In December 2018, the time when the entire NBFC ecosystem faced bankruptcy and went in most difficult times due to the liquidity crisis triggered by the default of the IL&FS group of companies, we discovered a real jewel in the housing finance segment – Aavas Financiers. This midcap affordable Housing Finance Company not only got successful to raise equity at the peak of the NBFC crisis in October 2018 but also made a strong market position and penetrated in its segment amid the worst crisis.

Aavas Financiers – Mid-sized Affordable Housing Finance Company

However, one year later nobody could have thought or predicted that Aavas would be best performing financial stock of 2019 surging more than 150 percent. It was proven that the biggest driver of share price and the company was due to solid earnings which have grown at more than 60 percent CAGR (compounded annual growth rate) in the previous four years.

Currently, the Valuations are still no longer as attractive. But we had usually noticed in past that stocks with normally low valuations (value stocks) have been largely not performing well and while stocks with high valuations have managed to outperform the market in the last one to two years. And due to that investor should not overlook a solid growth company like Aavas, despite its premium valuation.

Major Reforms in Affordable Housing Finance Space

According to CRISIL forecasting, development in resources under administration means Assets under management (AUM) of non-banks – including Non-Banking Finance Companies and Housing Finance Companies – is set to tumble to a decadal low of 6-8 percent in FY20, contrasted with 15 – 16 percent development last financial. In any case, a niche segment, for example, affordable housing space (mostly credit ticket size up to Rs 15 lakh) will keep on developing at a quicker pace given the present low entrance levels and the administration’s pushed on this classification.

According to Goldman Sachs, the complete credit book of the players in the affordable housing fragment is around Rs 1.5 trillion as of now and might increment to about 7.5 trillion ($ 100 billion) in the following 15 years, suggesting a development pace of around 15 percent compounded every year.

A few major reforms activities of the Narendra Modi government (interest subvention scheme, Tax exemptions, and incentives, Housing for All by 2022, infrastructure status declared to affordable housing, PMAY) alongside administrative push (priority sector status, lower hazard loads on little ticket size loans) will bolster high development.

While banks are additionally present in the littler ticket home lone market, their loaning to the financially more fragile area means to the economical weakener section (EWS) and low-income group (LIG) with no conventional pay proofs is constrained. This presents an energizing massive opportunity and opens the door for fair play in affordable housing finance companies like Aavas.

Aavas’ Loan book is as yet an exceptionally little bit (under 3 percent) of the general pie. Henceforth, minimalistically, its credit book can keep on developing at more than 25 percent for each annum, particularly as the opposition stands debilitated in the result of the liquidity emergency.

Aavas Financiers Strong Loan Growth

When the development of numerous HFCs has fallen off, Aavas’ loan portfolio adding up to Rs 6,753 crore as at end of September, developed by 42 percent YoY (year-on-year), yet on a littler base.

The empowering part is that this development has been volume-driven which is reflected in its expanding client base. More profound entrance in existing topographies through new branch augmentations has driven this solid development.

Aavas Financiers Improved Performance in Profit Terms

Alongside high development, Aavas has reliably improved productivity with RoA (return on assets) ascending from 2.82 percent in FY18 to 4.03 percent in H1 FY20. The development in RoA was on the rear of an improvement in operating proficiency with increment in the size of activities upheld by solid net interest margins and low credit costs.

Aavas Financiers Premium Valuations

At the present market cost of Rs 1200, Aavas is exchanging around 3.5 times Financial Year 2021 forecasted book value which is a noteworthy premium to numerous different Housing Finance Companies. Because of amazing profit development, the stock has re-appraised pointedly in recent years.



The Two areas of Major Concern are: Can Aavas’s loan book continue to expand at a rapid pace in the coming quarters and will high earnings growth sustain in the coming years?

Valuation is worth it or Purely speculated?

Commonly, speculators will, in general, think little of the organization’s development potential and get unduly stressed over the rich valuations. For example, the Street may cost in yearly development at 20-30 percent for the following 5 years, while as a general rule it might end up being 20-30 percent over the next 10 years. We trust Aavas is one such case introducing a multi-year development opportunity. What’s more, henceforth, the rich valuations are defended.

While this may sound excessively idealistic, consider the instance of Gruh Finance that conveyed returns of 25 percent CAGR from 2004-2019. Gruh conveyed 25 percent AUM development with normal Return on Assets around 2.5 percent in the course of the most recent 15 years before getting converged with Bandhan Bank.

Gruh’s stock exchanged at extended valuations for quite a while, considerably more than what most sound eyewitnesses would have anticipated. Indeed, Bandhan bank procured Gruh Finance at 10.5 times one-year forward book (P/BV), equal to around 45 times on forwarding P/E premise.

Submitting a general direction to Gruh’s case and thinking about Aavas’ development potential, we accept the last’s excellent valuation will continue in 2020. So, the rich valuation is likewise the greatest hazard factor as it doesn’t leave a lot of space for the moneylender to waver on development or resource quality.



With no place for a re-rating of the valuation different, Aavas’ stock cost will move pair with income. Long haul financial specialists should pay special mind to any value adjustment chance to purchase the stock.

Aavas Financiers Perfectly Leveraged for Consistent Returns on Assets

Affordable housing finance space can produce high hazard balanced returns. The yields in the affordable housing domain are higher than the conventional housing fragment given the generally expanded dangers related to the borrowers (for the most part independently employed) not being credit tried.

All things considered, margins could go underweight whenever the cost of assets moves higher. In any case, margin pressure, assuming any, can be halfway counterbalanced by progress in working effectively with an expansion in the size of projects.

Likewise, wrongdoings can ascend as a flipside to high development. In any case, high lending yield in the section (over 12 percent) is relied upon to counterbalance higher credit cost to a huge degree, assuming any.

We don’t envision Loan misfortunes to shoot up altogether for Aavas given the protected idea of lending with a moderate loan to ratio proportion at the beginning, the vast majority of the properties acting naturally involved and the organization being secured under the SARFAESI Act.

In general, we see Aavas keeping up a Return on Assets of over 3 – 3.25 percent. This rich RoA alongside high credit development will drive solid profit over the next couple of years.

Aavas’ Return on equity (RoE) was discouraged at around 13 percent in H1 FY20 because of overabundance capital. In any case, influence will improve in the medium to long haul as it scales up the business, along these lines improving RoE to 18 percent throughout the following 2-3 years.