Loaning the humble class: Analysing the business of Aavas Financiers Limited

Incorporated as ‘Au Housing Finance Private Limited’ in 2011, the company transitioned to a public limited entity in 2013, rebranding as ‘AU Housing Finance Limited.’ Further, in 2017, it adopted the name ‘Aavas Financiers Limited.’ Operating primarily in semi-urban and rural areas, Aavas caters to the low and middle-income segments, employing a unique appraisal methodology to serve financially excluded customers. It secures capital through various means, including term loans, NCD issuances, and refinancing from the National Housing Bank, ensuring financial inclusivity for creditworthy individuals without conventional income proof.

Business area of the company

The company is a retail, affordable housing finance company, primarily serving low- and middle-income self-employed customers in semi-urban and rural areas in India. A majority of its customers have limited access to formal banking credit. The company offers customers home loans for the purchase or construction of residential properties and for the extension and repair of existing housing units.

Products

Home Loan

Land Purchase + Construction Loan

Home Improvement Loan

Home Loan Balance Transfer

Home Equity (Loan Against Property)

Micro, Small and Medium Enterprise (MSME) Loan

Aavas Housing Finance: Key Drivers and Insights

AUM:

Aavas has carved a significant niche in the affordable housing finance market, boasting a robust AUM of Rs 153.2 billion. Its presence spans 13 states, with a focus on semi-urban and rural areas. Deep distribution networks, technological investments, and a strong employee force fuel its growth and efficiency.

Leverage and Capital Positioning:

Aavas’ capital position remains comfortable, with a well-capitalized balance sheet and strong internal accruals. Its leverage ratio stands at a healthy 3.18x, providing ample room for future expansion. The company maintains a diversified funding mix with long-dated borrowings, ensuring resilience and keeping borrowing costs in check.

Technology:

Technology plays a crucial role in Aavas’ strategy. Its “Aavas 3.0” initiative involves the implementation of advanced tech systems like Salesforce and Oracle solutions. This investment aims to enable 10x AUM growth without technological constraints and enhance operational efficiency.

Asset Management:

While Aavas primarily lends to the self-employed (59.9% of portfolio), it maintains robust risk management practices. Its detailed credit assessment methodology, strong monitoring, and low reliance on short-term borrowings mitigate potential risks. Asset quality has normalized post-pandemic, with gross stage-3 assets settling at 1.04% and 1+dpd at 3.58%.

Aavas’ non-housing loan portfolio is growing, currently representing 30.3% of AUM. Careful lending practices, low loan-to-value ratios, and adequate provisioning offer comfort while this segment continues to expand.

Financials

Profitability:

Profitability remains strong, with Aavas reporting an ROA of 3.2% in 1HFY24. However, a shift towards salaried customers and rising competition may lead to yield pressure. Upfront investments in technology will also initially weigh on growth. Nevertheless, operating expenses are expected to improve over time as operational efficiency and economies of scale kick in.

In conclusion, Aavas demonstrates a robust business model, capitalizing on its deep market understanding, strong risk management, and technological investments. While some moderation in profitability is likely, the company remains well-positioned for continued growth in the affordable housing finance market.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.