Edelweiss Financial Services has a buy call on Aavas Financiers with a target price of Rs 1,014.The current market price of Aavas Financiers is Rs 818.30.Time period given by the brokerage is one year when Aavas Financiers price can reach the defined target.Investment rationale by the brokerageWell invested to be bigger, better and stronger: Riding huge potential in the low-cost housing segment, Aavas has all the right ingredients to be bigger, better and stronger: a) niche customer profile (LMI self-employed, nearly 36 per cent new to credit) geographical presence (outside tier-2 cities); b) proactive investments in people, process technology; c) excess capital to be leveraged for growth; and d) strong execution capabilities.
Given risk associated with its operating segment, it is focused on robust credit assessment risk management practices.
It will be in a high-growth phase in the near term (albeit on a small base)loan/earnings CAGR of 40 per cent/43 per cent over FY18-21E.In right place with a few bridges to cross: Though appropriately positioned, anticipated performance comes with its own set of monitorables: a) liability management as scale builds up (series of rating upgrades crucial); b) credit cost behaviour (given robust growth and niche segment); and c) high operating cost structure (already invested, but getting buck back is crucial).
Also, RoE (albeit improving) remains low due to sub-optimal leverage and relatively higher cost/income.Outlook and valuations- Catch it young; initiate with BUY: Drawing comfort from niche operating segment, high growth phase, managements execution capabilities and unwavering focus on risk management, Aavas has all the ingredients to sustainably command premium valuation.
We assign 4x FY20E P/BV, a discount to compounder peer Gruh, given lower RoE (albeit improving) while premium to HDFC given strong sustainable growth trajectory.