Growth levers intact for Aavas Financiers

Stock up 37 per cent from issue price; higher valuation could cap further upside

At a time when investors have turned lukewarm to non-banking housing finance stocks, Aavas Financiers has stood out. The stock which had a dismal debut on the bourses in October 2018, is now up 37 per cent higher than its issue price.

In addition to a steady balance sheet, the company has no exposure to developers. The company focuses on retail segment in low-cost housing. Of the total assets under management (AUM) that indicates size of the loan book, 75 per cent comes from pure retail home loans. Thus, the recently announced slash in goods and services tax (GST) on affordable housing from 8 per cent to 1 per cent should auger well for the company.

According to an Edelweiss report, Aavas has potential addressable market in low-income segment of ~11 trillion or 208 times Aavas’ AUM as of December 2018, given the significant under-penetration in this segment. Analysts foresee the company to clock 37 per cent annual growth in AUM over FY19-FY20.

This would also be supported by comfortable assetliability management. In fact, the company reported 23 per cent sequential and 38 per cent year-on-year growth in disbursements in December 2018 quarter. This, in contrast to muted disbursement by its many peers that got impacted also due to asset-liability management pressures.

Further, robust and comprehensive credit assessment and risk management practice also provides comfort. Despite having higher exposure to riskier selfemployed customers (around 69 per cent of AUM), the company’s gross non-performing assets stood at 0.6 per cent as of December 2018. Geographic concentration and higher exposure to self-employed class should be keenly watched, caution analysts.

For now, though, growth potential is intact for Aavas (estimated annual net profit growth of 43 per cent over the next two years), higher valuation post the recent rally could cap the upside. The stock currently trades at about 5 times its FY20 estimated book value against below 4 times its peers.