Aavas Financiers

Aavas Financiers
About the company

 incorporated as a retail affordable Housing Finance Company
 primarily serves low/middle-income self-employed customers (~61%) in semiurban/rural areas.
 Target customers are owners of grocery shops, beauty parlors, tiffin services, 3Ws, agriculture-
related businesses etc.
 Product offering consists of home loans (~73% as of 3QFY21) for purchase, construction,
extension and repair of existing units
 Average Ticket size of around INR 9 Lakh
 present in 11 states covering Rajasthan, Maharashtra, Gujrat, Madhya Pradesh, Haryana, Uttar
Pradesh, Chhattisgarh, Delhi, Uttarakhand, Himachal Pradesh and Punjab.
 Rajasthan, Gujrat, MP and Maharashtra account for 88% of total AUM
Swot Analysis
Strengths:
 Distinguished model enabling growth longevity
 primarily lends to self-employed (~61%) customers in the semi-urban/rural geographies; typically >50km
away from city center this ensures growth longevity and pricing power.
 Deep reach, reducing borrowing cost and knowledge of local geography
 Scalable franchise
 Scalability depends on niche positioning, technology-backed processes and people
 Best-in-class management execution and ability to hit above its weight (industry leading risk & data
analytics)
 Appetite to grow
 comfortably capitalized with tier-1 ratio of 51% (Dec’20) vs regulatory requirement of 10%. Low leverage
(~3.9x) and sturdy internal accruals
 Sufficient capital buffer provides cushion for absorbing any unforeseen asset-side shocks
Swot Analysis
Weakness:
 Private equity dominated ownership
 Kedara Capital and Partners Group, the two private equity promoters cumulatively hold ~51% (Dec’20).
This exposes Aavas to possibility of radical change in ownership structure which could hamper its current
business conduct
 Lack of strong parentage may pose challenges to its growth prospects in times of severe industry
downturn
 Geographical concentration
 Almost 43% (Dec’20) of Aavas’ AUM is form Rajasthan.
 Any significant event in the said area can be a potential detriment for the company.
 The company needs to do the geographical diversification in order to mitigate the risk.
Swot Analysis
Opportunities:
 Low penetration of small-ticket size housing and government focus
 small-ticket housing lenders can grow at ~21% CAGR over next decade.
 GOI push for providing housing for all would make the regulatory environment for at-least next 5-7 years
would remain conducive for prudent lenders.
 Ability to benefit from economies of scale
 invested heavily in technology and analytics. Its existing infrastructure of branches and manpower has
enough capacity to derive scale benefit
 Improvement in efficiency of the existing branches as discussed by the management would result in
reduction of operating expenditure.
Swot Analysis
Threats:
 Refinancing risks by larger HFCs/banks
 Aavas’ target segment (<`1mn ticket size) is not aggressively serviced by large HFCs/banks.
 Improvement in credit score of the customers puts the assets under the risk of pre-payment
 Training and retention of talent would not be easy
 attracting and training right talent while scaling up could pose a challenge
 Unseasoned exposure
 Housing products have a long term exposure of 15-30 years
 54% of Aavas’s AUM is made of Housing Loans.
 This puts them at a risk of default in long term
Why Aavas Financiers?
Declining yield well-compensated by declining cost of borrowing
 yield declined by ~286bps
 299bps decline in cost of borrowing.
 Resulting in the interest rate spread of ~5%
 NIMs in the period expanded by ~140bps largely backed by ~`15.9bn of
capital-raise/infusion
 Aavas’ ~41% of AUM is contracted under fixed rate.
 Average yield on fixed rate book is higher at ~15.4% vs ~12.4% on
floating rate.
Aavas’ pricing power is best amongst peers
 significant presence in deeper geographies and niche in customer profile.
 Improvement in profitability (reported RoA of 3.8% in FY20 vs 2.6% in
FY16)
Diversified funding mix
Why Aavas Financiers?
 diversified funding mix with established relationship across 31lenders.
 Average Tenor of borrowing at 131 months.
 Average Asset Tenor at 85-100 months.
 zero dependence on commercial paper and fund raising from various multilateral institutions.
 Assignments and securitisation account for ~24% of the borrowing
 Assignment/securitization not only forms an additional cheap source of funding but also provides cushion in a tight
liquidity environment..
 Well matched ALM
 Maintains a positive cumulative surplus(~22%of borrowings). Aavas’ pricing power is best amongst peers
 Better ALM profile enables the company to manage its margins in a rising/decreasing interest rate cycle.

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