Aavas Financiers Ltd. – BUY

CMP – Rs. 1380/- share

Target – Rs. 1740/- share

Upside – 26%

Why is Aavas Financiers a “Reversal Play”?

In the recent past, due to the resignation of their MD and stock sale by him, the stock had been corrected. However, the stock has overreacted to this news, and the company, in its analyst meeting, showcased its vision 3.0, which would mainly focus on scalability & standardisation. On the other hand, governance, asset quality, profitability and growth remain vital priorities.

The company has excellent technological capabilities and has formed vital transformation initiatives like GATI and UNNATI for implementing digital loan orientation and new loan management solutions. All these will help the company figure out the right people to give loans to, thereby reducing its NPAs.

At present, the company has an AUM of Rs. 14,166 crores. Of the total AUM, 70% is from home loans and 30% from another mortgage loan. The cost of funds is 7.61%, and its yield is 13.12%, so it’s operating at healthy spreads of 5.51%. 

Notably, the company wants to grow consistently with a runway of 10-15 years, given the immense potential in affordable housing coupled with its underwriting capabilities and technology. The management also highlighted that it is imperative that all the top management people have been with the company for the long term. The company’s promoters clarified again that they do not intend to sell any stake soon.

Outlook and Valuation

The company trades at a P/BV of 3.5x and ROE of 14%, so leverage is just 4x. Thus, it can easily reach 5.5x, and ROE can move up to 19.25% in the longer term. 

The company’s stock trades at 2.4x P/BV, and the book value is Rs. 580 in FY25E. Its potential ROE can be 17% by FY25E and 20% CAGR growth given by the management. Thus, we think it is reasonably cheap considering the management outlook for growth and the main focus on governance and asset quality; we feel it should at least trade at 3x P/BV, and hence we arrive at a target price of Rs. 1740/- share with an upside of 26%.