Aavas Financiers IPO has strong fundamentals: Should you subscribe today?

Whether to subscribe to Aavas Financiers’ (Aavas’) initial public offering (IPO) or wait is the question investors are asking, given the selling pressure housing finance companies (HFCs) have come under in the last two trading sessions.

While the Street is worried about margin pressure amid high cost of funds, Aavas will be less impacted than its peers, thanks to the strong asset-liability management (ALM). Headquartered in Rajasthan, Aavas is a rural and semi-urban focused affordable housing financier and was incorporated as a subsidiary of AU Small Finance Bank (AUSFB) in February 2011. AUSFB reduced its stake. It stood at 6.8 per cent as on September 12, 2018.

Aavas has had a strong growth trajectory with assets under management (AUM) rising by 77 per cent annually over FY14-FY18 to Rs 40.7 billion and further to Rs 43.6 billion as of June 2018, three-fourths of which is home loans. Its net profit surged at the annual rate of over 95 per cent between FY14-FY18 to Rs 929 million. Its return on equity (RoE) fell over FY15-18 due to capital infusion.

Amid stiff competition, Aavas’ yield (return on interest-earning assets) fell from 18.1 per cent in FY14 to 14 per cent in FY18. However, it maintained the spread (difference between yield and cost of funds) above five per cent owing to lower finance cost. Its profitability is expected to remain robust. Among key positives are a strong asset liability match. Analysts at Emkay say that the average liability maturity is 136 months (11 years) whereas assets are being matured at an average duration of eight years. This provides consistency to the spreads of Aavas.

According to Sushil Kumar Agarwal, CEO of Aavas, while 45 per cent of Aavas’ AUM is at a fixed rate of interest, 55 per cent of its borrowings are also at fixed interest. Positively, its loan book has three-year reset clause (periodicity to revise interest rate), minimising yield pressure by repricing benefits.

Secondly, Aavas reduced its debt market share. Also, cost of term loans (48 per cent of borrowings) is comparatively cheaper. “Over 90 per cent of loans is considered under priority sector lending. We get term loan at the MCLR rate. Also, tenure of borrowed loans is close to that of the average loan book,” said Agarwal. Aavas has over 57,000 loan accounts as of June 2018 and 40 per cent of customers are new to bank credit. Its customer base increased 65.6 per cent annually over FY14-FY18. Positively, 73 per cent of the AUM growth is volume driven. 

The company has over 60 per cent of its customers from the self-employed category which could provide upside default risk in the event of a slowdown of the economy. “We have diversified profile base in the self-employed category with around 80 different businesses, which are on cash and carry. With consistent cash flow, we don’t lend to those who are directly linked to dairy and agricultural businesses,” Aggarwal clarified.