AAVAS Financiers Buy Rating: Target Price Set at Rs 1,500

A New Chapter for AAVAS Financiers

Prabhudas Lilladher has reiterated its positive stance on AAVAS Financiers, issuing a 'BUY' recommendation with a target price of Rs 1,500. This outlook comes as the housing finance company appears to be moving past a challenging three-year period marked by significant management changes, a promoter stake sale, and regulatory hurdles. According to the brokerage, these headwinds have now largely subsided, paving the way for a more stable operational environment. The stock has seen a correction of 11.5% over the past month, presenting what the firm views as a favorable entry point for investors, based on a sustainable growth trajectory and a steady margin outlook.

Overcoming Past Hurdles

The last few years have tested AAVAS Financiers' resilience. The company navigated the exit of its founder, a change in promoters from Kedaara Capital and Partners Group to CVC Capital Partners, and a general slowdown in its key financial metrics. This period of transition contributed to the stock's underperformance relative to its peers. Over the past year, AAVAS shares declined by approximately 10%, while competitors like Aadhar and IndiaShelter posted mid-teen gains. The three-year performance shows a more significant drop of around 24%. This underperformance was linked to a deceleration in Assets Under Management (AUM) growth, which slowed from 25% year-on-year in FY23 to 16% in the first quarter of FY26. Similarly, the Return on Equity (RoE) decreased from 14.1% in FY23 to 12.6% in Q1 FY26.

Growth Drivers on the Horizon

The optimism from analysts is rooted in several strategic initiatives expected to drive future growth. AAVAS is poised to see a significant pickup in loan disbursements, fueled by a multi-pronged strategy. This includes aggressive branch expansion, with plans to add approximately 50 new branches in FY27. The company is also focused on scaling up its Common Service Centre (CSC) model and leveraging its RRO (Relationship and Referral Officer) model to deepen its market penetration. The management anticipates that these efforts, combined with contributions from digital channels and inflation-led growth, will support a disbursement growth of around 25% YoY in FY27.

Financial Projections and AUM Outlook

AAVAS Financiers' management has projected an AUM growth of 18% for FY27 and 20% for FY28. Prabhudas Lilladher, while positive, has adopted a slightly more conservative forecast, building in AUM growth of 17% and 18% for the same periods. The brokerage notes that successful execution, particularly in markets outside its home state of Rajasthan, will be critical to achieving these targets. As of the third quarter of FY26, the company's AUM stood at Rs 222.0 billion, marking a 15% year-on-year increase, indicating that the growth momentum is already building.

Margin Stability and Cost Management

Net Interest Margins (NIMs) are expected to receive support from a potential credit rating upgrade, which is anticipated by July 2026. In Q3 FY26, the company's reported spread improved to 5.34%, and it has guided for maintaining a spread of around 5.25% for FY26. While operating expenses (Opex) are projected to be elevated in FY27 due to the costs associated with opening new branches, the brokerage expects productivity benefits to lead to a gradual improvement in the opex ratio in the medium term. Furthermore, credit costs are expected to remain benign, forecasted at a low 15-16 basis points, well within the company's guidance of keeping it below 25 basis points.

Asset Quality Remains Healthy

AAVAS has maintained a strong grip on its asset quality. In the third quarter of FY26, the company reported an improvement, with Gross Non-Performing Assets (GNPA) at 1.19% and Net Non-Performing Assets (NNPA) at 0.79%. This demonstrates robust underwriting and collection processes, even as the company expands its footprint. The health of the loan book across both established and emerging geographies provides a solid foundation for future growth.

Valuation and Brokerage Perspectives

The stock's recent correction has brought its valuation to an attractive level. It currently trades at 2.5 times its one-year forward price-to-book (P/B) value, which represents a significant 44% discount to its long-term average and is the lowest among its peers. Prabhudas Lilladher's target price of Rs 1,500 is based on a valuation of 1.8 times its FY28 estimated price-to-adjusted book value (P/ABV). Other brokerages also hold a generally positive view, though with varying targets.

Concluding Analysis

Prabhudas Lilladher's 'BUY' rating on AAVAS Financiers is underpinned by the belief that the company has successfully navigated a period of significant transition and is now positioned for steady growth. The strategy of expanding its physical and digital reach, coupled with a stable margin outlook and healthy asset quality, forms the core of the investment thesis. While near-term expenses related to expansion may impact profitability, the long-term outlook for sustainable growth remains intact. Investors will be watching the execution in new markets and the company's ability to capitalize on the demand in the affordable housing segment.