Branch Expansion And PMAY 20 Will Accelerate Affordable Housing Penetration

Key Takeaways

• Tech platform upgrades and operational efficiency initiatives aim to drive profitable growth and improve net margins.
  
• Branch expansion and policy-driven market opportunities anticipate increased loan disbursement and revenue, with strengthened funding from strategic partnerships.
  
• Rising interest rates and geographic expansion challenges could impact margins, while shifting focus to larger loans may increase credit risk and affect profitability.

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 has completed the upgradation of all major tech platforms, which are now stabilizing, setting the foundation for sustainable, scalable, and profitable growth, potentially impacting future revenue growth and net margins through increased operational efficiency.
  
• The company plans to bring down its OpEx-to-assets ratio by 20 bps every year to reach a level below 3%, aligning with its cost optimization strategy, which could improve net margins and profitability.
  
• Aavas is undertaking significant branch expansion, with plans to open over 20 new branches, primarily in Karnataka and Uttar Pradesh, which could drive future revenue growth and expand its market reach.
  
• The introduction of PMAY 2.0 and expectations for more budgetary allocations for affordable housing could enable faster penetration of housing for all, boosting Aavas's loan disbursement volumes and revenue growth.
  
• Aavas's co-lending tie-ups with PSU banks and successful raising of NCDs are expected to strengthen its funding base, supporting long-term business growth and potentially enhancing earnings through strategic financing initiatives.

Aavas Financiers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aavas Financiers's revenue will grow by 21.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 44.0% today to 44.4% in 3 years time.
• Analysts expect earnings to reach ₹10.1 billion (and earnings per share of ₹125.35) by about March 2028, up from ₹5.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, down from 27.0x today. This future PE is greater than the current PE for the IN Diversified Financial industry at 24.3x.
• 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 16.35%, as per the Simply Wall St company report.

Aavas Financiers Future Earnings Per Share Growth

Risks

• The potential increase in cost of borrowing due to rising interest rates can impact net margins, despite the company’s efforts in securing lower-rate financing.
  
• The seasonal nature of GNPA (Gross Non-Performing Assets) increases may indicate potential asset quality challenges which could impact credit costs.
  
• Execution risks related to branch expansion, particularly in new geographic locations like Karnataka, could pose challenges to revenue growth if local market conditions, such as E-khata issues, are not managed effectively.
  
• Reliance on macroeconomic factors for provisioning flexibility suggests that changes in the broader economic environment can affect asset quality and earnings.
  
• The focus on expanding into higher ticket size loans in newer markets might expose the firm to credit risk, especially if the new customer segments don't perform as expected, impacting future profitability and returns.

Valuation

• The analysts have a consensus price target of ₹1983.278 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 ₹2200.0, and the most bearish reporting a price target of just ₹1522.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹22.7 billion, earnings will come to ₹10.1 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 16.4%.
• Given the current share price of ₹1918.05, the analyst price target of ₹1983.28 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.