Buy Aavas Financiers, target price Rs 1,540: ICICI Securities

ICICI Securities has given a buy rating to Aavas Financiers with a target price of Rs 1,540. The . share price moved down by -0.84 per cent from its previous close of Rs 1315.45. The stock’s last traded price is Rs 1304.40.

According to the brokerage, the NBFC’s average liability of 134 months more than matches its average asset tenure. Aavas reduced its debt borrowings from mutual funds and has been increasingly focused on raising debt from multilateral institutions and NHB. In FY19, it mobilised Rs 2 billion in rupee-denominated masala bonds. It now has long-term borrowings from Asian Development Bank (ADB), CDC group and IFC. In addition, it has even planned to raise debt from insurance companies, which lend long-term.

Investment Rational

According to the brokerage, the key takeaways from Aavas’ FY20 annual report are as follows:1) Aavas continued to build upon its operational excellence and further reduced its turn-around time to 12 days 2) It now has more than 100,000 live customer accounts and has maintained the granular nature of its loan-book with exposure to the top-20 accounts at less than 1 per cent. 3) It has built processes which are scalable and its sourcing capability allowed it to cherry-pick customers – a high 72 per cent rejection filter; 4) Aavas is present in only 134 of the 295 districts of the states of its presence and still has huge headroom to grow. 5) While peer HFCs of its size had the going tough, it was able to raise borrowing at lower incremental cost and maintain a positive ALM across buckets. 6) Aavas advertised on various platforms and increased -- 3 times on a small base -- its advertising spends in FY20 to improve the mindshare in its target customer segment.

Aavas, in the brokerage view, is a re-rating candidate because of the collection efficiency trends it has demonstrated and a comfortable liquidity position which will help it deliver growth and low earnings volatility. The brokerage maintains a buy rating with a target price of Rs 1540, while changing the target multiple from 3.9 times to 4.5 times).

Risks: Aavas has ~65 per cent self-employed customer mix. This segment will remain vulnerable even in a post-COVID environment and will take longer to recover. In the interim, we expect Aavas’ 1+ dpd and GNPA to deteriorate once the moratorium gets over in August. To that extent, the brokerage has conservatively modelled credit costs of ~80bps in FY21E.


Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 234.42 crore, down -2.06 per cent from last quarter sales of Rs 239.36 crore and up 14.75 per cent from last year's same quarter sales of Rs 204.30 crore. The company reported net profit after tax of Rs 59.73 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 53.45 per cent stake in the company as of the financial year ending March 31, 2020, while FIIs held 13.47 per cent, DIIs 17.9 per cent and public & others 9.44 per cent.