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MOSL: AAVAS FINANCIERS: Confident of healthy loan growth and improvement in asset quality

• PAT grew 49% YoY to INR892m in 1QFY23 (in line). Elevated OPEX, with a cost-income ratio of 47%, was offset by very benign credit costs of INR9m.
• Underlying this, NII was flat QoQ and grew 20% YoY to INR1.8b (in line). Other income declined by 38% QoQ, driven by lower assignment income.
• Key highlights include: a) GS3 increased by ~10bp QoQ to ~1.1% and 1+DPD grew to 4.7% (v/s 4.5% in Mar’22); b) sequential NII growth was muted, leading to a compression of ~40bp QoQ in NIM; and c) quarterly disbursements of ~INR11b, led to AUM growth of 5% QoQ and 24% YoY, and has set the stage for a strong growth in FY23.
• We model an AUM and PAT CAGR of 23% each over FY22-24 for a RoA/RoE of 3.6%/15% in FY24. Valuations capture its growth trajectory and superior asset quality franchise. Before turning constructive, we would monitor the impact of rising interest rates on spreads and NIM and on delinquencies, if there is a significant increase in EMI for customers. We maintain our Sell rating with a TP of INR2,010 (based on 4.2x FY24E BVPS).

 

Spreads and NIM (calculated) declined QoQ

• Reported yields, CoB, and spreads were stable QoQ, but our calculated numbers suggest that there has been a decline in the core lending yields and increase in the cost of borrowings. This led to a compression in NIM.
• Reported spreads in 1QFY23 grew by ~4bp QoQ to ~5.8%. Reported NIM (including fee and other income) rose by ~75bp YoY, but declined QoQ. Calculated NIM declined by 10bp YoY and 40bp QoQ.

Marginal deterioration in asset quality, led by weakening in >90dpd loans

• Contrary to our expectations, there was minor asset quality deterioration, with GS3/NS3 increasing by 9bp/7bp to 1.08%/0.84%, driven predominantly by slippages of INR160m from the restructured pool of advances.
• 1+DPD grew to 4.7% (v/s 4.5% in Mar'22) and can be read as a seasonal deterioration in 1QFY23.

OPEX elevated in FY23, but will moderate sharply from FY24

• OPEX grew 53% YoY, led by investments in technology and salary increments effected from Apr-May'22. We model in an OPEX/assets ratio of 3.3% in FY23 (similar to FY22), but expect it to decline to 3% in FY24.

Highlights from the management commentary

• The management guided at AUM growth of 23-25%.
• AAVAS had raised its PLR by ~25bp from Jun'22. The NBFC will be increasing its lending rates by a further ~50bp from Aug’22. The same will immediately become effective on its entire floating-rate loan book.
• The management expects spreads to remain stable for the next two-to-three quarters.