Aavas Financiers: Not an affordable shelter

The company is on a strong footing, but geographic concentration and pricey valuation are risks

The Centre’s thrust on the affordable housing segment and the vast opportunity within the space have led to the advent of many players in recent years, who have been focussing primarily on small-ticket loans to the economically-weaker sections. Aavas Financiers is among the late entrants in the space, commencing operations in 2012. The company focusses on the low and middle-income self-employed segment in semi-urban and rural areas.

Given that small housing finance companies (HFCs) and niche players in the affordable space have been growing at a faster clip than larger HFCs, Aavas Financiers’ stellar growth comes as no surprise. The company’s loan book has grown by a robust 69 per cent CAGR (compounded annual growth rate) over the past three years. It also scores well across other performance metrics — with a net interest margin of 6-7 per cent, return on assets of about 2.5 per cent, and gross NPA of less than 1 per cent. But while the company appears on a strong footing, the intensifying competitive landscape, moderating growth, high geographic concentration, relatively shorter track record of operations and possibility of rise in delinquencies, given its focus on the risky self-employed and low- and middle-income borrower segment, increase the risk.

The asking price of the IPO is a dampener too. At the upper end of price band (₹818-821), the company is valued at about four times the FY18 book (post-issue). On a FY19 expected book value basis, the valuation works out to about 3.7 times.

From 1.1-1.5 times (Dewan Housing, LIC Housing Finance) to about 2.3-2.6 times (Can Fin Homes and Indiabulls Housing) and 1.8 times (Repco Home) to as high as 15 times (Gruh Finance), valuations are divergent for players in the housing finance space. Given that Aavas Financiers is a relatively smaller player — its loan book is still half or nearly a fourth of the size of players such as Repco, Gruh or Can Fin Homes — the asking price for the issue is expensive, leaving little upside for investors. While Aavas’ business prospects and financial performance are sound, investors can wait-it-out and buy the stock at a lower entry point. The IPO is a mix of fresh issue of shares worth ₹400 crore and an offer for sale (OFS) of up to 1.6 crore equity shares.

Strong growth

Aavas Financiers caters to the low- and middle-income self-employed customers in semi-urban and rural areas. The company offers home loans and other mortgage loans, including loans against property (used mainly for financing business requirements).

In line with the industry trend, the share of other mortgage loans for Aavas has been inching up from 6 per cent of gross loan assets as of March 2015 to 24 per cent as of June 2018.

The company’s growth in home loans has been robust at 58.6 per cent CAGR over the past three years. The company has also been able to grow its business profitably (earnings growing by 69 per cent CAGR in the past three years), with its net interest margin (NIM) maintained at 6-7 per cent and return on assets at about 2.5 per cent.

That aside, the company has been able to maintain its asset quality, with gross NPA ratio hovering between 0.3 and 0.7 per cent of loans over the past three to four years.

Aavas maintaining its low ticket size of loans at ₹8.7-8.8 lakh in the past three years also indicates that the growth has primarily been volume-led rather than driven by increase in ticket size.

But while the company’s prospects are sound, given the thrust of the Centre on affordable housing segment, the growth levels are likely to moderate.

Also, given the relatively shorter track record of operations, asset quality needs a watch, given the company’s exposure to risky segments.

As of June 2018, 61 per cent of the company’s gross loan assets were from customers earning less than ₹50,000 a month and 36 per cent from borrowers new to credit; and 64 per cent of loans were from self-employed. Hence, whether the company is able to keep delinquencies at bay despite the robust growth in loans, needs to be seen.

Risks to consider

Although the company has expanded its operations over the years, 92 per cent of the company’s loans comes from four States — Rajasthan, Maharashtra, Madhya Pradesh and Gujarat — with Rajasthan alone accounting for 46.6 per cent of loan assets.

Also, while the company enjoys best-in-class ROAs, its very low gearing (debt/equity) of 2.4 times as of March 2018, has led to lower return on equity (ROE) of 11 per cent (Repco has a gearing of 6 times and ROE of 16-17 per cent). While the management expects to improve its gearing, moderating growth in loans, pressure on NIMs as interest rates harden and increasing competition may continue to keep ROEs under pressure.

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