Broker’s call: Aavas Fin (Buy)

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Target: ₹1,820

CMP: ₹1,417.55

Aavas Financiers is the larger player in affordable housing listed space with 351 branches as of Q3-FY24 spread across 13 states (majorly north & west). Its focus area – 60 per cent customers are self-employed while remaining 40% are salaried in non-formal segments. The operationally intensive business model and low ATS has kept competition from banks and large NBFCs at bay.

Aavas reported decline in spread by 26bps y-o-y to 5.5 per cent during FY23 due to increase in cost of borrowings by 73 bps y-o-y to 7.61 per cent as interest rates inched up. Management guided spreads to remain above 5 per cent in longer term despite competitive pricing pressures as focus can be shifted to low ticket size with higher yields.

Aavas made significant investments in manpower and branches over the last few years to build a complete in-house model right from sourcing to collections. The company is currently in the midst of a tech up gradation process (to be to completed by Q4FY24) for which it expects to make an outlay of ₹150 crore which will be spread over a period of 5 years. The TAT is expected to come down to 6 days from the current level of 13 days.

Risks: Competitive intensity on NIMs; PE shareholder risk on stock performance.