Aavas Financiers: Affordable HFC play focused on Tier III towns and non-salaried customer base
Good business but significantly overvalued!
on a fundamental basis, a P/BV valuation of 4.7x is very high for any financial services company as it assumes the following:
** Growth of 20% for at least the next 20 years – history goes against this assumption for a long period like 20 years, with only HDFC/HDFC Bank being the exception*
** Sustainability of spread and RoA – competition from banks is expected to increase both for fresh loans to this segment and refinance (prepayment) as the formalization of the economy is expected to increase with digitization and GST infrastructure. Banks will be able to develop a model to assess risk in this segment with an increase in data points. This will put downward pressure on yield and asset book quality*
A high equity stake of private equity players and a low shareholding of the management team also creates an overhang on the stock in the medium/long term.
Share analysis in an easy-to-understand format:
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