Aavas Financiers: Navigating Growth with Prudence in H1 FY26

Aavas Financiers Limited has presented a robust performance for the first half of fiscal year 2026, demonstrating resilience and strategic foresight in a dynamic market. The company's Asset Under Management (AUM) grew by a healthy 16% year-on-year, reaching Rs. 21,360 crore. This growth is underpinned by strong disbursement figures, which saw a 36% quarter-on-quarter and 21% year-on-year increase in Q2 FY26. Management expressed confidence in sustaining this momentum, projecting an 18% AUM growth for the full fiscal year.

The company's focus on maintaining pristine asset quality remains a cornerstone of its strategy. Despite some localized pockets of stress, the 1+ Days Past Due (DPD) remained below 5% at 3.99%, with Gross Stage 3 (GNPA) at 1.24% and Net Stage 3 (NNPA) at 0.84%. These figures are well within the guided range, reflecting Aavas's disciplined underwriting and proactive risk management framework. The sanction-to-disbursement ratio, which experienced a temporary impact in Q1 due to a new recognition framework, has since recovered to approximately 80%, indicating improved conversion efficiency.

Financial Highlights and Strategic Shifts

The financial results for H1 FY26 underscore Aavas's commitment to profitable growth. The Net Profit After Tax (PAT) for Q2 FY26 grew by 11% year-on-year to Rs. 164.4 crore, driven by a robust 18% year-on-year growth in Net Interest Income (NII). The Net Interest Margin (NIM) expanded by 26 basis points year-on-year to 8.04%, supported by significant improvements in spread and a focus on risk-adjusted pricing. The Return on Asset (ROA) improved to 3.40%, and Return on Equity (ROE) reached 14.31% in Q2 FY26.

Financial Summary (H1 FY26)

Management has been proactive in optimizing its liability profile. By anticipating a potential softening in interest rates, Aavas strategically shifted a significant portion of its borrowings to External Benchmark Lending Rate (EBLR)-linked instruments and shorter-tenure MCLR structures. This forward-looking approach has resulted in liabilities repricing faster than many peers, leading to a 17 basis points sequential improvement in the cost of funds. The company's average tenure of borrowings remains longer than its assets, ensuring a positive Asset Liability Management (ALM) position.

Strategic Initiatives and Future Outlook

Aavas Financiers is actively pursuing several strategic initiatives to drive sustainable growth. The company has embarked on geographical expansion, entering Tamil Nadu with eight new branches in Q2 FY26 and planning to add another eight in H2. Further expansion into Andhra Pradesh and Telangana is on the horizon. This expansion strategy, coupled with a focus on contiguous, cluster-based growth, aims to deepen market penetration.

Technology remains a key enabler for Aavas. The company has completed a major technology transformation, implementing Salesforce for origination, Oracle Flexcube for loan management, and Oracle Fusion for ERP/GL systems. These investments have led to significant operational improvements, including a 54% reduction in Login to Sanction Turnaround Time (TAT) and a 1.4x increase in unique customer app logins. The integration of data and analytics across the customer lifecycle and compliance with cyber security measures further strengthen its technological backbone.

Addressing Challenges and Building Trust

While the performance has been strong, management transparently addressed areas requiring attention. The cost-to-income ratio, though declining sequentially, remains a focus area for further improvement. The company acknowledges that the cost-to-asset ratio appears temporarily elevated due to investments in branch expansion and digital transformation, which are yet to fully monetize. Management is committed to bringing the Opex to Asset ratio below 3% over the medium term, expecting operating leverage to steadily improve as disbursements scale.

Employee attrition, a common industry challenge, is also being actively managed. Aavas reported a reduction in attrition for FY25 and a further decrease in Q2 FY26, attributing this to its regional HR strategy focused on engaging and training frontline employees. The company's robust governance framework, including independent women directors, an independent chairperson, and a strong board, reinforces investor trust.

In conclusion, Aavas Financiers Limited's H1 FY26 performance reflects a company that is not only growing but doing so with strategic clarity and disciplined execution. The management's proactive approach to liability management, technology adoption, and risk mitigation, combined with a clear vision for geographical expansion, positions Aavas well for sustained long-term value creation for its stakeholders.