, with only HDFC/HDFC Bank being the exception

  • Sustainability of spread and RoA – competition from banks is expected to increase both for fresh loans to this segment and refinance (prepayment) as the formalization of the economy is expected to increase with digitization and GST infrastructure. Banks will be able to develop a model to assess risk in this segment with an increase in data points. This will put downward pressure on yield and asset book quality

A high equity stake of private equity players and a low shareholding of the management team also creates an overhang on the stock in the medium/long term.

I would be comfortable around a P/BV of 2.75x or a P/E ratio of 20x, as it would factor in some of these risks and will provide a margin of safety.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • A high proportion of non-housing loan (NHL) books; exposure to borrowers with modest credit profiles

  • Limited portfolio seasoning

  • Geographically concentrated operations make the company vulnerable to political interventions


About the Author

I have over 17 years of experience in equities with a detailed focus on autos, auto components, and media. I am an engineer and have an MBA from a premier institute in India.


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



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