Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aavas Financiers Limited Q2 FY '26 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rakesh Shinde, Head, Investor Relations of Aavas Financials Limited. Thank you, and over to you, sir.

Thank you, Rutuja. Good evening, everyone. I extend a very warm welcome to all participants, and thank you for joining us on today's earnings call to discuss the financial and operational performance of our company for H1 and Q2 FY '24, along with the business outlook going forward. The results and the investor presentation have been uploaded on the stock exchanges and are also available on our company website. I hope you had a chance to review them. Joining me today is the entire management team of Aavas. We will begin this call with the opening remarks from our MD and CEO, Sachinder Bhinder; CFO, Ghanshyam Rawat; and CRO, Ashutosh Atre. This will be followed by a Q&A session. With that, let me now hand over the call to Sachinder.

Thank you, Rakesh. Good evening to all. I thank you all for joining us on this earnings call. I hope you had a joyous Diwali and have a prosperous summer 2082. I am pleased to share that CARE Ratings has revised its long-term rating outlook on Aavas from stable to positive. This represents an important step towards a potential rating upgrade to AA+, which will further enhance our ability to diversify our liability profile in a cost-efficient manner. The outlook revision reflects Aavas' strong fundamentals, quality growth, robust asset quality, sustained profitability, a solid capital position and stability of our management team. As highlighted during our last quarter's commentary, we are pleased to share that we have made our entry into Tamil Nadu with opening of 8 new branches, and we plan to add another 8 in H2, taking our network to 405 branches across 14 states. We will continue to expand in a contiguous cluster-based manner, adding 20 to 25 branches in H2 to deepen our penetration in the existing markets. As our Tamil Nadu base strengthens, Andhra Pradesh and Telangana become natural next expansion opportunities under the same disciplined approach. On the business front, after the transition to the new disbursement recognition framework in Q1, operations have now normalized, resulting in a strong 36 percentage Q-o-Q and 21 percentage year-on-year growth in disbursement during Q2. Our sanction to disbursement ratio, which was impacted in Q1, has recovered and now stands at over 80 percentage, demonstrating improved conversion efficiency. Entering the second half of the year, traditionally a strong period for us, we expect this momentum to sustain and further strengthen. On the credit front, we continue to maintain a cautiously optimistic stance in our underwriting approach. While our asset quality continues to show steady improvement, we remain vigilant and are closely monitoring developments across specific customer segments, geographies and risk profile, especially in light of cautionary signals observed among some industry peers. Our calibrated risk strategy remains firmly anchored in prudence and discipline guided by sound underwriting principles rather than any perceived weakness in demand. Our AUM grew by 16 percentage year-on-year to INR 213.6 billion. Given the current momentum and positive market environment, we now anticipate full year AUM growth of around 18%. The broad economic backdrop remains supportive. The government's continued thrust on retail consumption, along with structural reforms such as GST rate reduction and income tax rationalization expected to further strengthen housing demand in the coming quarters. Additionally, a conducive interest rate scenario continues to support affordability and demand momentum in our core segments. Furthermore, government initiatives like the interest subsidy scheme, ISS, under PMA 2.0, coupled with a stable interest environment continue to support homebuyer sentiment and affordability. We are pleased to report that over 2,300 Avas customers have already benefited from these schemes, receiving subsidies amounting to more than INR 75 million. As we look ahead, our long-term strategic priorities remain clear to fully leverage our strong digital platforms, distribution network, further strengthen governance, drive scale efficiently, optimize cost and enhance productivity across the organization. With that preamble, I will now take you through our quarterly performance. After crossing the INR 200 billion milestone earlier this year, our AUM has now reached at INR 214 billion. During quarter 2 FY '25, we disbursed loans worth INR 15.6 billion, registering a 36% sequential and 21 percentage year-on-year growth while maintaining our strong focus on quality origination and prudent underwriting. Our net profit for quarter 2 FY '26 grew by 11 percentage Y-o-Y to INR 1.64 billion, led by robust 18 percentage Y-o-Y growth in NII on account of healthy improvement in spread. Our net worth continues to compound steadily, growing at 16 percentage Y-o-Y with the strength of our capital position driven by consistent compounding internal accruals. Our NIMs expanded by 56 bps sequentially to 8.04% during the quarter. This improvement was supported by significant improvement in the spread, coupled with our continuous focus on risk-adjusted pricing, which resulted in a 10 bps increase in the incremental business yields over H1 FY '25. Our OpEx to asset ratio saw a marginal increase of 5 bps sequentially to 3.51 percentage, while cost-to-income ratio declined by 260 bps quarter-on-quarter to 43.7%, reflecting the improved efficiency gains. Our asset quality remains pristine with 1 plus DPD below 5 percentage improved by 16 bps sequentially to 3.99 percentage as of September 2025, while GNPA levels remained stable at 1.24 percentage. Credit costs improved sharply by 8 bps sequentially to 16 bps, driven by lower 1 plus DPD flow and improvement in Stage 2 buckets. We continue to maintain our guidance of keeping the credit cost below 25 bps on a sustainable basis. Our ROA improved significantly by 46 bps sequentially to 3.4 percentage and ROE improving by 175 bps quarter-on-quarter to 14.31%. We remain committed to delivering quality, profitable and sustainable growth powered by tech-led efficiency and cost optimization. With a robust risk management framework, deep and diversified distribution network and the strong execution capabilities of our experienced team, we are confident of achieving our strategic milestones and delivering long-term value to all stakeholders. With that, ladies and gentlemen, I would now hand over to our CFO, Ghanshyam Rawat, to discuss the financial in details.

Thank you, Sachinderji. Good evening, everyone, and a warm welcome to our earnings call to provide update on borrowing first. Our liability to improve the cost of fund continue to underscore the strength and resilience of our well-diversified liability franchise with many long-term partners linked to various benchmarks. In line with our strategy of innovation in liability sourcing, we proactively anticipated a potential softening in interest rates and strategically shifted a sizable portion of our borrowings to ABLR-linked instruments and a short tenure MCLR structure. This forward-looking approach has continued to yield tangible benefit in quarter 2 as our liabilities are repricing faster than those of many peers. This position us well to maintain a competitive cost of fund while supporting sustainable quality growth. As a result, we have seen additionally 17 basis point improvement sequentially in our cost of fund on overall cost of borrowing. Our spread improved sharply by 34 basis points year-on-year to 5.23% in quarter 2, while the calculated spread increased by 59 basis points year-on-year to 6.27% in quarter 2 FY '26. We continue to borrow judiciously raising around INR 13.96 billion at a competitive rate at 7.83% in quarter 2 FY '26. Our average tenure of borrowing continued to be longer than that of our assets, ensuring a positive ALM across all time buckets. As of 30th September 2025, total outstanding borrowing stood at INR 186.87 billion. The borrowing mix as on 30th September 2025 comprised of 50% from term loan from various banks and institutions, 25% from assignments, 14% from National Housing Bank refinancing, 11% from debt capital market. We have optimum mix of various benchmarks of interest rates such as 36% borrowing linked to external benchmarks such as repo, TBL, MIBOR and 25% linked to sub 3-month MCLR, enabling faster repricing of nearly 61% of our borrowings in line with the interest rate movements. Lender support remains strong as ours continue to hold. We maintain access to diversified and cost-effective long-term funding. Our relationship with development fund institutions remain robust, supporting our strategic fundraising goals. As of 30th September 2025, we maintain ample liquidity includes cash and cash equivalents and unavailed cash credit limit of INR 18.94 billion, documented unavailed sanction of INR 21.51 billion. profitability and capital position. Our net total income in absolute terms grew by 18% year-on-year in quarter 2 FY '26. Net interest margin as a percentage of total assets expanded by 26 basis points year-on-year to 8.04% in quarter 2 FY '26. We remain well capitalized with a net worth of INR 46.8 billion and a capital to risk-weighted average assets ratio are 45.9%, significantly above regulatory requirement. Now I would like to hand over the line to CRO, Mr. Ashutosh Atri, to discuss the asset quality.

Thank you, Ghanshamji. Good evening, everyone. I am pleased to share the key portfolio risk parameters with you. Asset quality and provisioning. Aavas is strongly positioned to continue delivering industry-leading asset quality. Our asset quality remains within the guided range with 1-day past due well below 5% at 3.99% in Q2 FY '26 and gross Stage 3 and net Stage 3 under 1.25% stood at 1.2524% and 0.84%, respectively. From a geographic perspective, asset quality in our home state continues to remain healthy. The average 1 plus DPD and GNPAs stood well below 4% and 1.25% of AUM. Similarly, in our emerging markets, we are observing healthy credit performance with 1 plus DPD and GNPA levels remaining comfortably within 3.5% and 1% of AUM, respectively. Our ECL provisioning, including that for COVID-19 impact as well as Resolution Framework 2.0 stood at INR 1.21 billion as of 30th of September 2025. Our disciplined underwriting standards, coupled with proactive risk management framework have enabled us to stay ahead of emerging macroeconomic challenges. While several peers have reported asset quality pressure due to sectoral or regional headwinds, our portfolio has remained resilient. We continue to follow a rigorous credit assessment process, stress tested across multiple economic scenarios and remain selectively calibrated in our exposure to higher risk segments. This approach has helped us preserve asset quality, which continues to rank among the best in the industry. With this, I open the floor for Q&A.

[Operator Instructions] The first question is from Renish from the line of ICICI. Line of RCI.

Congrats on a good set of numbers. Sir, my first question is on basically yields, right? So while our spread expanded for last 2 quarters, but it's largely driven by cost of fund benefit and yield continues to fall. So what explains the drop in yields on a sequential basis? And where do you see yields settling in near term? Because at some point in time, we also have to review our PLR. And given there is a sharp reduction in cost of funds, we might have to lower our PLR maybe in the next couple of quarters. So where do you see the yield settling and ultimately spread...

Thanks, Renish. I think as highlighted earlier, our incremental business yield is still lower than our existing portfolio yield, which naturally pulls down the blended portfolio yield. And this has been the key driver of the 5 bps compression during the quarter. Additionally, in the current environment of heightened asset quality concerns and tighter credit conditions, we believe it is prudent to underwrite better quality, lower-risk customers even if there is a spar compression in the disbursement yields and site lower pricing. The intent is to protect portfolio quality and maintain long-term risk-adjusted returns. This said, positive momentum on placement yields with 10 bps Y-o-Y improvement in H1 FY '26 and gap between incremental yield and portfolio yield has narrowed meaningfully. Again, just to elaborate that we've taken some structural actions to support the yield sustainability, sharper focus on the lower ticket size and new to credit customers where yields are structurally higher, deeper penetration of the underserved geographies and higher-yielding prototype segments, along with the deviation metrics and system-based guardrails to ensure pricing discipline is there on the ground. I think this all will really help us to do. I think the positive part of the nation is that we have had momentum continue on the yield side as we speak. The second question on was on the PLR. So we are closely monitoring the rate environment. So far, we've not seen a meaningful reduction in MCLR from the banks, and therefore, the full transmission of lower rate has not yet taken place on the liability side. That said, our incremental disbursements are already being priced competitively, which means our incremental spreads are still lower than the reported portfolio spread. In fact, our effective yields are already lower than the most peers. We are also addressing customer level retention selectively. And I think we will continue to evaluate the cost of funds, Renish. And based on how the MCLR transmission plays out on the coming quarters, the ALCO will review and they take a considered view on revising the PLR.

Okay. So basically, let's say, till September '25, whatever benefit we got on the borrowing side, let's say, if there is no further benefit on the cost of borrowing, you will keep PLR where it is currently. Is that the fair assumption?

So I think that will -- at ALCO, we will review and take a considered call on -- based on the scenario emerge in the coming months.

Okay. Okay. Got it, sir. Sir, my second question is on the cost side, right? So we've been highlighting that we have taken many initiatives to improve productivity and bring down cost ratios. But somehow our cost to income is at around 41%, 42% even if adjusted for ESOP cost versus peers, we are below 35%. So there is a gap. So when do you see this cost-to-income ratio converging towards industry average?

Renish, the movement in OpEx to asset ratio this quarter is largely operational and timing related rather than structure. So this reflects the employee additions which were made as a part of our branch and distribution expansion plan. However, since disbursement are relatively softer, the cost-to-asset ratio appears temporarily elevated. So if you look at it, there is a 14 percentage Y-o-Y increase in the number of employees. This includes 1,150 employees we added. We still have the monetization of that to happen. So I think that is one part. But this is as a part of investment which we look at as we speak, we've added branches in Tamil Nadu. Still they have to come to a level where it starts being productive as we speak in the coming quarters. Now if you exclude the ESOP expense, the Y-o-Y increase in the OpEx ratio would have been 16 bps since quarter 2 of last year had ESOP reversals, which created a base effect. This all being a denominator effect with muted asset growth in the quarter, the benefit of operating leverage has still not flowed in. But on the positive side, as I reflected, the cost-to-income ratio has improved by 262 bps sequentially, indicating that the cost structure is already beginning to stabilize.

Okay. So this trend will continue going forward? I mean, that's what you're trying to highlight?

No. So we've actually guided that we are committed to bringing the OpEx to asset ratio below 3 percentage over the medium term. And as disbursement scale, AUM growth normalizes and technology and branch project benefits continue to accrue, we expect operating leverage to further steadily improve.

The next question is from the line of Kunal Shah from Citigroup.

So firstly, on assignment income, overall, when we look at it compared to the assignments which were done, in fact, the run rate to be quite high. So is there anything -- maybe is it more of a demand-supply thing? Or is there anything there?

Kunal, if you see assignment volume perspective, we are -- I think what we do every quarter and every H1 it is not much change as our AUM growing. So we generally keep between 15% to 20% growth in the assignment in the volume. But more particularly, now this year, our assignment, we used to do last year roughly 8.5% or plus. Now we are doing 7.5% plus basically, almost 100 basis point saving, which is giving us a better, let's say, spread and better income generation on that assignment if we do same transaction during this year. So that is a positive impact is coming on the income side.

Okay. And this was not there in first quarter or it was there in first quarter as first quarter, it seems to be high.

Yes. First quarter just started to falling. So we got some benefit. But quarter 2, we got a very good amount of benefit in the spreads.

Okay. And this will continue. So now incrementally, we will be doing it at this spread only?

Yes. Incrementally till we see reversal interest rate scenario till we hope that this trend will continue.

Sure. Got it. And secondly, on the disbursement side, so this entire impact of maybe the change in the recognition, which was there, has it played out in Q2 itself, the entire rollover effect or there will be something which will flow through in Q3, too?

Kunal, we've regained a healthy momentum, delivering 36 percentage Q-o-Q and 21 percentage Y-o-Y growth in disbursement. See, over the last 5 months, our monthly disbursement run rate has remained above INR 500 crores. And with H2 being seasonally strong for us, we are working towards taking this run rate to INR 650 crores to INR 700 crores kind of a range. On the demand side, monthly log-in volumes have remained robust at 15,000 plus, reflecting about 23 percentage Y-o-Y growth. So in that sense, we work towards achieving our AUM growth aspiration. We want to be clear that the portfolio quality remains good. But I think whatever was on the Q1, it has played out in Q2, and we don't see any of that really coming in the coming quarters, so to say. So it's as I stated, that we have stabilized and we are there on a normal pace, which is required at a normal steady state.

Got it. Got it. And lastly, on repayment rate and BT out. So BT out is now 5.7%. And if you look at across the product segment, it seems like it has gone up a bit on the home loan, while maybe I think the mortgages and all have almost remained steady. In fact, mortgage is also it's up slight bit. So maybe any pressures in any particular states or with any particular customer profile, if you can highlight that, yes?

So Kunal, our BT out rate for H1 stands at about 5.3%, which is around 10 bps higher than the same period last year. See, specifically in Q2, BT out was at around 5.7 percentage compared to 4.9% in Q1, if you are comparing that, indicating a normal seasonal variation. We've actually deployed predictive analytics to ensure that we engage with potential BT out customers. That is what we really continue to do. So we will continue our retention measures. At this period of time, we don't see anything which is on the alarming side. What actually we've seen other than the BT was the repayment rate, which increased by around 200 bps actually. These are part prepayments at around -- this was driven by more higher repayments, and this was incrementally higher outflow, which happened this quarter. So note, Kunal, if I were to look at it, there is increase in the part prepayment is also reflective of improved credit behavior and liquidity at the borrower end, which continues to be a positive indicator on asset quality.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, first thing on asset quality, while our 1 plus DPD has improved about 15 basis points Q-o-Q, which is appreciable. In your opening remarks and Ashutosh sir's opening remarks, I remember hearing me speaking about what has helped us achieve this asset quality. But at the same time, you also acknowledged in your opening remarks that you remain cautious because of what you are seeing in some of the industry peers. So some of the industry players have called out localized pain in various buckets, right? Some calling it some spillover from MFI, micro LAP into affordable housing, some saying it's more to do with U.S. tariffs, which has impacted a few industries, right, whether it be diamond, jewelry, textiles, leather, right? Is there anything that we are seeing at our end, right, which you are monitoring now, right, while your asset quality is holding up well, but something that you are monitoring at your end?

So thanks, Abhijit. I think overall, as you are talking about the tariff impact, I think if you look at the entire portfolio level, less than 1.8 percentage of AUM would be impacted by those tariff-related items because we are in an unassessed and those segment of customers which are there. So we are seeing pockets of stress, but not material at the portfolio level in certain geographies, and we've taken corrective actions. And this is where typically states like Karnataka, Madhya Pradesh had seen and Gujarat had some part of tariff industry-related disruptions in Surat, but we have a limited impact on that as far as this is concerned. And Karnataka, the MFI-related disruption because of the ordinance, we acted early by tightening the credit filter, slowing down disbursement in affected micro markets and strengthened field verification. The situation is stabilizing, and we continue to operate with a rightful cautious mode in these specific pockets. As far as Madhya Pradesh is concerned, there is a stress which is localized to the Eastern belt of MP. We have selectively tightened our underwriting and adopting a stance, which is with sharper credit and income assessment standards. As highlighted, the 1 plus DPD continues to remain contained at less than -- at around 4 percentage, which is encouraging and reflects a low opening flow of new cases. And we've also seen an improvement in Stage 2, indicating better stability in early delinquency buckets, Abhijit.

Got it. Sir, the second question I had is, I mean, this quarter -- this first half, right, I mean the AUM growth is tracking around 16% Y-o-Y. And I mean, what we started seeing in the last 2 quarters is in your presentation, you started sharing your aspiration of where you want to scale up your AUM by FY '30, which is about INR 55,000 which then kind of translates into almost a 23% kind of an CAGR from now to FY '30. So I'm just trying to understand now that CVC is clearly working along with you, in addition to expansion in Southern India and the digital transformation now complete, what are the other changes that you are making, right, which kind of makes you put out that aspirational target of getting to INR 55,000 crores by FY '20?

See, on a 20 percentage plus annual growth over the next 5 years is driven by a combination of following factors, if I were to really point out. One is the geographic expansion. Second is the employee productivity enhancement and investment in technology and sourcing channels. So I'll give you a broad breakup. 8 percentage will be driven by branch expansion in our existing footprint in the new states. 7 to 8 percentage comes from our productivity enhancement and 5% is expected from an inflation-led increase in the ticket size. So as we enter -- so as we speak, Abhijit, we have -- as I spoke, that Tamil Nadu, Andhra Pradesh and Telangana, these are the 3 open states which are available for us to really venture in and bring our footprint available. So that is an open landscape available. Plus, as I said that from a digital sourcing perspective, we've had diversified our mix by having digital channel like CSC, Mithra and other. And that volumes also we start seeing a steady increase in the volumes month-on-month and quarter-on-quarter basis. So we are optimistic with these implementations and with some of the projects which we have worked across to really get that in motion. We're confident as a management team that we will be able to deliver on the guided level of 20% plus annual growth over the next 5 years.

Got it, sir. And then I mean one other question I had is, I mean, while you said, right, I mean, the BT outs are still calibrated 5.3% for 1H, somewhere around 5.7% for the second quarter. So I mean, there are other peers who have kind of now started calling out that the BT outs or the portfolio attrition is elevated primarily because, I mean, in addition to banks being aggressive, now there are a lot of balance transfers which are happening to other peer affordable HFCs as well. So is that not something which is kind of worrying us?

So I think we were very proactive, Abhijit, if you look at ours, we have deployed predictive analytics to really identify and engage with the potential BT out customers proactively. And the other part, Abhijit, is that in-house sourcing model, unlike the others where it is either a channel-led or led by the partners, I think our in-house sourcing model also enables us that we have deeper customer relationships and stronger retention. So I think these are the 2 parts which really flow out for help us in this scenario. And for strong credit customers, we offer selective rate rationalizations or top of wherever we feel. Again, if you really look at it, the customer wherever there is a BT outperformance, we let the customer exit other one, historically, the portfolio we let go performs 3x worse than that was in our books, validating that the disciplined approach to the portfolio quality over volume is what we really embark upon actually. So I think when there is a possibility of holding the customer rightfully so on his cash flow-based underwriting, we continue to hold. Wherever he will let go, the performance really deteriorates. And historically, that is what we've seen. But we are mindful of the fact that whatever are predictive, our efforts will continue to hold this in the coming times.

Got it. And Sunil, sir, I wanted to squeeze in one last question. While I don't feel too good asking you this, right, but somewhere during the quarter, right, it has had an impact on the stock price. As you'll appreciate, right, there have been speculations and media articles, right? So just trying to understand, I mean, is everything okay when it comes to our promoter, everything going in the right direction...

Yes. So Abhijit, let's not mull over on the pure market speculations. All I can say is I'm here and fully committed to Aavas and its performance, and so is the Aavas Board and the promoter group.

The next question is from the line of Vishal Gupta from ASK Investments.

Congrats on a good set of numbers. Sir, I have 2 questions. First, I wanted to understand your thoughts on dividend payout given you are well capitalized and the change in ownership has happened. And the second question was with regards to -- you told that Eastern but of MP facing problem. So can you please highlight why you facing such problem.

Yes. Obviously, your question is valid to ask from shareholder side and what is about the dividend. But you know affordable housing, all stack, whether we are all peer group is growing at a good pace. And as Sachinder ji mentioned, I think we are embarking 20% to 25% growth rate in the next 5 years. So keeping that thing in mind, I think we will need whatever we have excess capital as of now to meet our growth plans. But once we reach at a level where ROE versus growth is a good, let's say, crossing to a good level, a steady-state basis, we will start to pay back the dividend to shareholders. And as regards to MP, I think Ashutosh I think he is right to answer your question.

Vishal, this is regarding. See, we have a process of understanding the portfolio based on various cuts geographically, ticket size-wise and various other cuts. So in that competitive study within Madhya Pradesh, we founded that in the Eastern belt, we had a few cases going bad. So that is the reason Sachinder ji mentioned that within MP, one belt was showing some kind of a stress in the -- in a few cases. And we have taken corrective actions. We have brought senior people in credit and taken the learnings from this. So it is a comparative statement when we were talking about state-wise and then further zonal and state -- further cuts on the state. So that's it.

But overall, I think as a company, we are very comfortable on asset quality, either bouncing rate or 1 plus or 90 plus. Bouncing rate steady-state basis, I think we didn't see any much change. 1 plus is improved in last, but I think we gained back our momentum and nothing less than 4% now. And in next 2 quarters, it starts to show in the results in the 90-plus also.