AAVAS Financiers faces AUM growth and margin pressure despite strong disbursements

Investment View and Valuation

Motilal Oswal Financial Services Limited retained its Neutral rating on AAVAS Financiers following the July 22, 2026 results update. The broker described 1QFY27 as a modest quarter: earnings were in line with estimates, but AUM growth was weaker than expected because of elevated repayments, while spreads and NIM contracted.

Motilal Oswal set a target price of Rs 1,650, valuing AAVAS at 2 times FY28E book value per share. The broker estimates AUM and PAT CAGRs of about 18 per cent and 16 per cent, respectively, over FY26-28E, with FY28E RoA of 3.3 per cent and RoE of 14.2 per cent.

1QFY27 Financial Performance

AAVAS reported 1QFY27 PAT growth of 23 per cent year-on-year to about Rs 1,700 million, in line with the broker's estimate. NII rose 17 per cent year-on-year to around Rs 3,200 million, also in line with estimates. Other income increased 17 per cent year-on-year to Rs 926 million.

Operating expenses grew about 10 per cent year-on-year to Rs 1,800 million, around 5 per cent below Motilal Oswal's estimate. Consequently, the cost-to-income ratio improved by about 2 percentage points sequentially to 44.1 per cent, while pre-provision operating profit grew 22 per cent year-on-year to Rs 2,300 million. Credit costs were Rs 128 million, above the broker's Rs 100 million estimate, equivalent to annualised credit costs of about 22 basis points. Reported RoA and RoE for the quarter were 3.2 per cent and 13.3 per cent, respectively.

AUM Growth, Disbursements and Repayments

AUM grew 15 per cent year-on-year and about 2 per cent sequentially to around Rs 2,39,000 million. Disbursements rose about 41 per cent year-on-year to Rs 16,100 million, supported by stronger volumes and productivity, although the comparison benefited from a low base.

Annualised loan-book run-off remained elevated at about 19.4 per cent, versus 19.8 per cent in the preceding quarter and 16.2 per cent a year earlier. Management said repayments increased modestly in April and May 2026, particularly in loans priced above 14 per cent, but normalised in June 2026 and are not expected to rise further.

Management retained its FY27 guidance for 22-23 per cent disbursement growth and 17-18 per cent AUM growth, with a medium-term AUM growth ambition of about 20 per cent. It aims to maintain a 65:35 home loan to non-home loan disbursement mix.

Margin and NIM Outlook

Margin pressure is a central issue in the broker's view. Reported spreads fell about 15 basis points sequentially to approximately 5.05 per cent, while calculated NIM declined about 20 basis points sequentially.

A further 10-basis-point PLR cut in June 2026 took cumulative PLR reductions to 25 basis points. Management expects full-year FY27 spreads to fall below 5 per cent because of PLR cuts, intense competition and a larger home-loan mix. Home-loan yields are around 150-200 basis points below non-home-loan yields.

Motilal Oswal models NIM of about 5.3 per cent in FY27E and 5.2 per cent in FY28E. Management expects productivity, cost efficiencies and income-side levers to help protect profitability despite lower spreads.

Asset Quality and Credit Costs

Asset quality showed minor seasonal deterioration. Gross stage 3 and net stage 3 increased about 6 basis points and 3 basis points sequentially to 1.11 per cent and 0.71 per cent, respectively. Loans overdue by more than one day increased about 60 basis points sequentially to 3.75 per cent.

Management said 1+ DPD remained below 5 per cent, no segment showed meaningful stress, and collections and credit quality remain priorities. It is nevertheless cautious on tourism, travel and restaurant-linked segments amid the Middle East crisis.

Motilal Oswal expects AAVAS to retain strong asset quality and models credit costs of about 20 basis points in FY27E and 15 basis points in FY28E.

Operational Priorities and Re-rating Trigger

Management is pursuing faster branch-level breakeven, direct sourcing through branches, better login-to-disbursement conversion through data and technology, and lower customer acquisition costs.

It aims to increase disbursements per field employee from Rs 800,000-1,000,000 currently to Rs 2,000,000-2,200,000 in less than three years. Motilal Oswal sees sustainable translation of the stated 20 per cent growth ambition into AUM growth, alongside healthy disbursements, as the key re-rating trigger.

Key Risks

• Competitive intensity.
• Continued portfolio attrition and repayments.
• Weaker execution against AUM guidance.
• Further yield and spread compression resulting from the higher home-loan focus.