Kotak Securities Upgrades This Midcap Stock To BUY, Trading Near 52-week Low, Buy For 24% Gains

Kotak Securities upgrade Aavas Financiers Limited to BUY from REDUCE with a target price of Rs 2,100 apiece. Investors buying the stock considering the given target price can anticipate a 24% potential upside from its current level. Aavas Financiers is a Midcap company that operates in the financial sector as NBFC-Housing. It has a market capitalization of Rs 13,541.78 crore.

Stock Outlook & Returns

On NSE, the stock is currently trading at Rs 1,704.90 apiece, trading 1.54% down from the previous close. It has recorded its fresh 52-week low today, January 6, 2023, at Rs 1,698.50 apiece. Whereas, it recorded its 52 week high on 2 February 2022 at Rs 3,340 apiece. 

The stock got listed on 8 October 2018, and since its listing, it has given a 120.4% multibagger return. The stock has fallen 7.09% in the past 1 week. In the past 1 and 3 months, it has fallen 8.7% and 21.32%, respectively. The stock has fallen 39.1% in the past 1 year. In the past 3 years, it has fallen 13.83%. 

Focus on scalability

Affordable HFCs are poised for higher growth than the rest of the banks/NBFCs, with a low base and established mechanism to appraise and cater to the unorganized. Apart from maintaining asset quality performance, a crucial aspect of the business is building scalability in the model to sustain high multi-year growth; Exhibit 6 shows that several lenders struggled on growing their balance sheets beyond a size. Acknowledging the above, Aavas has a strong long-term focus and is making consistent investments in processes and systems.

Aavas has guided for a 20% loan book CAGR for the next 20 years. Management takes concerted efforts to build scalability to its business model by constantly investing in people and systems. While acknowledging the challenges in its business that tends to be vulnerable to local challenges, Aavas scales up only 2-3 years after entering the region. Management highlighted that they always carry over 40% excess capacity to deliver steady growth, even if they need to tighten screens during downturns. After large IT investments, senior hires in new regions have led to an increase in the expense ratio (3.8% of AUM, 3.4% in FY2022), which is likely to sustain.

Upgrade to BUY

Aavas has corrected by 21% in the past three months. Business trajectory remains strong with marginal acceleration in business. The company has been prompt in passing on rate hikes to its borrowers, as was prompt in passing on rate cuts. As such, unlike other NBFCs, NIM pressure may not be sticky for Aavas. "The company has guided for 2.5-3.0% RoA (3% RoA in FY2022) and 6.0-7.0X (4.6X in FY2022) leverage to deliver about 18.0% (13.7% in FY2022) long-term RoEs. We retain a positive stance, with an unchanged FV of Rs2,100 (4X book and 30X earnings). We upgrade our rating to BUY from REDUCE," Kotak Securities said.

Disclaimer

The stock has been picked from the brokerage report of Kotak Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.