Branch Expansion And PMAY 20 Will Create New Opportunities

Key Takeaways

• Accelerating branch expansion and tech advancements aim to enhance geographical reach, optimize costs, and drive revenue growth.
  
• Strategic focus on risk-adjusted returns and digital channel expansion may boost earnings, reaching new customer segments and increasing market share.
  
• Aavas Financiers faces potential pressure on margins due to interest rate changes, competition, and macroeconomic factors, which may impede its growth and operational efficiency.

Catalysts

Provides housing finance services to customers belonging to low- and middle-income self-employed customers in semi-urban and rural areas in India.

• Aavas Financiers is focusing on accelerating its branch expansion strategy, planning to open new branches in the first half of FY '26, thereby aiming to increase geographical penetration and customer base which will likely drive revenue growth in the coming quarters.
  
• The company has completed the upgradation of major tech platforms, providing a foundation for scalable and profitable growth. This tech-led operational efficiency is expected to optimize costs, thereby potentially improving net margins.
  
• The targeted increase in disbursement yields through strategic focus on risk-adjusted returns across product segments is likely to support both revenue growth and the maintenance of stable spreads, thus positively impacting earnings.
  
• By engaging in value-accretive partnerships and enhancing digital channels, Aavas aims to tap into new customer segments, particularly those new to credit and mortgage, which could boost future revenues significantly.
  
• The introduction of the PMAY 2.0 scheme aligns with Aavas's mission to provide affordable housing finance, potentially driving higher demand for its products and supporting revenue growth and market share expansion across its target market in the coming years.

Aavas Financiers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aavas Financiers's revenue will grow by 18.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 43.4% today to 44.8% in 3 years time.
• Analysts expect earnings to reach ₹9.9 billion (and earnings per share of ₹125.55) by about May 2028, up from ₹5.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the IN Diversified Financial industry at 26.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.36%, as per the Simply Wall St company report.

Aavas Financiers Future Earnings Per Share Growth

Risks

• Aavas Financiers faces potential pressure on its net interest margins as the company is in a falling interest rate environment. With 70% of its assets on floating rates and a lag in repricing liabilities, this might compress spreads in the near term.
  
• The company's asset yields have remained static despite increasing PLR rates, which implies there might be limited room to pass on borrowing cost increases to customers, potentially affecting future net margins.
  
• Aavas' strategy to expand with a 20% annual growth target, while admirable, could strain operational efficiency or lead to increased operating expenses if not managed properly, impacting operating margins.
  
• The company is cautious about increased competition and over-leveraged customers, especially in new territories or lower ticket loans, which could affect the quality of its loan portfolio, potentially impacting credit costs and net earnings.
  
• Despite positive past performance, Aavas remains vulnerable to macroeconomic factors, such as rising delinquencies in specific segments and regulatory changes in affordable housing, which could deter its revenue growth.

Valuation

• The analysts have a consensus price target of ₹2141.059 for Aavas Financiers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2490.0, and the most bearish reporting a price target of just ₹1507.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹22.2 billion, earnings will come to ₹9.9 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 16.4%.
  
• Given the current share price of ₹1942.9, the analyst price target of ₹2141.06 is 9.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.