Aavas Financiers Ltd - Research Report

Private Client Research




Finance - Housing


Aavas Financiers Ltd

Finance - Housing

July 08, 2019

Sensex: 38720.57

CNX Nifty: 11558.60


BSE: 541988

Reco Price
Rs. 1505
Price Target (1 Year)
Rs. 1900


July 08, 2019



CNX Nifty








Stock Data

CMP (Rs)
Face value (Rs)
52 Week Range (Rs)
1563.50 - 612.25
Market cap (Rs Crores)
Price To Book Value (x)
P/E Ratio (x)

One Year indexed Stock Performance

Aavas Financiers Ltd Sensex
Aavas Financiers Ltd
Return (%)


(in %)

+91 22 6639 3000



Aavas (formerly AU Housing Finance) was incorporated in 2011 in Jaipur as a retail, affordable housing finance company. It primarily serves low and middle income self-employed customers in semi-urban and rural areas. A majority of its customers have limited access to formal banking credit. The company’s product offering consists of home loans for the purchase or construction of residential properties and for the extension &repair of existing housing units. AAVAS is primarily engaged in the business of providing housing loan to customers belonging to low and middle income segment in semi-urban and rural areas. These are credit worthy customers who may or may not have the income proof documents like IT return, salary slip and hence are financially excluded by other large housing finance companies and banks. AAVAS uses unique appraisal methodology to assess these customers individually. The financing solution need to be appropriated and suitable to them.Aavas Finserv (a subsidiary) was incorporated in Jaipur in November 2017 as an unlisted public company. It is authorised to provide finance either by way of loans or advances to individuals, association of individuals (whether incorporated or not), industry or corporates. It has not yet commenced operations and is still to apply to the RBI for a business license. Aavas (directly or indirectly through its nominees) holds 100% of the issued capital in Aavas Finserv.

Best asset quality among others, focused on retail lending, lower NPA's keeps Aavas financiers limited ahead then others. Government initiatives such as "Affordable housing", "PMAY" & "Housing for all" would act as demand driver for company.

Robust growth rates:
Aavas financiers limited has best growth rate in industry, their revenues have been grown at 70% for FY19 yoy basis, while net interest income has been grew at 88% for FY19 yoy basis. Also the AUM has been grown at 46% for FY19 yoy basis, Disbursements have grown at 67% CAGR for last 5 years. We expect the company is well poised to sustain these growth rates in future and Aavas will scale up its AUM.

Best asset quality in class:
Aavas financiers limited has best asset quality among peers in Housing finance industry. Its GNPA is 0.47% which is quite minuscule. This shows efficiency of company as well as its management, we believe this momentum to be continued in future as to keep adherence to its analytic-driven underwriting process.

Strong government initiatives:
Government of India has taken many initiatives such as “Housing for all”, “Pradhan mantra awas yojana(PMAY)” & “Affordable housing”, which will act as growth drivers for Aavas financiers limited as these initiatives encourage people to buy own houses then living on rent. Government of India has targeted to build around 1.95 crore houses under PMAY by FY22, and attractive deduction for housing loan (announced in recent budget) can act as key trigger to boost demand.

Focused management & strong balance sheet:
Aavas financiers limited has experienced management and professional management team which helps them to define &achieve higher goals. Aavas is clear in its vision they are focusing to target tier 2 & 3 cities where these areas are underserved and having great potential as well as penetration. Aavas has a sturdy balance sheet with good return ratios, best asset quality, high net worth and low leverage. Aavas has fully in-house sourcing and execution model leads them to better outcome.


Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities.

NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. NBFCs have emerged as key financial intermediaries particularly for small-scale and retail sectors. With easier sanction procedures, flexibility, low operating cost and focus on core business activity, NBFCs stand on a surer footing vis-a-vis banks.

How is NBFC different from banks?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

  1. NBFC cannot accept demand deposits;
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Source: RBI

NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. While this is advantageous to them, but they do not have access to low-cost demand deposits as in case of banks.

Types of NBFC in India
NBFC can be categories into different types depending on the segments they cater into.

Broadly speaking NBFC can be categories as below.

  • Housing Finance
  • Finance - Leasing and hiring
  • Finance - Investment
  • Term lending institutions
  • Finance - general

Housing finance sector is one of the largest segments for NBFC. We will explicitly focus on housing finance industry here.

Housing Finance Industry Overview

As clearly evident these companies operate in housing segments. The housing finance market in India is fragmented, with 80-plus players. However, two large companies, HDFC and LIC, each has assets over Rs 1 lakh crore, cornering 57 per cent, according to rating agency Icra.

The next batch, of three HFCs; DHFL, Indiabulls and PNB HFL with a book size of Rs 15,000-50,000 crore each have a combined market share of 21 per cent. 5 housing finance companies dominate mkt, lend 78% of home loans.

Source: ICRA

Issues in NBFC or particularly in housing Finance

Banks moving into NBFC space:
The major NBFCs in India have their relative specializations, for e.g. HDFC (mortgage loans), Mahindra Finance (agri loans), Power Finance Corporation (power finance) & Shriram Transport Finance (pre-owned commercial vehicle loans). The trend of segmental monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and short – term needs of the business masses.

Falling real estate prices:
The big risks could come from falling real estate prices. In fact, the demonetization undertaken in November 2016 did result in a dampening of real estate prices across India. Normally, falling real estate prices results in negative equity. That is normally a case that could lead to default, which be a key concern for HFCs.

Growth Drivers:

Low Cost Housing:
Low cost housing is likely to be the next big story for the Indian investment scenario. According to preliminary estimates, the low-cost housing opportunity in India is estimated to be worth $1.2 trillion. One can imagine the multiplier effect that it will have on demand for housing and for housing finance companies.

Even if population growth has slowed down urbanization is witnessing steady growth. Thus demand for new houses is steady.

New Real Estate Regulation Act:
The new Real Estate Regulation Law seeks to set right many shortcomings that currently plague the housing segment in India. The new law seeks to pin responsibility on developer to deliver the homes on time. This is expected to push non-serious players / speculators out of the arena and bring in transparency as well as confidence in the housing market.

Per capital house ownership in India is still one of the lowest:
At a macro level, if you compare with other nations in different areas, India lags behind other nations in per capita house ownership. The government’s ambitious Housing-for-All project by 2022 is likely creating huge demand for housing. When there is an explosion in demand companies have been known to sustain rich valuations for a fairly long period of time.

Demand for rural and semi urban sector:
With rising rural incomes and the government investing heavily in enhancing rural demand, we could see big demand coming from the rural and semi-urban areas. This is going to benefit hugely to housing finance companies.

Source: Investopedia, IBEF, Euro monitor

Profit & Loss Statement:- (Standalone)

(Rs Crores)

Particulars Mar-17 Mar-18 Mar-19 Mar-20 Mar-21
Interest Income 305.13 456.34 710.10 1087.46 1574.08
Interest Expense 142.82 189.05 255.40 460.86 675.93
Net Interest Income(NII) 162.31 267.29 454.70 626.60 898.15
Other Income 0.36 2.52 1.00 1.00 1.00
Total Income 162.67 269.81 455.70 627.60 899.15
Employee benefit expense 43.05 73.36 117.20 199.24 318.78
Operating & Establishment Expenses 24.38 47.74 67.02 87.86 125.88
Depreciation 2.77 5.63 9.70 5.50 6.50
Total Expenditure 70.20 126.73 193.92 292.60 451.16
Pre provisional operating profit(PPOP) 91.86 142.20 266.60 334.99 447.98
Provisions and Contingencies 4.91 1.33 8.90 13.89 23.01
Profit Before Tax(PBT) 86.95 140.87 257.70 321.10 424.97
Provision for Tax 30.42 48.82 81.80 112.39 148.74
Profit After Tax(PAT) 57.14 92.93 175.90 208.72 276.23
Adjusted EPS 9.82 13.43 22.50 26.76 35.41
Source: Stockaxis Research, Company Data


As per budget outcome, Government initiatives such as “Affordable housing”, “Housing for all” are key determinants for demand revival in housing sector. Aavas financiers limited would be perfect play as it has highest retail lending and solid asset quality with GNPA OF 0.47%. Aavas is focused in Tier 2 & 3 cities and operates in underserved markets. Plus as other HFC's has bad asset quality, excess corporate lending & no availability of funds for lending helps in a way to capture and penetrate markets deeper. Aavas trades at a premium valuations then other HFC, as it has the best asset quality among peers, and also has good growth rates Aavas financiers currently trades at 7.5x P/BV at CMP of 1505. We initiate a Buy on Aavas financiers limited with expected upside of 25%.