Tech Upgrades And Cost Optimization Will Improve Operational Efficiency In Housing Finance

Key Takeaways

• Major tech platform upgrades and cost optimization strategies may enhance governance, operating efficiencies, and profitability, improving net margins.
  
• Expansion into new regions and successful capital raising efforts position the company for growth by strengthening liquidity and maintaining competitive borrowing costs.
  
• Geographic expansion and competitive intensity pose risks to asset quality, operational efficiency, and profitability, potentially affecting revenue and growth projections.

Catalysts

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

• The completion of major tech platform upgrades is expected to enhance governance, drive scale, optimize costs, and boost operating efficiencies, potentially improving operating margins and net income.
  
• The company plans to reduce its OpEx-to-assets ratio by 20 bps annually, aiming for a level below 3% through cost optimization strategies, which could positively impact net margins and profitability.
  
• Expansion into new branches, particularly in Karnataka and Uttar Pradesh, along with more affordable housing supply from the government, can drive growth in the loan book, impacting revenues positively.
  
• Successful capital raising efforts, including innovative financing strategies like NCDs from IFC, strengthen liquidity to support loan growth and maintain competitive borrowing costs, impacting net interest margins positively.
  
• Enhanced predictive AI models for managing balance transfer (BT) outs and credit underwriting may help maintain asset quality and reduce credit costs, thereby supporting stable or improved earnings.

Aavas Financiers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aavas Financiers's revenue will grow by 21.1% 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 February 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 24.6x on those 2028 earnings, up from 23.8x today. This future PE is greater than the current PE for the IN Diversified Financial industry at 24.1x.
• 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 17.0%, as per the Simply Wall St company report.

Aavas Financiers Future Earnings Per Share Growth

Risks

• The company notes that its gross Stage 3 assets have increased marginally due to seasonal factors, which could indicate potential future credit quality challenges, impacting asset quality metrics and provisioning costs.
  
• There are potential risks associated with geographic expansion, especially in new states like Karnataka and Uttar Pradesh, where regulatory challenges (e.g., E-khata issues in Karnataka) could impact the pace of growth and operational efficiency, affecting revenue and profit growth projections.
  
• The asset quality in newer geographies lacks the maturity and stability seen in more established regions, which could pose a risk to achieving sustained asset quality metrics if not managed carefully, potentially leading to higher credit costs.
  
• The competitive intensity in the market, as mentioned with respect to challenges in regions like Karnataka, can lead to pressure on disbursement yields and borrowing costs, potentially affecting net interest margins and profitability.
  
• Potential increases in cost of borrowings and reliance on various borrowing sources might lead to higher interest expenses, impacting net interest margins and profitability if not mitigated by corresponding yield improvements on assets.

Valuation

• The analysts have a consensus price target of ₹1955.389 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 24.6x, assuming you use a discount rate of 17.0%.
  
• Given the current share price of ₹1690.75, the analyst price target of ₹1955.39 is 13.5% 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.