Aavas Financiers Limited — Q2 FY25 earnings call

Call held 7 Nov 2024

Management summary

AAVAS delivered a resilient performance in Q2 FY25, characterized by strong bottom-line growth and robust asset quality despite temporary operational headwinds. The quarter was marked by the successful implementation of a new Loan Management System (Oracle Flexcube), which caused a short-term shutdown affecting disbursements. Management remains confident in achieving 20%+ AuM growth for the full year, supported by a 22% disbursement growth seen in the September-October period.

Highlights

  • Assets under Management (AuM) grew 20% YoY to Rs. 184 bn

  • Net Profit for Q2 FY25 stood at Rs. 1.48 bn, registering a growth of 22% YoY

  • Gross NPA remained stable and healthy at 1.08% with 1+DPD at 3.97%

  • Disbursements for H1 FY25 reached Rs. 25.05 bn, up 8% YoY, despite a muted Q2 due to tech transitions

  • Net Interest Margin (NIM) as a percentage of total assets stood at 7.78% for Q2

  • Opex-to-asset ratio improved significantly by 40 bps YoY to 3.25% in H1 FY25

  • Successfully raised Rs. 6.3 bn from IFC via NCDs in October, the company's largest debt fundraise to date

  • Return on Assets (RoA) improved by 18 bps YoY to 3.49% in Q2 FY25

Key financials

  1. AuM 184 bn +20%YoY
  2. Net Profit 1.48 bn +22%YoY
  3. GNPA 1.1% 0%QoQ
  4. NIM 7.8%
  5. Spread 4.9% -2.2%QoQ
  6. RoA 3.5% +5.4%YoY

What they filed

Q1 FY27: revenue up 12.9%, net profit up 23.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue579 597 636 628 667 +15%674 +13%715 +12%709 +13%
Net profit148 146 154 139 164 +11%170 +16%182 +18%171 +23%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Yield Differential
400 bps Total
  • Housing Loan 200 bps 50.0%
  • Non-Housing Loan (LAP/MSME) 200 bps 50.0%

Guidance & targets

Volume

  • AuM Growth Volume · FY25 · High confidence 20% plus
    So, we continue our guidance for the current year of AUM of 20% plus.

    — Sachinder Bhinder, MD & CEO

  • AuM Milestone Volume · by 2033 · Low confidence Rs. 1 trillion
    We aspire to reach a milestone of Rs. 1 trillion in assets under management by 2033.

    — Sachinder Bhinder, MD & CEO

Margin

  • Spread Margin · FY25 · Medium confidence 5% plus minus 20 bps
    But as I said that even at 4.89%, we continue to guide on 5% plus minus 20 bps for the current year.

    — Sachinder Bhinder, MD & CEO

Profitability

  • Opex-to-asset ratio Profitability · next couple of years · Medium confidence below 3%
    We, I think in the beginning of the year, we guided 25 to 30 bps annual savings after the tech transformations for a couple of years, till we reach at a 3% opex level.

    — Ghanshyam Rawat, CFO

Other

  • Asset Quality (1+DPD) Other · Ongoing · High confidence less than 5%
    We continue to guide 1+DPD of less than 5%, a GNPA of less than 1.25%, and a credit cost of below 25 bps.

    — Sachinder Bhinder, MD & CEO

Risks & concerns

  • Muted Disbursement Growth

    medium

    Q2 disbursements were impacted by a one-time LMS shutdown and an extended monsoon affecting construction.

    Both acknowledged

  • Spread Compression

    medium

    Spreads fell to 4.89% due to rising cost of funds and lower disbursement yields relative to AuM yields.

    Analyst acknowledged

  • Competitive Intensity in South India

    low

    Entry into Tamil Nadu (Hosur) faces competition from established players like Aptus and Chola, but management cites their unique SENP focus as a differentiator.

    Analyst downplayed

Areas of evasion (1)

  • Slightly vague on the exact timeline for when disbursement yields will fully catch up to AuM yields, citing it 'takes its own time'.

Q&A highlights

3 direct
Spread Compression and Yield Trajectory Direct
The current AuM yield stands at 13.04%, the current disbursement yield of the H1FY25 is 30 lower than the AuM yield... we are passing on the cost of fund increase by raising our BPLR by 25 bps w.e.f. October.

Explains why spreads dipped below 5% for the first time and the management's corrective action via pricing hikes.

Asked by Renish Bhuva, ICICI Securities

Capitalization of IT Expenses Direct
Total amount we'll capitalize in the IT projects, which will be amortized in the next seven years... will be around Rs. 60 crores.

Clarifies the accounting treatment of significant tech investments and their impact on the balance sheet vs. P&L.

Asked by Raghav Garg, Ambit Capital

ESOP Cost Reversal Impact Direct
Even if we exclude this ESOP also, then we will have a 30 bps better opex improvement on H1-to-H1.

Distinguishes between one-time accounting gains and sustainable operational efficiency improvements in the opex ratio.

Asked by Mona Khetan, Dolat Capital

2 min read 5 chapters

Detailed narrative

Technology Transformation and Operational Impact

AAVAS successfully transitioned to the Oracle Flexcube Loan Management System (LMS) and a Salesforce-based Lead Management System in Q2 FY25. While this transition caused a temporary shutdown in August that muted quarterly disbursements, management views it as a critical milestone for future scalability. The new systems have already improved the 'login to sanctioned' turnaround time (TAT) to eight days. These investments are expected to drive significant operational efficiencies and 'touch-free' processes in the coming quarters.

Navigating Spread Compression

The company faced spread compression in Q2, with the figure dropping to 4.89% from historical levels above 5%. This was driven by a 7 bps sequential increase in cost of funds and a 4 bps compression in yields. To counter this, AAVAS raised its Benchmark Prime Lending Rate (BPLR) by 25 bps effective October 2024. Management expects this repricing, combined with stabilizing borrowing costs, to pull spreads back toward the 5% guidance range in the second half of the fiscal year.

Asset Quality and Risk Management

Asset quality remains a core strength, with 1+DPD at 3.97% and GNPA at 1.08%, well within the guided range of <5% and <1.25% respectively. Credit costs improved to 11 bps in Q2 from 20 bps in Q1. The company maintains a conservative provisioning stance with total ECL provisioning of Rs. 946.1 mn. Management emphasized that their focus remains on self-construction individual houses, which provides better risk-adjusted returns and lower ultimate losses.

Opex Optimization and Operating Leverage

The opex-to-asset ratio saw a remarkable improvement, falling to 3.18% in Q2 FY25 from 3.47% in Q2 FY24. While a portion of this (approx. 12 bps) was due to a one-time ESOP cost reversal, the underlying improvement of 10-30 bps is attributed to technology-led operating leverage. The company has kept its employee count flat at 5,761 for nearly three years while significantly growing its AuM, demonstrating the success of its digital initiatives.

Strategic Expansion and Liability Management

AAVAS is cautiously expanding its footprint, opening five new branches in H1, including its first entry into Tamil Nadu (Hosur). On the liability side, the company continues to diversify its funding, recently raising Rs. 6.3 bn from IFC at sub-8% costs. With 30% of liabilities linked to external benchmarks, the company is well-positioned to benefit from any future interest rate cuts, which would allow for faster repricing of liabilities compared to assets.

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