Aavas Financiers Share Price Analysis – Emerging Mid-Cap Housing Finance Stock

Aavas Financiers Share Price Analysis – Emerging Mid-Cap Housing Finance Stock

Introduction

Hi! Today I have come up with a new article series for you – 5 Minute Stock Ideas. In this article, we will cover such companies which are doing well in their business.

We’ll first briefly talk about the company’s business, then tell you some things we like about the company, and some things we don’t. The main purpose of this article is that without wasting much of your precious time, we will explain a good business in a very concise manner.

This will give you an idea of not only a lot of different stocks but also what different factors you can analyze in a particular industry stock. I know, I know, a company can be analyzed in 5 minutes.

But friends, for this 5-6 mins article, our team researches for hours and then prepares this analysis for you. That’s why must watch the article till the end. So, we are going to start this series with a housing finance company named Aavas Financiers Limited and we’ll do some Aavas Financiers Share Price Analysis.

About Aavas Financiers Limited

As I told you, it is an affordable housing finance company that started in 2011 as a subsidiary of AU Small Finance Bank. What are these HFCs or Housing Finance Companies?

See, unlike banks that offer all types of loans, HFCs focus only on housing finance, that is, loans that you need to buy or renovate a home, and that’s why they also provide specialized services and customized loan options.

The market for affordable housing finance is quite underpenetrated in India. Not only this, the market in which it operates has only 5% penetration! As you can see, the runway ahead for the company’s growth is long. Aavas Financiers caters to a niche market.

Also Read: Indigo Paints Share Price

What We Like About Aavas Financiers Share Price

They mostly provide service to those customers who are from rural or semi-urban areas, and do it in the lower-middle income segment. Although most of their customers are self-employed, some of them also those who do not even have income proof. Now big banks and other financial institutions will not serve them, and here comes the role of housing financiers. Perhaps this customer-friendly philosophy of housing is their specialty.

Look, a bank or a housing finance company just borrows money from one place, lends it at a higher rate, and earns profit, right? Now housing finance companies like Aavas have good credit ratings and can leverage this to raise money from their lenders at lower rates.

So, their cost of borrowing will come down, and their profit margin will improve. Well, thinking of Aavas is different. Aavas understands the situation of its borrowers and passes on the benefit of its lower cost of borrowings to them.

As you can see, as their cost of borrowing comes down, they pass that benefit on to their customers in terms of lower lending rates as well.

See for yourself, their spreads have remained flat for the last 7 financial years. Now you must be thinking that everyone must be doing this. But no, let’s compare them with their close friends only. While there is a difference of 1% in the cost of borrowing for both companies, the difference in lending rates is 4%, which means Aavas is lending money at a lower rate. And it is correct.

In a way, this strategy can help the company to gain market share in the coming times. Another strong point of the business model of housing financiers is their in-house sourcing and execution model. The company has a strong technology infrastructure and a wide branch network.

Due to its unique customer valuation methodology and strong business acumen, Aavas today has a healthy ALM i.e. Asset Liability Management, i.e. their asset liabilities are comfortably high for all time periods. And this means that their balance sheet is also very strong. ALM (Asset Liability Management) is a process where financial institutions meet their liabilities by managing their assets and cashflows.

The more efficient and ALM, the better its risk management. Another plus point for Aavas is their numbers show consistent and strong growth, despite being highly cautious on both the assets and liabilities side.

In the Q1FY23 con call, someone asked whether housing financiers have plans to enter other fee-generating businesses. So Sushil Agarwal, CEO and MD of the company, said that they have no such plans, and their focus will always be on the lending business. And he has also given comfortable guidance of 20-25% growth for the next 10-15 years. But, just like every coin has two sides, similarly if a business has its strengths, then it also has its weaknesses.

What we don’t like about Aavas Financiers Share Price

Let us now look at some such things about the business of the company which we as an investor should keep in mind. What is most important in any lending business?

That you get the borrowed money along with the interest on time, right? Now it is possible that the borrower’s condition is such that they cannot repay the money on time. That’s why financial institutions use a metric called Stage 3 to monitor non-performing loans.

And as you can see, Aavas stage-3 loans are up from the last 4 quarters. Aavas’s Stage-3 numbers could be a key watch for investors in the coming times. Aavas faces stiff competition from affordable housing finance companies like Aptus Value Housing Finance, CanFinHomes & Home First.

And finally, let’s talk about the Valuation of Aavas Financiers Share Price.

Valuation of Aavas Financiers

Post covid, when there was a low-interest rate month – what a time it has Aavas Financiers Share Price touched Rs. 3037/share at the top and so after listing in 2018 their average Price to book ratio is 5.1 times, which is relatively high.

Yes, it is true that quality commands a premium, but if a company’s growth goes off target due to unforeseen developments, such as demonetization or Covid-19, it can have a negative impact on Aavas Financiers Share Price. What do you think are the other strengths and weaknesses of the Aavas financiers’ business? Do you have any HFCs in your portfolio? Tell us the name of the stock and its returns in the comments.