Aavas Financiers Ltd-IPO Note

We experienced a catastrophic fall in the market on 21st Sept 2018 and of course, that has made all the market participants panic and rethink their view on markets.

The reason for the market fall was the selling pressure on the debt papers due to concerns over the liquidity crisis that affected the NBFC’s and HFC’s.

The launch of the IPO is, unfortunately, clashing with this event and since “Timing is everything in the market”, we will have to closely observe all the factors and then take a call on whether to go ahead with the IPO or not.

So let us analyze the prospects of the upcoming IPO of Aavas Financiers Ltd. which serves the low and middle-income customers and in such areas where the credit penetration is low.


Issue Size: Total issue size of Rs. 1734.07 cr.

  • Fresh Issue of upto 0.48 cr equity shares aggregating to Rs. 400 cr.
  • Sale of up to 1.62 cr equity shares aggregating to Rs. 1334.07.

Opening Issue Date:  September 25, 2018

Closing Issue Date:   September 27, 2018

Issue Price Range: Rs. 818 – Rs.821 Per Equity Share

Lot Size:   18 equity shares

Face Value: Rs.10 per share

Merchant Banker: ICICI Securities, Citigroup Global, Edelweiss Financial, Spark Capital and HDFC Bank.


The Net Proceeds of the Fresh Issue will be utilized towards increasing the Company’s Tier I capital base to maintain the minimum capital adequacy ratio.

Note: The company will not receive any funds from OFS.


India clearly has maximum exposure in Real Estate and it is the only nation in the above chart to have exposure in Gold.

In 2011, on an aggregate basis, 87% of approximately 247 mn households in India stayed in owned houses. The ownership status in rural areas was significantly higher at 95%. Despite the high ownership rates of houses, there is a significant housing shortage in India. The overall housing is due to changing social and demographic patterns in India, such as rising urbanisation and the nuclearisation of families.

The share of mortgage liabilities is low, reflected in the low mortgage penetration levels in India. Low mortgage finance penetration in India has primarily occurred due to housing finance being offered largely to individuals with reported incomes, therefore creating a lack of access to finance for a large proportion of individuals working as self-employed or in the informal sector.


Many large Indian States such as Bihar, Uttar Pradesh, Orissa and Punjab are less penetrated than the overall Pan India mortgage penetration.


The Indian housing finance market has grown at a CAGR of 18% over the last five years and is expected to grow at CAGR of 18 to 20% over the next five years.

Rising Urbanization and Nuclearization


Independent housing

Indians traditionally prefer to live in independent houses. However, the increasing population density especially in urban areas, has increased the demand for flats. As of 2001, 74.4% Indians were living in independent houses and 10.2% were residing in apartments.

Pradhan Mantri Awas Yojana-Urban

The Government proposes to encourage public-private partnerships in building homes for the economically weaker sections and the low income groups by offering incentives such as allowing a higher floor space index (“FSI”) and through announcing grants and subsidies for slum redevelopment programs.

The following table sets forth Budget allocation for PMAY-Urban:

The following table sets forth the gross budgetary support for the PMAY – Grameen programme :


The total housing credit outstanding was approximately ₹ 16.7 trn as of FY18 (₹ 14.4 trn as of FY17). The Indian housing finance market has grown at a five year CAGR of 18% with the pace of growth of HFC’s and NBFC’s being higher at a five year CAGR of 20% as compared to a five year CAGR of 16% for banks. Over the last five years (FY13 to FY18), the housing credit growth has remained steady despite a tough operating environment, subdued real estate demand and low affordability levels. This could be attributed to construction linked housing loans (and thus disbursements being linked to construction stages), secondary sales and low mortgage penetration in India.

The following table sets forth an overview of the Indian Housing Finance Market:

Over the last seven years, HFCs have been gaining market share due to their focus on niche segments such as self-employed and affordable housing segments, which have been largely served by HFCs and have a higher growth potential.

The following table sets forth portfolio growth trends for HFCs:

HFCs reported an overall portfolio growth of 24% in Fiscal 2018 supported by a higher 29% year-on-year growth in the non-housing loan segment. The home loan portfolio grew by 21%.

About Company

AAVAS is primarily engaged in the business of providing housing loan to customers belonging to a low and middle-income segment in semi-urban and rural areas. These are creditworthy customers who may or may not have the income proof documents like IT return, salary slip and hence are financially excluded by other large housing finance companies and banks. AAVAS uses unique appraisal methodology to assess these customers individually. The financing solution needs to be appropriated and suitable for them.

AAVAS providing home loans of Rs. 8 lakh average ticket size to 60,000 customers, through its 166 branches in tier 2 to tier 6 towns across 8 Indian states, with gross loan book of Rs. 4,356 crore (30th June 2018).

Geographically, loan book is heavily concentrated, with 4 states (Rajasthan, Gujarat, Maharashtra, Madhya Pradesh) accounting for 92 5%, with Rajasthan alone accounting for 46.6% of the gross loan book. Product-wise, loan book is split 76% as home loan and 24% as other mortgage loans, including loan against property. Company serves only retail customers, with zero developer loans.

Customer-wise, 64% of loans are to self-employed individuals, 61% to economically weaker section and low income group, earning less than Rs. 50,000 per month, while 36% of loans are to first-time borrowers (new to credit).


  1. Strong Distribution Network with Deep Penetration Serving Underserved Customers in Rural and Semi-Urban Markets
  2. Access to Diversified and Cost-Effective Long-Term Financing: It has a diverse funding mix including bank borrowings, NCDs and NHB refinance, with securitization and assignments, given that a significant proportion of the portfolio qualifies for priority sector lending, thereby providing an additional funding source. Also, Aavas has been able to raise funds at fairly competitive rates. Its average cost of borrowings has reduced from 12.28% as of March 31, 2014 to 8.57% as of June 30, 2018. Further, as of June 30, 2018, 30.82% of total Borrowings and securitization and assignment were at fixed rates of interest, while 69.18% were at floating rates.
  3. In-house Sourcing Model leading to Superior Business Outcomes. Company is also working with rating agencies to build rating score card model.
  4. It is a technology driven company and they leverage information technology and data analytics for on boarding customers, underwriting analysis, loan monitoring, risk management and collection functions. Between FY14-18, the company invested Rs 15.04 cr in the information technology systems.
  5. Effective ALM management with positive ALM over next 5 years supported by cost effective long term funding and negligible refinance risks with avg asset tenure at 13 yrs and liabilities at 11yrs. Hence Average COB has declined to 8.6% (Q1FY19).
  6. Robust and Comprehensive Credit Assessment, Risk Management and Collections Framework



  1. Expand the Branch Network to Achieve Deeper Penetration.
  2. Diversify the Borrowing Profile to Optimize Borrowings Costs.
  3. Increase the Product Portfolio and Improve Cost Efficiency through Use of Technology and Data Analytics.
  4. Enhance the Brand Recall to Attract New Customers.



  1. The business requires substantial capital and any disruption in the sources of capital could have an adverse effect on the business.
  2. The risk of non-payment or default by borrowers may adversely affect the business. As of June 30, 2018, 36.27% of the Gross Loan Assets were from customers who were new to credit. Further, as of June 30, 2018, 64.21% of the Gross Loan Assets were from self-employed customers.
  3. The company is affected by changes in interest rates for the lending and treasury operations, which could cause the net interest income to decline.
  4. The company may face asset-liability mismatches, which could affect the liquidity and adversely affect the business.
  5. The inability of company to recover the full value of collateral or amounts outstanding under defaulted loans in a timely manner, or at all, could adversely affect the results.
  6. The company is exposed to operational and credit risks which may result in NPAs and the company may be unable to control or reduce the level of NPAs in the portfolio.



  1. Demonstrated ability to profitability grow business

The company has grown at a rapid pace over the past three years with AUM increasing at a CAGR of 78%. Despite the high growth, Aavas has been able to maintain its profitability profile supported by good net interest margins, moderate operating expenses and low credit costs.


  1. Good asset quality and NPA’s are Low:

Aavas enjoys good asset quality with Gross NPA accounted for 0.50% of Gross Advances, while the Net NPA accounted for 0.38% of the Net Advances due to stringent underwriting norms, strong collection infrastructure and detailed analytics. Given the high pace of growth, gross NPA on a 1-year lagged basis would have been 0.5%, which is better than the industry average.

However, the company’s portfolio vulnerability remains high given its target borrower profile and low seasoning of the portfolio. Thus, delinquencies in the softer buckets are likely to remain volatile. Despite this, the company expects low credit losses given the secured nature of lending with a moderate loan-to-value ratio at origination (around 50 percent), most of the properties being self-occupied and the fact the company is covered under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

  1. PBT and PAT to Avg Total Assets

  1. Price to Book Value



The company is doing effective use of technology and analytics right from origination to underwriting and collection of loan which also improves customer service and retention. This is helping them to build an efficient operational model which in turn will increase the Profits.

Currently the company majorly borrows from banks and financial institutions (Approx 66% from Bank Lines). Further it intends to increase its lender base to insurance, pension and provident funds, overseas lenders, external commercial borrowings and through the issue of commercial paper.

After analyzing the business model and the overall growth of the company, it is certain that the company is fundamentally sound. Also, the sector is expected to grow at CAGR of 18-20% in the next 5 year and PMAY will also be a major boosting factor to this.

On the valuation front, the company the company demands price-book (P/B) multiple of 3.9x compared with the P/B of less than three for some of the established bigger peers.

On the basis of the current situation in the market, wherein all the HFC’s and NBFC’s tumbled because of the liquidity fear, hence, we recommend the investors to wait for the market sentiments to settle and post that you may buy the shares in the secondary markets rather than subscribing through IPO.

-Report by Apeksha Shetty