Prabhudas Lilladher has come out with its report on Aavas Financiers. The research firm has recommended to "Avoid'' the IPO in its research report as on September 24, 2018.
Aavas Financiers Ltd (Aavas) is a play on affordable housing finance with loan portfolio of Rs 43,591 mn. Aavas was promoted by AU Small Finance Bank (SFB) but is now controlled by private equity (PE) companies, namely; Kedaara Capital and Partners Group. Aavas operates 165 branches across 8 western/northern states with focus on small towns. It has ATS of ~ Rs 0.86 mn for housing loans with 85% being individual loans.
Valuation and Outlook
Aavas has strong business momentum (65% disbursements/78% loan growth in FY14-FY18) with greater thrust on operational efficiency, strong credit quality marked by in-house business sourcing, wider usage of analytics, risk management and collection framework with resultant GNPA at mere 0.5% (Q1FY19). Such superior metrics have led to ratings upgrade from BBB+(FY14) to A+(FY18) resulting into cost of funds (CoF) decline from 12.3% (FY14) to 8.6% (Q1FY19). However, at trailing book and upper price band (Rs 821), P/E of 52x, P/B of 5.0x and post infusion at 4.1x P/B (FY19), valuations stand at a significant premium vis-à-vis peer set (quality HFCs trading at ~3x) pricing in all the positives. Further, elevated CAR at 61%, challenging market conditions, coupled with higher valuations entail greater risk to sustenance of high growth and improved RoE’s. Although long term prospects look positive, valuations are stretched and leave scope for negative surprise. AVOID.
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