Aavas Financiers Ltd IPO Note - NOT RATED

Source: RHP, 5Paisa Research; *On non-diluted basis at upper band, # Q1FY19 nos. not annualized

Key Investment Rationale

1. The company has been able to access cost-effective debt financing and reduce average cost of borrowings over the years due to better financial performance and improving credit ratings. The company’s long term credit ratings have improved from CRISIL BBB+/Stable in August 2012 to CRISIL A+/Stable currently. The management is expecting a further rating upgrade (from A+ to AA) post completion of equity listing. Its average cost of borrowings has reduced from 12.28% in FY14 to 8.57% in Q1FY19.

2. The company will continue its focus on low and middle income self-employed customers and increase the market share in its existing products in the rural and semi-urban markets of India. A large segment of India’s rural and semi-urban population is currently unserved by formal financial institutions comprising customers without credit history. According to ICRA, the housing shortage in rural areas among the economically weaker section was for 3.93cr units constituting 89.93% and 99.84% of the total rural housing and urban housing shortage respectively, which offers significant opportunity to company like Aavas Financiers.

Key Risk

As of Q1FY19, 92.82% of its gross loan assets were located in the states of Rajasthan (alone accounting for 46.63%), Maharashtra, Madhya Pradesh and Gujarat. Any significant slowdown in real estate and housing market could hamper its asset quality and financials. Any significant change in interest rates would affect interest expense on its floating interest-bearing liabilities as well as its net interest income. Any increase in its cost of funds may lead to a reduction in net interest margin and hence could adversely affect its financials.