Aavas Financiers BUY

INITIATING COVERAGE AAVAS IN EQUITY March 24, 2021 Running its own race BFSI Longevity of profitable growth in the underpenetrated small-ticket Recommendation housing segment is a given for Aavas. Expect segment to post ~18% Mcap (bn): `189/US$2.6 CAGR through FY30, with Aavas best-suited to capitalize (~21%). Scalability hinges on niche positioning, technology-backed processes 3M ADV (mn): `246.3/US$3.4 and people. Asset quality is ensured from time-tested informal CMP: `2,405 assessment model, knowledge through local hires and in-house souring. TP (12 mths): `2,950 In periods of stress, prudent risk management DNA, diversified liquidity Upside (%): 23 profile and impressive collection infrastructure will make it stand out. Faster earnings compounding of ~21% vs <19% for peers (FY21-26E) Flags should help sustain premium valuations. Even if 1-year fwd P/B de-rates 30% (FY30), exit multiple of 4.9x implies ~15% IRR. Desired combination Accounting: GREEN of high-growth business with low construction risk makes 15%+ RoE Predictability: GREEN sustainable. Key risk: Absence of a long-term strategic shareholder. Earnings Momentum: GREEN Competitive position: STRONG Changes to this position: STABLE Catalysts Bang for the buck! AUM/disbursements posted 72%/48% CAGR between FY13-20; led by declining . >20% AUM and earnings growth in repayments (18% in FY20 vs 29% in FY14). Faster than system growth helped FY22 capture ~0.7% of HFC-HL share. Granular lending (nil developer), in-house . Normalization in 1+ DPD to <4% sourcing and LTVs of ~50% render underwriting credibility. Credit costs which spiked in FY21 to ~8.2% remained <60bps since inception. Impressive asset quality with consistent growth helped deliver >2.3% RoAA across cycles (highest amongst peers). Performance Designed to scale up AAVAS IN EQUITY SENSEX Scalability prospects are supported by: i) niche segment; ~61% self-employed; 250 ii) entrenched presence; most branches are >50km away from city centre; iii) 200 investments across people, processes and technology; iv) capital cushion with 150 best-in-class execution record. This takes it away from commodity HL segment, 100 enabling it to on-board stickier customers and accentuating its pricing power. 50 AUM growth to be highest amongst peers; help drive RoAA of >2.5% Jul-20 Jan-21 Jun-20 Apr-20 Oct-20 Feb-21 Sep-20 Dec-20 Mar-21 Mar-20 Aug-20 Nov-20 Expect 21% AUM CAGR between FY20-30 factoring ~20% repayments p.a. We May-20 factor ~25bps yield compression p.a., a higher borrowing charge (as leverage picks) and 30-35bps annual credit cost (on assets) given vulnerable borrower Source: Bloomberg, Ambit Capital research profile. With modest ~10bps improvement in opex ratio, Aavas can deliver RoAA (including off-BS) of ~2.5% in FY30. Our analysis (exhibit 79) suggests successful HFCs operate with >2x pricing power with >8x leverage. High pricing power (~4x) but sub-optimal leverage restricts RoE expansion but adds firepower. Valuations reflect opportunity, longevity and execution premium Expensive multiples must be read with Aavas’ ability to drive superior profitability (avg. RoAA of >2.5%). Effective use of analytics and asset quality focus made it stand out vs peers, justifying 100-160% premium. We value Aavas using excess return, implying valuation of 8.6x FY22E P/B. Valuations reflect i) faster earnings Research Analysts compounding (~21% EPS CAGR over FY21E-26E vs <19% for peers); ii) depth in Udit Kariwala, CFA underwriting character and iii) ability to identify and capitalize on opportunities. [email protected] Key financials +91 22 6623 3197 Year to March FY19 FY20 FY21E FY22E FY23E FY24E Net interest margin (`bn) 4.2 5.8 5.9 6.9 8.5 10.2 Pankaj Agarwal, CFA Operating Profits (`bn) 2.7 3.1 3.8 4.6 6.0 7.4 [email protected] Net Profits (`bn) 1.8 2.5 2.7 3.3 4.3 5.2 +91 22 6623 3206 Diluted EPS (`) 23.7 31.8 34.6 42.6 54.3 66.7 RoAA (incl. off-BS) (%) 3.0 3.1 2.6 2.7 3.0 3.0 Mitesh Gohil RoAE (%) 11.6 12.7 12.1 13.2 14.6 15.4 [email protected] P/B (x) 9.7 9.0 8.0 7.0 6.0 5.2 +91 22 6623 3197 Source: Company, Ambit Capital research

Ambit Capital and/or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. All Investors including US Investors should not consider this report as the only factor in making their investment decision. Please refer to the Disclaimers and Disclosures at the end of this Report. [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Narrative in charts

Exhibit 1: Aavas is a good blend of sticky customer profile and calibrated risk spectrum

Shubham

Low India S Aptus

Aadhar MOFS Vastu HFFC Shriram Aavas MGMA MUTH

Medium Repco

Income profile CanFin GRUH High 20 30 40 50 60 70 80 Largely semi-formal Largely informal Customer segment (% of self-employed) Source: Company, Ambit Capital research estimates *Note: Size of the bubble indicates AUM. Note**: MGMA- Magma Housing, Shriram- Shriram Housing, India S- India Shelter Finance, GRUH – Home loan portfolio of Bandhan Bank, MOHF- Motilal Oswal Home Finance, HFFC - Home First Finance Company, MUTH - Muthoot HomeFin Exhibit 2: Reach from city – Aavas’ geographical reach renders pricing power and is relatively less exposed to competition

Aptus Value Housing- Rs32bn Aavas Financiers- Rs78bn

Grihasakti- Rs43bn Home First Finance- Aadhar Housing- Rs36bn Rs114bn Mahindra Home- Rs79bn CanFin Homes- Repco Homes- Rs118bn Magma Housing- Rs207bn Rs33bn 20-50 km >50 km Gruh Finance- CITY 20 km Rs181bn Shriram Housing- CENTRE Rs23bn Manappuram home- GIC Housing- Rs128bn Rs6bn Vastu Housing- (retail) Rs18bn Shubham Housing- India Shelter Finance- Rs17bn Rs17bn

Source: Company, Ambit Capital research *Note AUM used is for FY20

Exhibit 3: Aavas’ ticket size is low Exhibit 4: 1/3rd customers new to credit Exhibit 5: Aavas’ pricing power is high

Average ticket size - (Rsmn) Share of new to credit Pricing power: (NII-opex-credit 60% customers cost)/avg. assets - (FY20, %) 2.0 8.0 1.5 40% 6.0 1.0 4.0 0.5 20% 2.0 0.0 0% 0.0 HFFC Vastu Aptus Aavas Repco GRUH MUTH Shubh… MOHF MGMA HFFC Vastu CanFin Aptus PNBH Aadhar Aavas FY14 FY15 FY16 FY17 FY18 HDFC Repco LICHF MOHF FY19* FY20* CanFin Aadhar Source: Company, Ambit Capital research Source: Company, Ambit Capital research; *assmp Source: Company, Ambit Capital research

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Exhibit 6: Aavas has built a completely in-house sourcing model and has amongst the lowest LTV ratios 40%

LICHF 50% Aavas

60% CanFin Repco GRUH PNBHOUSI 70% HDFC Loan to value ratio

80% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of loans sourced in-house Source: Company, Ambit Capital research; *Note: Size of the bubble represents average HL ticket size

Exhibit 7: Aavas’ state/city expansion has been based on creeper approach; we expect Aavas to enter at least Telangana, Andhra Pradesh, Karnataka and Jharkhand by FY30

Source: Company, Ambit Capital research estimates *Note: Number in brackets represents number of branches in that state of the respective entity

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Exhibit 8: Aavas has a superior underwriting character

Underwriting practices Business practices

Exposure to developer loans, land financing No sales target for first three years to a NIL and high ticket LAP new branch in a new state

Separate teams for sales, credit and Ex posure towards single homes ~80% collections

Exposure towards self-owned/self-constructed ESO P programme for senior and mid- >90% properties level employees

Prefers to recruit outside mortgage Of loan applications are approved on an finance sector ensuring team is free ~33% average fr o m biases and eazy to mould

Incentive of sales team linked to 1 day Cases are sourced in-house ~100% overdue performance

High on analytics. Uses predictive Cases with only agricultural income rejected ~100% modelling. All data is geotagged

Of business done in first three weeks of the Aavas monitors performance of ~70% month vs ~50% for peers customers that it rejects

Source: Company, Ambit Capital research

Exhibit 9: Aavas has cushion to absorb >8x of average credit cost; highest amongst peers

12 4x MUTH 10 MGFL 8x BAF 20 - Aptus 8 Vastu SHTF FY18

- 6 Aavas CIFC Repco MMFS HFFC SUF 4 CanFin Aadhar 2x MGMA 2 LICHF PPOP/AAUM PPOP/AAUM PNBHOUSI 0 0.0 0.5 1.0 1.5 2.0 2.5 Credit cost/AAUM - FY18-20

Source: Company, Ambit Capital research *Note: Size of the bubbles indicates size of AUM (not as per scale)

Exhibit 10: ALM profile stacks best amongst peers Exhibit 11: Set to deliver RoA of ~2.8% between FY21-26E

ALM gap (years) RoAA (%) RoAE (%) - RHS 4.0 25

-4.2 -3.3 -3.5 -3.6 3.5 20 -2.5 -2.7 3.0 3.1 -1.3 3.0 3.0 3.0 2.9 -1.0 -1.0 3.0 15 2.7 2.8 2.6 2.5 2.3 2.4 10 0.7 2.3 2.1 2.0 5 HFFC Vastu Aptus Aavas HDFC LICHF REPCO Aadhar CANFIN FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E PNBHOUSI Source: Company, Ambit Capital research;*Note:- FY20 data Source: Company, Ambit Capital research;*Note: RoA is including off-B/S

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The bright kid on the block! Aavas was incorporated as a retail affordable Housing Finance Company (private limited) at Jaipur, Rajasthan under the name of "AU Housing Finance Private Limited" on February 23, 2011. The company was initially promoted by AU Financiers (India) Limited, which is now known as AU Small Finance Bank Limited (AU SFB). In 2016, AU SFB sold 90% of its stake to Lake District Holdings (Kedaara Capital) to comply with regulatory requirements while pursuing the small finance bank licence. Aavas is a leading small ticket size HL lender in the country with ~0.7% HFC market share as of Mar’20.

Exhibit 12: Journey so far has been no less than of a poster boy of HFCs Year Event 2011 Incorporated as AU Housing Finance and got registered as a non-deposit taking HFC with NHB 2012 Received its first rating 'BBB+/Stable' from CRISIL for long-term bank facilities of `1bn 2013 Converted into a public limited company. Received first refinancing assistance from NHB 2014 Issued first tranche of NCDs Entered into first pool buyout transaction in housing loan segment (priority sector) 2015 Got identified as a ‘financial institution’ under the SARFAESI Act, 2002 Started loan against property business Received investment from Lake District Holdings (Kedaara Capital) and Partner Group 2016 ICRA assigned “A with a stable outlook’ rating for long term facilities of `5bn Received its first subsidy from NHB under ‘CLSS-PMAY’ Name changed to Aavas Financiers 2017 CARE assigned 'A+; Stable’ rating for long term bank facilities of `3.8bn and subordinated debt of `0.5bn Entered into its first PTC transaction with IDBI Trusteeship Services CARE/CRISIL upgraded rating to 'A+; Positive', and 'A+/ Stable' for long term facilities 2018 ICRA assigned rating 'A+/ Positive' for bank limits and NCDs and 'A1+'for commercial paper 2019 Got listed on BSE & NSE in October 2018, rating upgraded by CARE to ‘AA-; Stable’ in March 2019 2020 Achieved footprint of 250 branches spread across 10 states Source: Company, Ambit Capital research Developing entrenched presence to lend to under-served Aavas primarily serves low/middle-income self-employed customers (~61%) in semi- urban/rural areas. Most of its customers have limited access to formal credit. Target customers are owners of grocery shops, beauty parlours, tiffin services, 3Ws, agriculture-related businesses etc. Product offering consists of home loans (~73% as of 3QFY21) for purchase, construction, extension and repair of existing units with an average ticket-size of `0.92mn along with LAP constituting ~27%. It has an in-house sourcing and execution model. It is present in 11 states covering Rajasthan, Maharashtra, Gujrat, Madhya Pradesh, Haryana, Uttar Pradesh, Chhattisgarh, Delhi, Uttarakhand, Himachal Pradesh and Punjab. Top four states (Rajasthan, Gujarat, M.P and Maharashtra) account for ~88% of it AUM with Rajasthan contributing ~43%. As of Dec’20 its operations were spread across 263 branches. Its team strength as of Mar’20 was 4,581. As at end-Dec’20, Lake District Holdings and Partners Group, the two promoters cumulatively held ~51% stake in the company.

Exhibit 13: Private equity dominates current shareholding

Shareholding as of 3QFY21

Employees, 7% Others, 3%

DII, 9% FII, 31%

Partners Group, 21%

Kedaara Capital, 30% Source: Company, Ambit Capital research

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Exhibit 14: SWOT analysis - strengths and opportunities outweigh weaknesses and threats STRENGTH WEAKNESS

1) Distinguished model enabling growth longevity 1) Private equity dominated ownership . Aavas primarily lends to self-employed (~61%) customers in the . Lake District Holdings and Partners Group, the two private equity promoters semi-urban/rural geographies; typically >50km away from city cumulatively hold ~51% (Dec’20). This exposes Aavas to possibility of centre this ensures growth longevity and pricing power radical change in ownership structure which could hamper its current . Its entrenched reach, reducing borrowing cost and knowledge of business conduct local geography form deterrents to not only protect but increase its . Lack of strong parentage may pose challenges to its growth prospects in market share times of severe industry downturn 2) Scalable franchise 2) Geographical concentration . Scalability hinges on niche positioning, technology-backed . Almost 43% (Dec’20) of Aavas’ AUM is form Rajasthan. Whilst share of processes and people portfolio emanating from Rajasthan may not reduce sizably over next 3-4 . Its time-tested informal income assessment model, knowledge years; presence across deeper pockets of the state diversified across sub- through local hires and in-house souring strategy ensure impressive districts/towns provides some comfort asset quality . Best-in-class management execution and ability to hit above its weight (industry leading risk & data analytics) make it future-proof 3) Appetite to grow . Aavas is comfortably capitalized with tier-1 ratio of 51% (Dec’20) vs regulatory requirement of 10%. Low leverage (~3.9x) and sturdy internal accruals enable it to growth between 20-25% CAGR over next 5-7 years without needing any capital infusion . Sufficient capital buffer provides cushion for absorbing any unforeseen asset-side shocks OPPORTUNITIES THREATS

1) Low penetration of small-ticket size housing and GoI focus 1) Refinancing risks by larger HFCs/banks . As discussed in our thematic small-ticket housing lenders can grow . Aavas’ target segment (<`1mn ticket size) is not aggressively serviced by at ~21% CAGR over next decade large HFCs/banks. As customer credit scores develop balance transfers . GoI’s push for providing housing for all makes us believe the especially for 18-24 months seasoned loans remains a risk over next 5-7 regulatory environment for at-least next 5-7 years would remain years conducive for prudent lenders 2) Training and retention of talent would not be easy 2) Ability to benefit from economies of scale . Underwriting involves informal income assessment and deep understanding . Aavas has invested heavily in technology and analytics. Its existing of collateral. Hence, attracting and training right talent while scaling up infrastructure of branches and manpower has enough capacity to (since each ticket size and geography will have different nuances) could derive scale benefit pose a challenge . Around 37% of braches were opened between FY18-Dec’20. As 3) Unseasoned exposure vintage of existing branches improves efficiencies in the form of . Housing loans are long terror products; with 15-30 years contractual lower cost to asset ratio would come by. We expect 15-20bps maturity and 7-8 years of behavioural. Almost 54% of Aavas’ book is built annual reduction in opex ratio over the next 4-5 years over past 3 years (FY18 to YTD). Hence portfolio seasoning is a long overhaul Source: Company, Ambit Capital research Create. Execute. Prosper As a stated strategy it enters and Aavas’ differentiated customer profile (~34% new to credit and ~61% self-employed) develops four new states in a block and geographical niche ensure customer stickiness and renders long growth runway. of five years backed by meaningful Whilst demand for credit in the segment remains abundant, execution remains key investment in technology/analytics given largely informal credit assessment requirement and extensive understanding of with a healthy mix of local hires. local geography. Its calibrated approach to growth addresses this challenge. As a stated strategy it enters and develops four new states in a block of five years backed No target for first three years to a by meaningful investment in technology/analytics with a healthy mix of local hires. new branch in a new state is an Decision to open every new branch is backed by analytics and deep understating of example of a well thought through demographics. This helps in maintaining desired branch economics whilst not and prudent risk management undertaking too much risk. No target for first three years to a new branch in a new framework/DNA state is an example of a well-thought-through and prudent risk management framework/DNA. Its swift AUM growth rate of ~56% CAGR between FY15-20 whilst maintaining stable asset quality is testimony of its acute execution capabilities. Longevity of profitable growth should drive constant compounding Small-ticket housing is a large opportunity with ~21% CAGR for the sector through FY30. Aavas is best suited to capitalize. Entrenched reach, well-structured credit assessment and collections framework, technology-backed processes and pricing power will help sustain profitable growth. Admirable execution led by prudent risk management DNA and calibrated growth strategy render additional comfort. Aavas trades at 7.0x FY22 P/B, which is at 100-160% premium to most peers. Factors that justify premium valuations are: i) visible levers to sustainable long term profitable growth; ii) prudent risk management DNA with capability to replicate/scale and iii) ability to identity/capitalize opportunities to culminate into a life-cycle financing company.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 28 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Not just another HFC Aavas is a small-ticket housing financier with entrenched presence across semi-urban/rural geographies. Its philosophy has been to create markets thus in turn advance aggregate ground-level demand from an economic class that was not expected to play a potent economic role for years. This is well-reflected in its material exposure to the informal self-employed segment (~61% of AUM) in terrains which are typically >50km away from city centres. This takes it away from commodity home financing segment, enabling it to onboard a stickier customer profile and thus accentuating its pricing power. Its business architecture has been designed to scale right from inception through setting up processes which institutionalise knowledge base and improvements through automation. This along with its calibrated contiguous growth strategy sets it aside amongst peer group. Financing the underserved in deeper rural/semi-urban pockets Aavas is a small-ticket housing financier catering predominantly to lower income segment (<`0.6mn p.a.) in semi-urban/rural geographies. It has most (~90%) of its branches in the tier 2, 3 and 4 locations where residents are largely outside the ambit of the formal banking system. Almost ~61% of its AUM is to the self-employed segment. Hence bulk of its customers would typically not possess adequate documented income/asset proof and in all likelihood be outside the purview of filing IT returns. This makes getting a loan from most HFCs unviable. Aavas predominantly depends on unconventional appraisal filter using proxy-based income asset model.

Exhibit 15: Picturing the HFC universe – Aavas a good blend of sticky customer profile and calibrated risk spectrum

Shubham Aptus Low India S

Aadhar MOFS Vastu HFFC Shriram Aavas MGMA MUTH

Medium Repco

Income profile CanFin GRUH High 20 30 40 50 60 70 80 Largely semi-formal Largely informal Customer segment (% of self-employed)

Source: Company, Ambit Capital research estimates; *Note: Size of the bubble indicates AUM. Note**: MGMA- Magma Housing, Shriram- Shriram Housing, India S- India Shelter Finance, GRUH – Home loan portfolio of Bandhan bank, MOHF- Motilal Oswal Home Finance, HFFC - Home First Finance Company, MUTH - Muthoot HomeFin. Process-driven entrenched long-term growth strategy Compared to peer group Aavas operates in deeper geographies; typically >50km away from the city centre. To successfully operate in deeper geographies Aavas spends considerable time in evaluating local demographics, local civic plans in the coming decade and competition. This sets Aavas away from commodity home financing, where an attractive proportion of borrower equity is invested in the purchased home. It also helps in staying away from concentration and construction risks as large proportions of these properties are self-constructed and self-occupied. Philosophy is to create demand by building presence where customers are present. In most cases its rural presence is in geographies where penetration is <2%. Aavas prefers to enter such geographies after spending considerable time in evaluating economic viability. In many cases branch economics are reverse engineered to enable faster breakeven. This is possible through a well-established and communicated longer-term vision backed by able and well-oiled analytics.

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Exhibit 16: Reach from city – Aavas’ geographical reach renders pricing power and is relatively less exposed to competition

Aptus Value Housing- Rs32bn Aavas Financiers- Rs78bn

Grihasakti- Rs43bn Home First Finance- Aadhar Housing- Rs36bn Rs114bn Mahindra Home- Rs79bn CanFin Homes- Repco Homes- Rs118bn Magma Housing- Rs207bn Rs33bn 20-50 km >50 km Gruh Finance- CITY 20 km Rs181bn Shriram Housing- CENTRE Rs23bn Manappuram home- GIC Housing- Rs128bn Rs6bn Vastu Housing- (retail) Rs18bn Shubham Housing- India Shelter Finance- Rs17bn Rs17bn

Source: Company, Ambit Capital research;*Note: AUM used is for FY20.

Aavas currently has presence across 11 states with dominance in the western part of the country. Top four states, namely Rajasthan, Gujarat, M.P and Maharashtra, account for ~88% of it AUM with Rajasthan contributing ~43%. It intends to be a pan-India player though it intends to expand gradually. It prefers to expand in adjacent states and districts that are contiguous. Given more informal and rural/semi-urban exposure, around 1/3rd of customers as of FY20 are new to credit (first time borrowers). This number has gradually reduced from ~55% in FY14.

Exhibit 17: Exposure is concentrated towards western part Exhibit 18: Almost 1/3rd of customers are new to credit of the country though well-diversified within each state (first time borrowers)

Presence - (no. of states/UTs) Share of new to credit customers 21 20 20 55% 15 42% 12 12 11 11 11 11 9 9 33% 35% 34% 33% 29% 4 HFFC Vastu Aptus Aavas GRUH MOHF India S India MGMA CanFin Aadhar Shriram Shubham FY14 FY15 FY16 FY17 FY18 FY19* FY20* MUTH HFin MUTH Source: Company, Ambit Capital research;*Note- 3QFY21 data for CanFin, Source: Company, Ambit Capital research;*Note: Numbers for FY19 and Aavas & HFFC; FY19 data for GRUH and FY20 data for others FY20 are assumptions

Informal customer income profile across semi-urban/rural geographies has enabled and aided Aavas to have one of the lowest ticket sizes (~`0.84mn vs peer average of ~`1.1mn) across the peer group. Its customer profile also enables it to have pricing power. This is well-reflected in its higher yield profile than most of its peers.

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Exhibit 19: Ticket size is amongst lowest in the peer group Exhibit 20: Yield reflects higher risk and pricing power Average ticket size - (Rsmn) Average yield 2.0 18%

1.5 15%

1.0 12%

0.5 9%

0.0 6% HFFC Vastu Aptus HFFC Vastu Aptus Aavas Repco LICHF GRUH Aavas Repco MOHF GRUH India S India MOHF MGMA CanFin MGMA Aadhar CanFin Aadhar Shriram Shubham Shubham PNBHOUSI MUTH HFin MUTH MUTH HFin MUTH Source: Company, Ambit Capital research;*Note: 3QFY21 data for CanFin, Source: Company, Ambit Capital research Repco, HFFC & Aavas; 2QFY21 data for MGMA & Aadhar, FY19 data for GRUH and FY20 data for others.

Self-employed segment contributes ~61% of AUM, higher than most peers. To enable a more effective and smoother underwriting process Aavas has created 50-60 occupation profile templates for evaluating informal client profiles.

Exhibit 21: Aavas – Focus is towards self-employed... Exhibit 22: …higher vs peers given entrenched presence Share of self-employed (%) Salaried (%) Self employed (%) 81 77 73 68 61 61 52 45 44 43 57 61 64 64 64 65 65 38 35 28 25

43 39 36 36 36 35 35 HFFC Vastu Aptus Aavas Repco GRUH MOHF India S India MGMA CanFin Aadhar Shriram Shubham MUTH HFin MUTH FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, Ambit Capital research Source: Company, Ambit Capital research;*Note: 3QFY21 data for MGMA , Aavas, Recpo, GRUH (Bandhan Housing), CanFin & HFFC; 2QFY21 data for Shriram, Aptus, Aadhar & India S and FY20 data for others.

At present ~73% of exposure is to retail housing and the rest to LAP. Exposure to developer loans remains NIL and would continue to be the case. Over the longer term Aavas intends to have at least 65% of its AUM in housing loans.

Exhibit 23: Aavas has NIL exposure to developer segment Exhibit 24: Intends to maintain ~65% of HL exposure

Home loans (%) Other mortgage loans (%) 54 Non-housing loans share - (%) 49 48 - 39 6 12 35 18 22 24 27 27 19 19 15 18 100 10 10 8 94 88 82 78 76 74 1 HFFC Vastu Aptus Aavas Repco GRUH MOHF India S India MGMA CanFin Aadhar Shriram Shubham FY14 FY15 FY16 FY17 FY18 FY19 FY20

HFin MUTH Source: Company, Ambit Capital research Source: Company, Ambit Capital research;*Note: 3QFY21 data for Aavas, Repco, GRUH (Bandhan Housing), CanFin & HFFC; 2QFY21 data for MGMA, Aadhar & Aptus and FY20 data for others.

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Technically sound to handle ‘sticky wickets’ AUM grew at ~72% CAGR (FY13-20) vs ~ 48% disbursement growth. Control over prepayments did the trick. Improving brand visibility, increasing rural footprint, customized offerings and institutionalizing improvements helped reduce portfolio churn. Improvement in CoFs coupled with opex benefit backed by scale helped maintain interest spreads. Effectively, strategy to have judicious balance between price and volume helped strengthen competitiveness and sustainability. Diversified long-term funding aided in maintaining adequate liquity at all times. Granular lending (NIL developer exposure), in-house sourcing and reasonable LTVs (~50%) added credibility to underwriting. Focus on addressing infant delinquencies backed by analytics and able collection infrastructure with majority (>90%) exposure to self-constructed/self-occupied residential properties benefited. Adequate capital buffers (tier-1 of 51%) give Aavas enough room to grow its AUM between 20-25% over the next 7-8 years. AUM growth backed by sharp improvement in portfolio churn Whilst Aavas’ AUM grew at ~72% CAGR over FY13-20 to ~`78bn, disbursements grew slower at ~48% CAGR. Faster AUM growth was backed by sharp decline in repayment rates to ~18% in FY20 vs ~29% in FY14. Between FY17-20, Aavas grew faster (~42% CAGR) than most peers (~40% average).

Exhibit 25: AUM growth surpassed disbursement growth Exhibit 26: Aavas has grown faster than most peers

AUM (Rsbn) AUM (Rs bn) AUM CAGR: FY17-20 - (RHS - %) AUM growth YoY - (RHS -%) 250 120 Disbursement growth YoY - (RHS -%) 100 80 150 200 80 120 150 60 60 100 90 40 40 60 50 20 20 30 - 0

0 0 HFFC Vastu Aptus Aavas Repco GRUH India S India MGMA CanFin Aadhar Shriram Shubham FY14 FY15 FY16 FY17 FY18 FY19 FY20

HFin MUTH Source: Company, Ambit Capital research Source: Company, Ambit Capital research

In addition to higher disbursements vs most peers, the reason for faster AUM growth Balance transfers have been has been lower portfolio churn. Balance transfers have been consistently declining consistently declining and stack and stack amongst the best despite having a high share (~73%) of housing loans. amongst best despite having a high Consistent decline in cost of funds, conscious strategy backed by analytics to offer share (~73%) of housing loans competitive pricing to credit worthy customers and increasing presence in deeper geographies helped Aavas reduce the quantum of balance transfers. In the longer run, we estimate repayment rates of ~21% for Aavas. For Aptus, repayment rates have been lower on account of higher share of non-housing loans than peers.

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Exhibit 27: Disbursement growth has been consistent; FY20 Exhibit 28: Balance transfers for Aavas has been on a an aberration given lockdown decline; stack amongst lowest % of Disbursement Repayment FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20 non- growth rate HL MGMA -18% 84% 24% Aptus 22% 19% 15% 48%

Aptus 79% 47% 16% LICHF 15% 15% 18% 18% 18% 16% 16% 23%

Aavas 52% 92% 96% 32% 47% 30% 10% Repco 17% 18% 20% 18% 21% 19% 17% 19% HFFC 76% 111% 3% CanFin 18% 16% 18% 20% 21% 18% 17% 10%

CanFin 40% 31% 17% 22% 9% 5% 0% Aadhar 14% 18% 15%

Aadhar -18% 0% Aavas 29% 25% 25% 22% 25% 20% 18% 27%

Vastu -3% HFFC 28% 36% 18% 8%

LICHF 4% 20% 19% 15% 19% 9% -13% MGMA 29% 25% 20% 54%

Repco 47% 27% 31% -7% 6% 10% -15% MOHF 23% 19% 16% 16% 20% 10%

MOHF 404% 32% -40% -80% -34% Vastu 25% 21% 35%

PNBHOUSI 72% 53% 43% 61% 9% -48% PNBHOUSI 23% 30% 22% 24% 30% 22% 24% 43%

GRUH 19% 21% 24% 7% 27% -6% GRUH 18% 17% 19% 18% 22% 20% 14% Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Declining yield has been well-compensated by declining cost of borrowing Between FY15-20 Aavas’ yield declined by ~286bps vs ~299bps decline in cost of borrowing. This aided in maintaining interest rate spread of ~5%. Improving performance (FY20 RoA of 3.1% vs 2.3% in FY16), scale and resultant upgrade in credit rating (current: AA-/stable vs A-/stable in FY15) led to sharp decline in cost of borrowing. NIMs in the period expanded by ~140bps largely backed by ~`15.9bn of capital-raise/infusion between FY17-19. Additionally, unlike most peers, Aavas’ ~41% of AUM is contracted under fixed rate. Average yield on fixed rate book is higher at ~15.4% vs ~12.4% on floating rate book. This aids Aavas in maintaining its margins.

Exhibit 29: Declining cost of borrowing similar to yield has Exhibit 30: Compared to peers, Aavas has a relatively helped Aavas maintain interest rate spreads higher share of fixed rate book

Yield on assets (%) Share of fixed rate loans in AUM Cost of borrowings (%) Interest spread (%) - RHS NIMs (%)- RHS 20 9.5 45% 44% 40% 41% 8.5 15 32% 7.5 23% 10 6.5 11% 5 5.5

0 4.5 FY14 FY15 FY16 FY17 FY18 FY19 FY20

FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Aavas’ pricing power is amongst best, would aid in maintaining spreads Given significant presence in deeper geographies and niche in customer profile, pricing power for Aavas is amongst the best. As of FY20 our calculations suggest pricing power (NII-opex-credit cost) for Aavas is second only to Aptus amongst the peer group. With its strategy to get deeper in each state, it’s superior underwriting character and agility to reduce opex ratio with scale, pricing power for Aavas would sustain. This will aid in maintaining spreads (margin) over the next 3-4 years.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 33 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Exhibit 31: Pricing power for Aavas is amongst best in peer group and sustainable

5.8% Pricing power: (NII-opex-credit cost)/avg. assets - (FY20)

4.0%

3.1% 2.8% 2.5% 1.6% 1.6% 1.2% 1.1% 1.1% 0.8% HFFC Vastu Aptus Aavas HDFC Repco LICHF MOHF CanFin Aadhar

PNBHOUSI Source: Company, Ambit Capital research

Improvement in profitability (reported RoAA of 3.8% in FY20 vs 2.6% in FY16) for Aavas was supported by ~28bps improvement in opex. In FY18 sharp rise in opex was on account of large one-time investment in technology (0.5-0.6% of FY18 assets) and multiple senior-level hires. We expect opex to continue to decline by 20-25bps in FY23 and FY24 due to economies of scale. In FY22, we expect opex t`o be largely flat as economic activity goes back to normalcy post multiple lockdowns in FY21.

Exhibit 32: RoA remains one of the highest amongst peers; Exhibit 33: Decline in opex benefiting from economies of expect RoE to improve in tandem with leverage scale has aided in improving profitability

RoAA (%) RoAE (%) - RHS 60 Cost to income - (%) 5.0 Opex to avg. assets - (RHS - %) 4.0 3.8 25 3.6 3.5 20 50 4.0 3.1 3.0 2.8 15 2.6 2.6 40 3.0 2.5 10 2.2 30 2.0 2.0 5 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, Ambit Capital research;*Reported numbers Source: Company, Ambit Capital research

Diversified funding mix has helped maintain liquidity Aavas has built a diversified funding mix with established relationship across 31 lenders and average tenor of outstanding borrowings of 131 months (~11 years) vs average asset tenor of 85-100 months (7-8 years). It’s zero dependence on commercial paper and fund raising from various multilateral institutions including CDC Group, International Financial Corporation and most recently Asian Development Bank (received ~`4.4bn in FY20 through in the form of NCDs) provide long-tenor stable funding. Assignments and securitisation account for ~24% of the borrowing mix given a significant proportion of Aavas’ portfolio qualifies for priority sector lending. Proportion of securitized book is higher for Aavas vs peer group. Assignment/securitization not only forms an additional cheap source of funding but also provides cushion in a tight liquidity environment.

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Exhibit 34: Borrowing mix: Aavas benefits from a diversified funding mix

Banks NHB Refinancing Off-Balance Sheet NCDs FDs Others 100% 80% 60% 40% 20% 0% HFFC Vastu Aptus Aavas Repco CanFin Aadhar

PNBHOUSI Source: Company, Ambit Capital research;*Note: 3QFY21 data for Repco, CanFin, Aavas & PNBHOUSI and FY20 data for others.

Well-matched ALM, better than most peers Consequent to a sturdy liability profile, Aavas’ ALM remains comfortable. As of end- Dec’20 it had a positive cumulative surplus (~22% of borrowings) in the one-year bucket of structural liquidity statement. Even in our stress case scenario it maintains a positive cumulative surplus. Current ALM profile of Aavas stacks better than peers; it’s the only HFC to run an ALM surplus. Better ALM profile enables the company to manage its margins in a rising/decreasing interest rate cycle.

Exhibit 35: Aavas runs ALM surplus across all buckets Exhibit 36: ALM profile stacks best amongst peers

ALM gap (years) `bn Assets Liabilities 100 -4.2 -3.3 -3.5 -3.6 80 -2.5 -2.7 -1.3 60 -1.0 -1.0 40 20 0.7 0 HFFC Vastu Aptus Aavas HDFC LICHF REPCO Aadhar 7+yrs 1-3 yrs 3-5 yrs 5-7 yrs CANFIN 3-6 mths < 3 mths 6-12 mths 6-12 PNBHOUSI Source: Company, Ambit Capital research Source: Company, Ambit Capital research;*Note: Chart is based on FY20 data

Additionally, on-balance-sheet liquity in the form of cash and liquid investments of ~`19.6bn (~30% of borrowings) as of end-Dec’20 is adequate to cover ~6 months of disbursements and is higher than that of the peer group.

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Exhibit 37: On-balance-sheet liquidity for Aavas is highest amongst peers

25% Cash and cash equivalent as % of total AUM

20%

15%

10%

5%

0% BAF SUF CIFC SHTF HFFC Vastu SCUF Aptus MGFL Aavas Repco LICHF MMFS MUTH India S India MGMA CanFin Aadhar Shubham

PNBHOUSI Source: Company; Ambit Capital research;*Note: 3QY21 data for Aavas & HFFC ; FY20 data for Aptus & Vastu and 2QFY21 data for others. Despite having relatively higher share of longer tenor borrowing Aavas continues to borrow at competitive rates between 6-8% for tenors ranging between 43-167 months. Aavas’ average cost of borrowing (~7.9% for 9MFY21) is not only competitive but comparable to incremental borrowing cost of few higher rates peers.

Exhibit 38: Aavas’ focus has been to borrow for longer Exhibit 39: Even after factoring higher tenor, borrowing tenor cost for Aavas has been best in class Avg. tenor of outsd. borrowings (yrs) Interest cost* 10% 12 11 11 11 8% 10 8 6% 4%

2%

0% HFFC Vastu Aptus HDFC Repco LICHF GRUH AAVAS CanFin Aadhar FY16 FY17 FY18 FY19 FY20 PNBHOUSI Dec'20 Source: Company, Ambit Capital research Source: Company, Ambit Capital research;*Note: 9MFY21 data for HDFC, CanFin, LICHF, Aavas, PNBHOUSI & Repco; FY19 data for GRUH and FY20 data for others.

Exhibit 40: Liquidity mapping - Aavas well-placed compared to peers Cash/cash ALM strength Ability to raise Overall score (out Entity equivalent as a % /borrower’s ability funds/parentage of 4) on liquidity of AUM to repay LICHF 3.0

Aavas 2.7

GRUH* 2.7

CanFin 2.7

Aadhar 2.3

Aptus 2.3

PNBHOUSI 2.0

MGMA 2.0

MOHF 2.0

HFFC 1.7

Vastu 1.7

India S. 1.3

Repco 1.3

Shubham 1.0

Source: Ambit Capital research estimates;*Data for erstwhile GRUH, Note: - Strong; - Relatively Strong; - Average; - Relatively weak

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Asset quality has been stable … Aavas’ stage-3 assets (GNPA) were 1.0% for 9MFY21 (FY20: 0.46%; FY19: 0.47%). Lead approval rate for Aavas has Even at the product level, gross NPAs have been fairly stable. Factoring impact of typically been ~33%. lockdown 1+dpd increased to ~8.2% in 3QFY21 compared to average historical range of 2.5-6.5% though well-covered by heightened provisions. We take comfort in Aavas’ demonstrated ability to maintain its asset quality during challenging times like demonetization, RERA and GST implementation.

Exhibit 41: Asset quality has been impressive; credit Exhibit 42: Even GNPA across products has been fairly costs/GNPAs remained <66bps/100bps since inception stable

Gross NPAs (%) Net NPAs (%) HL: GNPA (%) Credit cost (%) Other Mortgage: GNPA (%) 1.0 1.2 1+DPD (%) - RHS 1.1 1.0 0.9 12.0 0.8 0.8 0.8 0.8 0.6 0.6 0.6 0.5 0.6 0.6 0.5 8.0 0.5 0.5 0.5 0.4 0.5 0.4 0.3 0.2 0.4 0.2 0.3 4.0 0.2 0.1 0.1 0.0 0.0 - 0.0 0.0 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20 3QFY21 9MFY21* Source: Company, Ambit Capital research Source: Company, Ambit Capital research

… and equips well to address low seasoning of loan book concerns Typically mortgage loans The prime concern with respect to asset quality of small ticket size housing loan experience peak delinquencies financiers has been low seasoning of loan portfolio and high growth phase. High between 1.5-2.0 years of growth phase could camouflage true level of delinquency. For Aavas, ~38% of AUM origination. as at end-FY20 was originated in FY20 itself. Given these concerns and our knowledge that mortgage loans delinquencies peak between 1.5-2.0 years of origination, we take cues from lagged delinquencies. For Aavas, gross NPAs (basis AUM) on a one-year/two-year lagged basis have been below ~1.2%/2.0% over the last five years. Even assuming a similar level of GNPAs as a normal course of business, Aavas is well-equipped to deliver RoAA of ~2.5% over a long cycle.

Exhibit 43: 1-year lagged GNPAs for Aavas has been Exhibit 44: 2-year lagged GNPAs for Aavas has been <1.2% since inception <2.0% since inception

Aavas: 1yr lagged GNPA -% Aavas: 2yrs lagged GNPA -% 1.5 4.0

HL Others Total HL Others Total

3.0 1.0

2.0

0.5 1.0

0.0 0.0 FY17 FY18 FY19 FY20 Dec'20 FY17 FY18 FY19 FY20 Dec'20

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Even when compared to peers, delinquency for Aavas is amongst the lowest. Aavas’ tight control over infant delinquency benchmarks backed by robust analytics and collection infrastructure has been the secret sauce. Even through the lockdown, Aavas was able to reach out to its entire customer base and in some cases convince borrowers under moratorium to start payments.

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Exhibit 45: Aavas’ delinquency stacks well amongst peers

5.0 Reported gross NPA - (%) 4.0

3.0

2.0 1.0 1.0

0.0 HFFC Vastu Aptus Aavas Repco LICHF GRUH MOHF India S India MGMA CanFin Aadhar Shriram Shubham PNBHOUSI MUTH HFin MUTH Source: Company, Ambit Capital research; *Note: 3QFY21 data for PNBHOUSI, LICHF, Repco, MOHF, HFFC, Aavas & CanFin; 2QFY21 data for Aadhar and Aptus; FY19 data for GRUH and FY20 data for others. **GNPA for Aadhar, Aavas & PNBHOUSI are basis on-book for others basis AUM Even on a lagged basis, delinquency for Aavas is amongst the lowest. It continues to demonstrate good control on it asset quality. It also benefits from most of its exposure being self-constructed and self-occupied residential properties (>90%). Moreover, the company is also covered under the SARFAESI Act.

Exhibit 46: Even lagged delinquency for Aavas is amongst lowest in peer group 5.0 Gross NPAs

4.0 FY20 GNPA - (%) FY20: 1yr lagged GNPA - (%)

3.0

2.0

1.0

0.0 HFin HFFC Vastu Aptus Aavas Repco LICHF MUTH MOHF India S India MGMA CanFin Aadhar Shriram Shubham

PNBHOUSI Source: Company, Ambit Capital research; Note: NPA for Aadhar, Aavas and PNBHOUSI are basis on-book, for others basis AUM Loans that are sourced in-house We take comfort in Aavas’ granular lending approach (average HL ticket size of have lower balance transfer cases. ~`0.92mn), in-house sourcing model and reasonable LTV ratio (~50% as of FY20). It Even pricing power is higher as does not rely on DSAs (direct selling agents) as a primary source of origination; it has DSAs typically apply same case file developed a large in-house sales team. This enables it to underwrite better quality to multiple lender and compete for loans and also reduces risk of balance transfers and improves pricing power. lower rates and higher LTVs. Exhibit 47: Built a completely in-house sourcing model and has amongst the lowest LTV ratios 40%

LICHF 50% Aavas

60% CanFin Repco GRUH PNBHOUSI 70% HDFC Loan to value ratio

80% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of loans sourced in-house Source: Company, Ambit Capital research;*Note: Size of the bubble represents average HL ticket size x

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Deeper penetration aids in maintaining smaller ticket size. Around 80% of Aavas’ branches are located in towns/villages with a population of <1mn. It has point of presence in 1,073+ tehsils across 11 states with active loans in 10,928+ villages/towns. It has been able to penetrate small towns with a population of less than 10,000 also.

Exhibit 48: Aavas’ ticket size is amongst lowest in peer group across product segments

Average ticket size (` mn)

1.0 Home loans Other mortgage

0.8

0.6

0.4

0.2

0.0

FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, Ambit Capital research

Structured process-oriented approach to credit underwriting and collections not only helps in maintaining asset quality but also provides legs for scaling up.

Exhibit 49: Four-pronged credit assessment framework designed to scale up 1 2 3 4 Underwriting Legal assessment Technical assessment Risk containment unit Technical evaluation of property with Legal validation of property title and Preliminary visit to assess the help of external vendors with local Verification of credit bureau scores, other documents with the help of business income and expertise (~100+ technical agencies CERSAI checks, scrutinises documents, external lawyers (~160+ law firms & requirement empanelled) and in-house team of dedupe check etc. lawyers are empanelled) engineers (~100 members) In-house team of lawyers (50-60 Subsequent visit to assess members) to support external lawyers Fraud identification through personal Periodic review of construction projects property and review reports submitted by visit to select customers external lawyers Repository of multiple (50-60) Geography specific risk assessments, customer profile templates for authentication of demand letters and Process driven decision making ease of underwriting and employment smoother knowledge transfer certifications >35% of underwriters are

Charted Accountants Employee strength 400-450 50-60 ~100 50-55 Source: Company, Ambit Capital research Contained delinquencies have kept credit cost under control Annualized credit cost for 9MFY21 was 60bps. Over past five years (FY16-20), average credit cost for Aavas was ~27bps. This was lower than most of its peers. Spike in 9MFY21 (annualized) credit cost was on account of heighted provisions post lockdown and the resultant jump in delinquency.

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Exhibit 50: Aavas’ credit cost has been <65bps since Exhibit 51: …and lower than most peers despite focus on inception… a relatively more vulnerable borrower profile

Credit cost (%) Credit cost (FY18-20, %) 0.6 0.82 0.82

0.79 0.79

0.4

0.4 0.53

0.47 0.47

0.3 0.45

0.3

0.38 0.38

0.3 0.2 0.20 0.20

0.16 0.16

0.09 0.09

0.1 HFFC Vastu Aptus Aavas Repco LICHF FY14 FY15 FY16 FY17 FY18 FY19 FY20 CanFin Aadhar 9MFY21* PNBHOUSI Source: Company, Ambit Capital research; *annualized Source: Company, Ambit Capital research;*Note: FY18-20 average credit cost considered

Given Aavas’ focus on low ticket size housing loans and absence from bulky developer loan segment, its provision cover, though optically low, is adequate.

Exhibit 52: Aavas has maintained focus on granular assets; Exhibit 53: PCR optically lower than a few peers; average HL ticket size of ~`0.9mn adequate given more granular HL-focused profile

Number of loan accounts (in 000') PCR on stage 3 (%) Avg. tick. size: HL- RHS (Rsmn) 47 47 44 Avg. tick. others: HL- RHS (Rsmn) 41 40 120 1.0 39 36 33 32 29 28 28 90 0.9 22 22 21 15 60 0.8

30 0.7 HFFC Vastu Aptus Aavas Repco LICHF GRUH

0 0.6 MOHF India S India MGMA CanFin Aadhar Shriram Shubham PNBHOUSI MUTH HFin MUTH FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, Ambit Capital research Source: Company, Ambit Capital research;*Note:3QFY21 data for PNBHOUSI, Repco, CanFin, LICHF, MGMA, HFFC & Aavas; 2QFY21 data for Aptus & Aadhar; FY19 data for GRUH and FY20 data for others.

Nevertheless, given build-up of stress post lockdown slippages from stage-1 and stage-2 assets could be higher than historical run-rate. In our framework we assess how adequate are additional provisions on stage-1 and stage-2 assets on each HFC’s balance sheet. We factor existing provision cover on stage-3 assets to be adequate in our calculations basis our loss given default estimates. For Aavas, assets equalling ~0.8x of existing GNPAs are provided for - higher than most peers. Our estimates exclude standard asset provisions which are over and above these provisions. Existing provisions on stage-3 assets are in excess of historical loss given default, which renders some comfort.

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Exhibit 54: Provision coverage for Aavas seems to be adequate for ~0.8x incremental assets turning into NPA PNBHOUSI Aavas Repco Factored GNPA framework (` bn) 2QFY19 3QFY19 4QFY20 2QFY21 3QFY21 4QFY20 2QFY21 3QFY21 4QFY20 2QFY21 3QFY21 Quantum of stage 1 & 2 assets - (A) 665 704 657 649 617 62 67 69 113 116 117 ECL provision on stage 1 & 2 assets - 3 4 11 11 9 0 0 0 0 0 1 (B) ECL provision % on stage 1 & 2 0% 1% 2% 2% 1% 0% 0% 0% 0% 0% 1% assets - [C] = (B/A) ECL % on stage-3 - (D) 22% 23% 36% 44% 47% 26% 32% 28% 36% 41% 44% Assumed standard asset provisions % 1.0% 1.0% 1.0% 1.0% 1.0% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% on stage 1 & 2 assets - ('E) Factored % GNPA - [F] = (C/D) - E 1.2% 1.2% 3.6% 2.9% 2.1% 0.3% 0.5% 0.8% 0.1% 0.3% 1.1% Existing % GNPA (stage 3 assets) - 0.4% 0.5% 2.7% 3.0% 4.5% 0.5% 0.5% 1.0% 4.3% 4.0% 3.3% (G) Factored GNPA multiplier - [H] = 2.7 2.6 1.3 1.0 0.5 0.5 1.1 0.8 0.0 0.1 0.3 (F/G) Source: Company, Ambit Capital research estimates

Pre-provisioning buffers render additional comfort With respect to PPOP/assets (operating buffers), Aavas is well-placed with >8x of average credit cost as buffer. Aavas’ buffer is amongst the strongest within listed HFCs and NBFCs. Continuous reduction in cost of funds and focus on risk-based pricing have been instrumental in building this buffer. Entrenched reach in deeper geographies equips Aavas to have pricing power and hence maintain profitability.

Exhibit 55: Aavas has cushion to absorb >8x of average credit cost; highest amongst peers

12 MUTH 4x 10 MGFL 8x BAF 20 - Aptus 8 Vastu SHTF FY18

- 6 Aavas CIFC Repco MMFS HFFC SUF 4 CanFin Aadhar 2x MGMA 2 LICHF PPOP/AAUM PPOP/AAUM PNBHOUSI 0 0.0 0.5 1.0 1.5 2.0 2.5 Credit cost/AAUM - FY18-20

Source: Company, Ambit Capital research *Note: Size of the bubbles indicates size of AUM (not as per scale)

Consistent returns backed by comfortable capitalization Backed by sustained growth (~72% AUM CAGR between FY15-20), Aavas maintained interest spreads of ~5%, sturdy asset quality (gross NPAs/credit costs <1%/<60bps since inception) and reduction in opex (28bps between FY15-20). Aavas managed to expand its RoAA to 3.8% from 3.1% in FY15. RoAE has lagged given equity infusions of ~`12.3bn between FY17-19 and initial public issue of ~`3.6bn in October 2018. The leverage ratio (assets/equity) of ~3.7x at end-FY20 was well within management expectations of ~6.0x in the longer term. Adequate capital buffers give it enough room to grow its AUM between 20-25% over the next 7-8 years and provide a cushion against any asset quality shocks. As at Dec’20, it reported a tier 1 capital ratio of 51% and total capital ratio of 53%.

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Exhibit 56: Aavas has delivered sustainable RoAA; RoAE to Exhibit 57: Capitalization remains comfortable; no need improve as leverage rises to raise capital over the next 7-8 years

RoAA (%) RoAE (%) - RHS Tier 1 ratio Leverage (assets/equity)- (RHS) 4.0 25 3.8 90 12 3.6 75 10 3.5 20 60 8 3.1 45 6 3.0 15 2.8 30 4 2.6 2.6 15 2 2.5 10 2.2 - 0 HFFC 2.0 5 Vastu Aptus Aavas Repco LICHF GRUH MOHF India S India MGMA CanFin Aadhar Shriram Shubham FY14 FY15 FY16 FY17 FY18 FY19 FY20 PNBHOUSI HFin MUTH Source: Company, Ambit Capital research Source: Company, Ambit Capital research;*Note:-3QFY21 data for LICHF, PNBHOUSI, CanFin, Repco, MOHF, HFFC & Aavas; 2QFY21 data for Aadhar, FY19 data for GRUH and FY20 data for others.

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Imagining Aavas in and through FY30 At valuation of 7.0x 12M forward price to book, high growth and expectation to manage asset quality are given. Expansion over a long period for Aavas would entail shrinkage in yield as it faces competition. Even prudence warrants moving up the yield curve as it expands into newer states. We run a scrub of Aavas’ state-wise footprint against our in-depth state-wise housing opportunity assessment and also factor its expansion plans in newer states. Our study suggests Aavas’ AUM can grow at 21% CAGR through FY30 even after factoring ~20% annual repayment rates. We assume ~25bps of annual yield compression, a higher P&L borrowing charge backed by gradual uptick in leverage and 30-35bps annual credit cost on assets given exposure to the vulnerable borrower segment. Factoring this and modest improvement of ~10bps p.a. in opex ratio as operating leverage plays out, Aavas is set to deliver RoAA (including off-balance-sheet exposure) of ~2.5% in FY30 and thereafter. We estimate Aavas’ AUM to grow at 21% CAGR though FY30 In our view, growth of small-ticket housing players is a function of assessing on- ground reach and ability to standardize processes and replicate them than just the macro pan-India opportunity. Hence, we run a scrub of Aavas’ state-wise footprint against our in-depth state-wise housing opportunity assessment to understand its longer-term growth potential. We also factor in competition in different states along with Aavas’ expansion plans in newer states. Given Aavas’ contiguous growth strategy, current presence, competition and quality on land records we expect Aavas to at least enter Telangana, Andhra Pradesh, Karnataka and Jharkhand by FY30. Exhibit 58: Expect Aavas to at least enter Telangana, Andhra Pradesh, Karnataka and Jharkhand by FY30

Source: Company, Ambit Capital research estimates;*Note: Number in brackets represents number of branches in that state of the respective entity.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 43 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Resultantly, we expect the housing portfolio to grow at a CAGR of ~22% between FY20-30 and non-housing portfolio at ~18%. This implies overall AUM for Aavas to grow at ~21% CAGR. Given the nature of small-ticket lending some quantum of balance transfers is inevitable. We factor ~20% of annual repayments for housing and ~24% for non-housing portfolio through FY30. Our AUM and repayment estimates imply ~21%/16% disbursement growth between FY20-30 for the housing/non-housing book. As at end FY30, we expect ~79% of Aavas’ AUM to be housing loans.

Exhibit 59: Expect Aavas’ AUM to clock at CAGR of ~21% through FY30 led by ~20% disbursement growth FY20-30E Particulars (` bn) FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E CAGR AUM Housing 32 45 57 69 83 100 123 150 183 223 272 332 405

Non-housing 9 15 21 25 30 37 45 52 60 70 81 93 108

Total 41 59 78 94 113 137 168 202 243 293 353 426 514

AUM growth (YoY) Housing 43% 42% 28% 20% 20% 21% 23% 22% 22% 22% 22% 22% 22% 22% Non-housing 87% 59% 42% 21% 21% 22% 23% 16% 16% 16% 16% 16% 16% 18% Total loan book 51% 46% 31% 20% 20% 21% 23% 20% 20% 20% 21% 21% 21% 21% Mix Housing 78% 76% 74% 73% 73% 73% 73% 74% 75% 76% 77% 78% 79%

Non-housing 22% 24% 27% 27% 27% 27% 27% 26% 25% 24% 23% 22% 21%

Disbursements Housing 15 19 21 18 27 34 43 52 63 77 94 114 140 21% Non-housing 6 7 9 7 10 13 16 18 21 24 28 32 37 16% Total 21 27 29 25 37 47 59 70 84 101 121 147 177 20% Disbursement growth (YoY) Housing 39% 31% 6% -10% 44% 28% 25% 21% 22% 22% 22% 22% 22%

Non-housing 75% 29% 19% -20% 45% 27% 25% 11% 16% 16% 16% 16% 16%

Total 47% 30% 10% -13% 44% 28% 25% 18% 20% 20% 21% 21% 21%

Repayments (YoY) Housing 24% 19% 18% 13% 19% 20% 20% 20% 20% 20% 20% 20% 20%

Non-housing 30% 22% 18% 13% 20% 21% 21% 24% 24% 24% 24% 24% 24%

Total 25% 20% 18% 13% 19% 20% 20% 21% 21% 21% 21% 21% 21%

Source: Company, Ambit Capital research estimates PMAY not a demand generator but provides some cushion to asset quality The government in June 2015 had articulated its intent to provide housing to all citizens in urban areas by 2022. Pradhan Mantri Aawas Yojna (PMAY) is the flagship scheme though which the government extends interest subsidy to promote small- ticket housing. Whilst the scheme has received a fair bit of success it’s not a game changer when it comes to demand generation, especially for players like Aavas. Since at the time on-boarding a new customer it’s not certain that the customer would be eligible for benefits under the scheme, it fails to actually generate additional demand. Nevertheless, later when the customer receives interest rate subsidy it does add a little more comfort on asset quality as the LTV reduces by 10-20%. For details on the PMAY scheme please refer exhibit 100 in the annexure section. Would yield for Aavas remain intact? As Aavas becomes larger and enters newer geographies we expect yields to contract. Not just competition but as prudent strategy it makes sense to move up the yield curve and underwrite safer customer set in newer geographies. Hence, we factor yield for Aavas to contract on an average by ~25bps each year to ~12.2% by end of FY30 from current level of ~14.5% (calculated).

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Exhibit 60: Aavas - Expect yield to contract by ~25bps each year through FY30

Yield for on-book loans 16%

15%

14%

13%

12% FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Source: Company, Ambit Capital research estimates Is profitability really susceptible to upfronting of assignment income? Under Ind-As companies are required to upfront estimated income spread through the life of the assigned loans. Starting FY15 Aavas has been relatively aggressive with its sell-down strategy, resulting in share of assigned loans increasing to ~21% of its AUM as at end-Dec’20, higher than peers. Resultantly, assignment income has become meaningful at ~15% of NII and 25-30% of PBT.

Exhibit 61: Share of off-balance-sheet loans is higher for Exhibit 62: …hence contribution of assignment income to Aavas… NII/PBT is higher than peers

Share of off-BS loans as % of AUM HDFC PNBHOUSI Aavas Aadhar 25% FY16 FY17 FY18 FY19 FY20 50%

40% 20% 30% 15% 20%

10% 10%

5% 0% FY18 FY19 FY20 FY18 FY19 FY20 0% Aadhar Aavas PNBHOUSI HDFC Assign. income (% of PBT) Assign. income (% of NII)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

So the key question is, does this really make overall profitability of Aavas susceptible to quantum of sell-downs during the year? Not really. We say so as the absolute quantum of direct assignment sell-downs for Aavas was merely 0.6%/0.6% of industry volume in FY19/FY20. Hence current absolute annual run-rate of ~`6-7bn can be maintained over a longer period of time. Additionally, a large proportion of Aavas’ book (70-75% of FY20 AUM) comes under the priority sector which makes sell-down easy. Even in the short run (next 2-3 years), a couple of large HFCs that were active in the direct assignment market going out of business presents opportunity for Aavas to step-up its direct assignment sell-down if need be.

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Exhibit 63: Aavas has <1.5% direct assignment market share Industry direct assginment volume (Rs bn) 1,600 Share of Aavas in industry DA volumes - (RHS) 1.6%

1,216 1,200 1,140 1.2%

800 0.8%

441 477 464 400 302 0.4%

- 0.0% FY16 FY17 FY18 FY19 FY20 9MFY21

Source: CRISIL, Ambit Capital research Hence we assume that though securitization (direct assignment) as a percentage of AUM/disbursements would taper gradually, absolute run-rate of ~`10.5bn can be maintained with ease. Hence, we factor the same in our estimates through FY30.

Exhibit 64: Maintaining current run-rate (absolute) of direct assignments should not be tough ask

New securitization (Rs bn) Off-book % - (RHS) New securitization as a % of disbursements - (RHS)

12.0 10.5 10.5 10.5 10.5 10.5 10.5 10.5 30% 10.0 8.9 25% 8.0 20% 6.8 6.6 6.4 6.8 6.0 5.4 15%

4.0 3.4 10% 2.2 2.0 5% 0.1 0.0 0% FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Source: Company, Ambit Capital estimates Asset quality: Does Aavas have nerves of a marathon runner? Low seasoning of loan book, lack of experience in newer geographies and exposure to vulnerable borrower segment pose key questions in any investor’s mind. Whilst seasoning will only build gradually, we take comfort in some of the good practices and depth in Aavas’ underwriting character.

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Exhibit 65: Asset quality - Lack of experience made up by depth in character Sr. No. Concerns Practices that render comfort Articulated strategy to expand gradually in a contiguous manner. In a block of five years Aavas enters four new states No sales target for first three years to a new branch in a new state Lack of experience in 1 Fixed service matrix across all branches to ensure consistency newer geographies High on analytics. Uses predictive modelling to contain balance transfers. All data is geotagged Have ability to move up the yield curve in newer states and still maintain interest spreads Large part of the book (>90%) is towards self-owned/self-constructed properties Lowest ticket size (~`0.8mn) and LTVs (~50%) amongst organised HFCs in India Institutionalises improvements; increased focus on automation. Has created over ~50-60 templates for different occupations Aavas monitors performance of customers that it rejects Low seasoning of loan No-month end concept: ~70% of business is done in the first three weeks of the month (<50% for most peers). This 2 book helps in better capacity utilization and prevents undue pressure on sales and credit thereby helps maintain underwriting standards NIL exposure to the developer segment/land financing Separate team for sales, collections and underwriting. Credit manager at the branch reports to the area credit manager and not the branch manager. Aavas has 500+ member underwriting team; amongst largest in peer group Incentive of sales team linked to 1 day overdue performance. Credit manager needs to visit every customer that turns NPA Almost all cases are sourced in-house Tight underwriting filters: On an average ~1/3rd of its loan applications are approved

Exposure to vulnerable Amongst largest collections team (450+ members) within peer group; coverage under the SARFAESI Act 3 borrower segment Employer guarantee needed for customers who receive salary in cash Customers with 100% agricultural income are rejected Risk based pricing approach Source: Company; Ambit Capital research Nevertheless, given exposure to the vulnerable borrower segment and plans to expand into newer geographies, we factor in 30-35bps credit cost on average assets (including off-balance sheet loans). This is closer to the stress levels in FY21. Exhibit 66: To err on the conservative side, we factor high level of credit cost through FY30

0.4% Credit cost as a % of avg. assets - (incl. off-BS)

0.3%

0.2%

0.1%

0.0% FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Source: Company, Ambit Capital research How much opex can Aavas cut? Given Aavas’ more entrenched presence in deeper geographies, higher focus on the self-employed segment and higher investments in people, processes and technology, it has a higher opex model. It is built to scale with its large investments. As an example, the number of employees of Aavas has grown ~5x over the last four years and is highest amongst the peer group. It has also opened ~98 branches (~37% of existing branches) in the last three years (FY18 to YTDFY21). These branches are yet to scale up to full potential. As these branches gradually scale up over the next 2-3 years, significant operating leverage benefits would play out. We also note that new branch count addition (30-35 every year) would be lower than 20% of existing stock of branches and would largely remain constant, and hence operating leverage benefit would continue to accrue at least through FY30.

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Exhibit 67: Even after 10 years of operation AUM/branch is Exhibit 68: AUM/employee is amongst lowest in peer in the lower quartile vs peer group group

1,200 300 AUM/branch (Rsmn) AUM/employee (Rsmn) 1,000 800 200 600 400 100 200 - - HFFC Vastu HFFC Vastu Aptus Aptus Aavas Aavas Repco Repco MOHF MOHF India S India India S India MGMA MGMA CanFin CanFin Aadhar Aadhar Shriram Shriram MUTH HFin MUTH MUTH HFin MUTH Source: Company, Ambit Capital research *Note: FY20 data Source: Company, Ambit Capital research*Note: FY20 data

We factor on an average a modest improvement of ~10bps p.a. in the opex ratio through FY30. We remain mindful of Aavas’ more entrenched and relatively higher opex model, and hence even by end of FY30 we factor total opex to asset ratio of ~1.5% (basis average assets including off-balance-sheet loans). As of 3QFY21, Aavas’ opex ratio was ~2.4% of average assets (including off-BS assets) vs peer group average of ~1.7%.

Exhibit 69: Aavas’ opex ratio is highest amongst peers Exhibit 70: Hence, we factor modest improvement of given a more entrenched business model ~10bps p.a. on account of operating efficiencies

Staff cost - (%) Other expenses - (%) AUM (Rs bn) - RHS Staff cost - (%) Other expenses - (%)

3.5 250

1.4 3.0

200 1.4 1.4

2.5 0.6

1.0 1.0 0.7 0.7

1.2

2.0 150

1.0

0.7 0.7

0.7

0.7

1.5

100 0.7 0.6

2.2 2.2 2.9

2.1 2.1 1.0 0.4 2.0 2.0

50 2.0

1.8 1.8 1.3 1.3 1.8

0.5 1.6 1.5 1.4 1.4 - - 1.0 HFFC Vastu Aptus Aavas Repco FY18 FY19 FY20 CanFin GRUH* Aadhar FY21E FY22E FY23E FY24E FY30E Source: Company, Ambit Capital research;*Note: Opex ratio for GRUH is for Source: Company, Ambit Capital research;*Note: Opex ratio is including off FY19, FY20 data for all other companies.** Aavas & Aadhar Opex ratio is B/S assets. including off B/S assets.

Use of technology to aid in opex reduction/underwriting Aavas has an about 80-member technology team and a 15-member analytics team. Most data is geotagged with portfolio mapped on heatmaps. Pointing to any location gives it details of loans, arrears, collections, demographics, etc. Some other tools used/developed by the team include predictive analytics model on customer bounce. Management guides 70-80% hit rates for these models. These models also predict customers who are likely to balance transfer (BT out of Aavas). Aavas then sets predetermined pricing (used in cases where customers puts a request to move out) to help retain the customers. This has helped Aavas curtail BT by ~50%. Technology has also helped reduce turnaround times and transaction costs there by improving levels of service. Aavas invested ~`150mn in technology systems between FY14 and FY18 (~0.8% of average assets during the period) which is significant given its size.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 48 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Exhibit 71: Turnaround time for Aavas has been Exhibit 72: … resulting in improved efficiency consistently coming down…

Turnaround time (days) % of cases processed 87% 14 13 76% 12 10 55%

FY18 FY19 FY20 FY21YTD <=10 days <=15 days <=20 days

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

In the longer run where would RoAA for Aavas settle? Factoring yield compression (as discussed in the section above), higher P&L borrowing charge (on account of rise in leverage), modest improvement of ~10bps p.a. in the opex ratio and credit cost of 30-35bps on average assets (including off-balance sheet loans), we estimate Aavas to still be able to make RoAA of ~2.5% in FY30 and thereafter.

Du-pont analysis: All set for a marathon run!

Exhibit 73: Aavas set to deliver at least 2.5% RoAA over the longer term Du-pont analysis FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Interest Income 12.2% 11.8% 10.8% 10.2% 10.2% 10.4% 10.3% 10.1% 10.0% 9.9% 9.9% 9.8% 9.7% Interest Expenses 5.0% 4.5% 4.5% 4.5% 4.5% 4.4% 4.4% 4.4% 4.5% 4.6% 4.7% 4.8% 4.9% Net interest Income 7.2% 7.3% 6.3% 5.7% 5.7% 6.0% 5.9% 5.7% 5.5% 5.3% 5.1% 4.9% 4.8% Other income 0.5% 0.5% 0.4% 0.4% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Total Income 7.7% 7.8% 6.7% 6.1% 6.0% 6.3% 6.3% 6.1% 5.9% 5.7% 5.5% 5.3% 5.2% Staff cost 2.9% 2.0% 1.8% 1.6% 1.5% 1.4% 1.4% 1.3% 1.3% 1.2% 1.1% 1.1% 1.0% Other expenses 1.4% 1.2% 1.0% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.4% Total Opex 4.2% 3.2% 2.8% 2.4% 2.2% 2.1% 2.0% 1.9% 1.8% 1.7% 1.6% 1.6% 1.5% Operating Profit 3.5% 4.6% 3.9% 3.7% 3.8% 4.2% 4.2% 4.2% 4.1% 4.0% 3.9% 3.8% 3.7% Provisions 0.07% 0.15% 0.19% 0.29% 0.22% 0.25% 0.26% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% PBT 3.4% 4.4% 3.7% 3.4% 3.6% 4.0% 4.0% 3.9% 3.7% 3.6% 3.5% 3.4% 3.4% Tax 1.1% 1.4% 0.7% 0.8% 0.8% 1.0% 1.0% 0.9% 0.9% 0.9% 0.9% 0.8% 0.8% RoAA (incl. off-BS) 2.4% 3.0% 3.1% 2.6% 2.7% 3.0% 3.0% 2.9% 2.8% 2.7% 2.7% 2.6% 2.5% Leverage 4.4 3.8 4.1 4.6 4.8 4.9 5.2 5.4 5.5 5.7 5.9 6.1 6.3 RoAE 10.6% 11.6% 12.7% 12.1% 13.2% 14.6% 15.4% 15.6% 15.6% 15.6% 15.7% 15.8% 16.0% Source: Company, Ambit Capital research estimates Experienced management team Most key personnel have been associated with the company for >6 years and on average have around two decades of experience. CEO Mr. Sushil Kumar was previously associated with AU SFB. He was instrumental in setting up the current SME business at AU SFB. He along with Mr Sanjay Agarwal (promoter of AU SFB) started the journey of Aavas Financiers. It has its top executives coming from different backgrounds and experiences which boosts idea generation and helps set improved service standards. Even most of the board members have rich experience (refer exhibit 98 in annexure section).

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Exhibit 74: Aavas Financiers’ top executives are from the lending background Year of Total Remuneration Name Age Designation Qualification Previous Employers Joining Experience (` mn) Mr. Sushil Kumar Chartered Accountant and ICICI Bank, 43 MD and CEO 2011 19 years 24.0 Agarwal Company Secretary Kotak Mahindra Primus First Blue Home Mr Ghanshyam Chief Financial Finance, Accenture India Pvt. 52 Chartered Accountant 2014 24 years 18.2 Rawat Officer Ltd and Deutsche Postbank Home Finance Ltd Company Secretary, Bachelor's Mr. Sharad Company ~31 degree in commerce from the AU Housing Finance 2012 ~9 years 1.9 Pathak Secretary Rajasthan University Bajaj Finance, Bajaj Auto Finance Ltd, Future Finmart Ltd, GE Countrywide Bachelor of science and Master Consumer Financial Services, Mr Sunku Ram Chief Business of Business Administration - Future Capital Financial 47 2015 24 years 8.8 Naresh Officer both from Sri Krishnadevaraya Services Ltd, ICICI Bank Ltd, University GE Money Financial Services Ltd, Nestle India Ltd and Mala Publicity Services Pvt. Ltd

Equitas Housing Finance Pvt. Ltd, Equitas Micro Finance Diploma in finance from India Pvt. Ltd, ICICI Bank ltd, SVKM’s NMIMS University and ICICI Personal Financial Chief Credit diploma in mechanical Mr Ashutosh Atre 50 Services Co. ltd, 2014 30 years 8.9 officer engineering from Madhya Cholamandalam Investment & Pradesh Board of Technical Finance Co. ltd, Apple Education, Bhopal Industries ltd and Sanghi Brothers (Indore) ltd B.Sc. and Certified in Indiabulls Senior Vice Management of Customer Housing Finance, Cointribe Mr Rajeev Sinha 45 President- 2016 20 Years 7.4 Relationship from IIM Technologies Pvt. Ltd, and Operations Ahmedabad (EE) ICICI Bank ltd. Deloitte Special Senior Vice Project India, First Offshore Mr Anurag Master of Arts (economics) 40 President- Technologies Pvt. Ltd, 2016 15 years 7.2 Srivastava from the University of Delhi Data Science American Express and WNS Global Services Pvt. Ltd Bachelor of arts and LLB degree – both from University Senior Vice Bajaj Finance, Mr Surendra of Rajasthan and Master of 47 President- Cholamandalam Investment & 2017 18 years 10.2 Kumar Sihag Business Administration from Collection Finance Company ltd the Periyar University B. Sc. (Hons) from MS Ruchi Soya Group, ICICI Bank, Senior Vice University of Baroda and Larsen & Toubro Ltd, Mr. Vijay Sethi ~40 President - 2018 18 years DNA PGDBA (HR) from ITM Landmark Group LLC Dubai. Human Resources University, Navi and Tata Group Mr. Mukesh Vice President- D1 Williamson Magor Bio Fuel 44 Chartered Accountant 2012 21 years 6.6 Agarwal Accounts Ltd B. Com, MBA from M D Mr. Shailendra Vice President- 45 University / Executive MBA India bulls Housing Finance 2017 20 years 5.1 Kumar Gupta Sales from IIM Lucknow Mr. Praveen Vice President- 42 Mechanical Engineering Bajaj Finance Ltd 2017 20 years 5.4 Kumar Sharma Collection Source: Company, Ambit Capital research

Managerial remuneration lower than peers Remuneration paid to MD & CEO was ~0.8% of PBT in FY20 vs 0.7-3.1% for most peers. Given Aavas’ performance, even on an absolute basis managerial remuneration seems justified.

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Exhibit 75: Remuneration to key managerial personnel is line with performance and comparable to peers

` mn YoY Peers Name Designation FY19 FY20 change (%) average Mr. Sushil Kumar Agarwal MD & CEO 22.0 24.0 9% % of PBT 0.9% 0.8% 0.7%-3.1%

Mr. Ghanshyam Rawat CFO 16.7 18.2 9% % of PBT 0.6% 0.6% 0.4%-1.4%

Mr. Sharad Pathak CS 1.5 1.9 23% % of PBT 0.1% 0.1% ~0.1%

Total managerial remuneration 40.2 44.1 10% % of PBT 1.6% 1.5%

PBT 2,577 3,020 17% Source: Company, Ambit Capital research

Incentive structure at par with industry standards The compensation structure of senior management of Aavas is largely at par with industry standards. The compensation consists of fixed, variable and ESOPs. ESOP incentivises the management to work towards improving the bank’s performance. The outstanding ESOPs as a proportion of outstanding shares for Aavas are at largely par with that of regional banks.

Exhibit 76: Outstanding ESOPs (as a % of outstanding Exhibit 77: …and so are ESOPs granted (as a % of shares) are largely at par with regional banks… outstanding shares)

Outstanding ESOPs (as a % of outstanding ESOPs granted (as a % of outstanding shares) shares) - FY20 - FY20 0.31% 0.09%

0.20%

0.14% 0.15% 0.04%

0.00% 0.00%

SIB Aavas CSB KVB CSB SIB Aavas KVB

Source: Company, Ambit Capital research;*Note: SIB- South Indian Bank, Source: Company, Ambit Capital research;*Note: SIB- South Indian Bank, CSB-Catholic Syrian Bank & KVB-Karur Vysya Bank CSB-Catholic Syrian Bank & KVB-Karur Vysya Bank

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Execution merits the premium Aavas’ expensive multiples (absolute and relative) must be read with ability to drive superior profitability and return in a hugely underpenetrated business. Given its pricing power, reducing CoFs and levers to reduce opex, visibility to maintain RoA >2.5% over next 5-7 years is high. Current valuations (7.0x FY22E P/B) reflect niche positioning, stable asset quality experience, clear path to scalability, and less cyclical business. Effective use of technology/analytics and relentless focus on asset quality have made it stand out vs peers; justifying 100-160% premium to most peers. Valuations could expand further given: i) ability to grow faster than peers (~21% vs 15- 18% for peers), ii) ability to maintain profitability (~21% EPS CAGR over FY21E-26E without dilution), iii) tight control over asset quality, and iv) no capital/liquidity constraints. Resultant efficient capital deployment opportunities would help expand RoE to >15% and keep it sustainable thereafter. Even if Aavas’ one-year forward P/B de-rates by 30% by FY30, exit multiple of 4.9x implies ~15% IRR at current valuations.

Our excess return based DCF implies TP of ` `2,950 We value Aavas using excess return value, wherein we take NPV of excess returns generated above our cost of equity assumption. Our DCF value of `2,950 factors yield compression of ~25bps each year to ~12.2% by end of FY30, higher P&L borrowing charge (on account of rise in leverage), modest improvement of ~10bps p.a. in opex ratio and credit cost of 30-35bps on average assets (including off- balance-sheet loans) through FY30. We estimate Aavas to still be able to make RoAA of ~2.5% in FY30 and thereafter. We use 14% CoE for our calculation. Our DCF- based valuation is based on two growth phases over the next 20 years – a ten-year high growth period, a ten-year matured period of moderate growth and terminal period. Our terminal growth rate of 7% is in line with expected growth in small-ticket housing loans given under-penetration. Market-share gains through entry into newer segments and sharper-than-anticipated credit rating upgrades and reduction in cost of funds can drive further upside. As cost of funds gradually reduce, Aavas would partially pass on the benefit to better quality customers to reduce quantum of balance transfers and in longer run even look to move up marginally on the yield curve to gain market share. Exhibit 78: Valuations reflect opportunity, longevity and sustainable profitability Key valuation drivers Commentary Aavas' philosophy has been to create demand by building presence where customers are present. It has most of its offices in Ability to identify the Tier 2, 3 and 4 locations of the country where residents are largely outside the ambit of the formal banking system. In opportunities and create most cases rural presence is in geographies where penetration is <2%. In many cases branch economics are reverse markets engineered to enable faster breakeven. Resultantly, we expect Aavas to maintain tighter grip over sourcing than most of the peer group and still be able to grow its AUM at CAGR of ~21% through FY21. Granular lending (NIL developer exposure), in-house sourcing and reasonable LTVs (~50%) add credibility to its Depth in asset quality underwriting. Focus on addressing infant delinquencies backed by analytics and able collection infrastructure with majority character (>90%) exposure to self-constructed/self-occupied residential properties render comfort.

Superior RoA profile with Even after factoring yield compression (~25bps p.a. through FY30), higher P&L borrowing charge (on account of rise in ability to maintain the leverage), modest improvement of ~10bps p.a. in the opex ratio and credit costs of 30-35bps on average assets (including same over longer term off-balance sheet loans) we estimate Aavas to still be able to make RoAA of ~2.5% in FY30 and thereafter.

Adequately capitalised Adequate capital buffers (tier 1 of 51%) give Aavas enough room to grow its AUM between 20-25% over next 7-8 years. Source: Company, Ambit Capital research

Aavas is in sweet spot to scale over longer term Our analysis suggests successful HFC credit profiles operate in a high core pricing power of 2-3x with leverage of >8x. Aavas commands the desired pricing power; sub-optimal leverage drags RoE but provides enough fire power for future growth.

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Exhibit 79: Positioning/pricing of housing finance companies

12

10

8

6

Leverage (x) Leverage 4 Aavas 2 0.0 1.0 2.0 3.0 4.0 5.0 Pricing power: (NII-opex-cc)/avg. assets

Source: Ace Equity, Ambit Capital research estimates. Note: HFCs with asset size of at least `2bn and maximum of `200bn have been considered for analysis. Bubble size indicates total assets

Market share gain to continue In addition to the drivers mentioned above, led by its entrenched reach and ability to offer superior price to customers within its target segment, we expect Aavas to continue to gain market share not just across HFCs but also across peer group.

Exhibit 80: We expect Aavas to grow fastest amongst similar-sized peers

Aavas' housing market share within HFCs - (%) Aavas' housing market share within smaller ticket size HFCs - (%) 5.1

3.7 3.2 2.5 2.4 1.8 1.4 1.3 1.0 0.7 0.5 0.4 0.4 0.5 0.1 0.1 0.2 0.3 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY30E Source: Company, Ambit Capital research estimates

Even when compared to other lenders Aavas would drive superior return . Over the next decade (FY20-30), we estimate Aavas’ earnings to compound at a CAGR of ~19%, much higher than 11-13% for other lenders and even higher than 15% for peer group. . Aavas would benefit compared to peers as a large part of Aavas’ growth would entail lower refinance risk as it would develop ability to offer best-in-class pricing. It would also benefit from its deeper reach which implies lower competition from prime HFCs in most pockets.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 53 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Exhibit 81: Profitability of Aavas will outpace that of lenders next decade

Earnings compounding over next decade 19%

15% 13% 11% 9%

Prime HFCs NBFCs Pvt Banks Small ticket size Aavas HFCs

Source: Ambit Capital research

Some examples of high-growth/high-RoE businesses in India There are many Indian financial services companies which have delivered high growth and high RoE for multiple years. HDFC Bank, Gruh Finance and Bajaj Finance are prime examples. Presence in high-growth industries has been key feature of all these three companies.

Exhibit 82: Track record of some high-growth/RoE companies in India Average PAT Share price Exit Starting PE Starting PB Exit PB RoE (%) CAGR (%) CAGR (%) PE HDFCB (1997-2020) 19% 33% 29% 2.3 3.8 26.9 4.1 Bajaj Finance (2009-2020) 18% 58% 89% 5.4 0.2 70.7 8.9 Gruh Finance (2002-2019) 27% 27% 43% 3.9 0.5 52.0 12.3 Source: Company, Ambit Capital research *one year forward multiple In all the above examples, valuations got rerated rather than getting de-rated despite multiple years of high growth. However, there one difference between Aavas Financiers and these other high-growth Indian financial services companies: . The starting point of valuation is higher for Aavas Financiers vs the above mentioned cases and hence significant re-rating potential for Aavas Financiers is low and earnings growth would be key driver of stock price. Exhibit 83: Market shares of HDFCB/Gruh Finance/BAF in their initial years Year Category Market share

HDFCB FY97 All loans 0.2% Gruh Finance FY05 Home loans 0.6% Bajaj Finance FY09 Retail loans 0.5% Source: Company, Ambit Capital research However, as explained in the earlier sections, we expect Aavas to improve its market share from ~0.7% to ~1.3% given large potential, its entrenched presence and ability to maintain pricing. Hence, it’s the high future growth trajectory of the small- ticket housing industry and some market share gains for Aavas Financiers which would drive earnings and hence valuations.

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Exhibit 84: Aavas stacks up well compared to peers across most parameters Overall score Entity Credit rating Liquidity profile Asset quality profile Capital adequacy Profitability profile (out of 4) Aavas AA-/Stable 3.5

Aptus A+/Stable 3.3

Vastu A/Stable 3.3

GRUH* AAA/Stable 2.8

CanFin AA+/Stable 2.5

Aadhar AA/Stable 2.5

HFFC A+/Stable 2.5

India S. A/Stable 2.0

LICHF AAA/Stable 2.0

MGMA AA-/Stable 2.0

MOHF AA/Stable 1.8

Shubham A-/Stable 1.8

Repco AA-/Stable 1.8

PNBHOUSI AA/Negative 1.3

Source: Company, CRISIL Ratings, ICRA, CARE, Ambit Capital research estimates;*data for erstwhile GRUH considered. Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Detailed assumptions and estimates Exhibit 85: Even after factoring yield compression and elevated credit costs, Aavas is set to deliver 2.7-3.0% RoAA ` mn FY18 FY19 FY20 FY21E FY22E FY23E FY24E Comments Assumptions We expect AUM growth to remain fairly constant between 20- YoY AUM 22% factoring 13% decline in disbursements in FY21 thereafter 51.2% 45.9% 31.2% 20.2% 20.4% 21.4% 22.6% growth increasing on an average by ~32% through FY24. Our calculations factor repayment rate of ~20% Yield on We build-in on an average of ~30bps of yield compression advances 15.2% 15.0% 14.5% 14.6% 14.4% 14.0% 13.7% each year starting FY22. As Aavas expands it may need to (calculated) reduce its yields to support growth

We factor 5-10bps annual improvement in cost of borrowing Cost of funds 8.5% 8.1% 8.1% 7.9% 7.8% 7.7% 7.6% through FY23 factoring Aavas' recent rating update and improve (calculated) scale of operations Net interest Given sharper cut in expected yields than cost of borrowing and margins 8.3% 8.5% 7.4% 6.9% 6.7% 6.8% 6.7% rising leverage; expect margins to shrink (calculated) Cost to income As economies of scale pick-up we expect cost to income to 55% 41% 41% 39% 37% 34% 32% (%) decline ~37% of Aavas' branches are yet to scale–up to its full potential. As these branches gradually scale-up over the next 2-3 years, Opex to asset 4.2% 3.2% 2.8% 2.4% 2.2% 2.1% 2.0% significant operating leverage benefits would play out. We ratio factor on an average a modest improvement of ~10bps p.a. in the opex ratio through FY24 Given exposure to vulnerable borrower profile even though Credit cost 0.09% 0.22% 0.28% 0.44% 0.33% 0.36% 0.36% Aavas has adequate provision cover; erring on the side of caution we factor annual credit cost of 35-45bps through FY24 Outputs (` bn) NII 2.8 4.2 5.1 5.9 6.9 8.5 10.2

Operating profit 1.4 2.7 3.2 3.8 4.6 6.0 7.4 Net Profit 0.9 1.8 2.5 2.7 3.3 4.3 5.2

EPS (`) 16 24 32 35 43 54 67 BVPS (`) 203 247 268 302 345 399 466

RoAA (incl. off- 2.4% 3.0% 3.1% 2.6% 2.7% 3.0% 3.0% BS) RoE (%) 10.6% 11.6% 12.7% 12.1% 13.2% 14.6% 15.4%

Source: Company, Ambit Capital research

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Our FY22/FY23 EPS estimates are 3%/2% lower than consensus as we factor yield compression and higher credit costs.

Exhibit 86: Ambit vs consensus – Our EPS estimates are 3%/2% lower than consensus Aavas (` mn) Ambit Consensus Difference (%) PAT (`) FY21E 2,711 2,682 1% FY22E 3,341 3,364 -1% FY23E 4,254 4,311 -1% EPS (`) FY21E 35 35 -1% FY22E 43 44 -3% FY23E 54 55 -2% BVPS (`) FY21E 302 302 0% FY22E 345 344 0% FY23E 399 397 0% RoAA (%) FY21E 2.6% 3.1% -48bps FY22E 2.7% 3.2% -42bps FY23E 3.0% 3.3% -38bps RoAE (%) FY21E 12.1% 22.3% -1020bps FY22E 13.2% 19.2% -606bps FY23W 14.6% 18.0% -343bps Source: Bloomberg, Company, Ambit Capital research

Cross-cycle valuations Aavas has a short trading history of ~2 years and the stock has always traded expensive due to superior earnings trajectory and ability to consistently surprise street estimates. The stock did see a sharp fall between Mar-May’20 led by fears of significant deterioration in asset quality amid lockdown given Aavas’ vulnerable borrower segment. Better-than-anticipated asset quality performance led to subsequent revival.

Exhibit 87: Implied market valuations are currently trailing Exhibit 88: Aavas has yielded >24% return over last 12 above 2-year average valuations months outperforming Bankex

One-yr fwd P/B AAVAS IN BANKEX Index Par 7.5 2 year average one-year fwd P/B 240 6.5 200

5.5 160 120 4.5 80 3.5 40 2.5 Jul-20 Jan-21 Jun-20 Apr-20 Oct-20 Feb-21 Sep-20 Dec-20 Mar-20 Mar-21 Aug-20 Nov-20 May-20 Jul-19 Jul-20 Jan-20 Jan-21 Sep-19 Sep-20 Mar-19 Mar-20 Mar-21 Nov-19 Nov-20 May-19 May-20

Source: Bloomberg, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research

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Over the recent quarters, given its niche, entrenched presence and superior liquidity profile, the business has proven to be less cyclical than peers. While the business is a play on under-penetration in India’s housing segment, ability to scale up in low-ticket housing and its established niche within small-ticket housing finance make it command a premium. Given the business is very geography-specific, there is no large pan-India player in the segment yet. We believe Aavas can be one over next 10-15 years. We believe multiples would be a function of ability to deliver ahead-of-peers earnings growth and maintaining RoA. Exhibit 89: Aavas has always traded at a premium to the peer group 10 Aavas (trailing P/B) Peer* average (trailing P/B)

8

6

4

2

0 Jul-19 Jul-20 Jan-19 Jan-20 Jan-21 Sep-19 Sep-20 Mar-19 Mar-20 Mar-21 Nov-18 Nov-19 Nov-20 May-19 May-20 Source: Bloomberg, Company, Ambit Capital research; *Note: Peers considered are CanFin, Repco and PNBHOUSI Strong earnings growth to boost stock returns despite P/B de-rating It would be fair to assume that as housing penetration in India improves, multiples for the sector should contract. Even if Aavas’ one-year forward P/B de-rates by 25-30% by FY30, exit multiple of 4.9-5.2x implies 15-16% IRR at current valuations. Potential to outpace peers’ EPS growth by ~1.5x justifies 4.9-5.2x P/B exit multiple in FY30. Exhibit 90: Aavas could deliver 15-16% IRR over the next few years even if FY30 exit multiples are at 25-30% discount 30% discount 25% discount Parameters Current FY30F IRR FY30F IRR 12m forward P/B 7.0x 4.9x 5.2x 15% 16% Price 2,405 8,345 8,941 Source: Company, Bloomberg, Ambit Capital research Comparison with Gruh Finance Whilst it’s difficult to find an exact match for Aavas given its niche, the closest listed peer with reasonable history would be Gruh. We note Gruh differed in its operations as it operated largely in the salaried segment vs self-employed for Aavas and benefitted from its parentage to always have much lower cost of fund than Aavas. Nevertheless, lending to the same asset class with similar ticket sizes, meaningful geographical overlap and sustained growth and earnings momentum are things in common. Gruh’s evolution indicates that consistent meaty asset growth of >18% backed by sustained earning growth (~25% average) helped it trade at a premium to peers on a sustainable basis. While Aavas is trading at a premium to peers, its valuation multiple could expand further over the next 2-3 years given: i) ability to grow faster than peers (~21% vs 15-18% for peers) with established presence in geographies with lower competition; ii) ability to maintain profitability even at high growth; iii) tight control over asset quality and iv) no capital constraints and superior liquidity profile.

Nevertheless, we are mindful that Gruh’s parentage (HDFC Limited) aided in building a robust low-cost liability franchise which in turn aided in delivering a sustainable operating performance. Though Aavas lacks similar parentage it has been prudent in building a respected liability franchise which also reflects in its improving and lower borrowing cost compared to most peers. It’s a matter of time before its liability franchise becomes a beneficiary of rating upgrades. It is also better placed to grow its asset book given lower competition from larger lenders.

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Exhibit 91: A look at performance of Gruh when it was Aavas’ size; HDFC parentage aided in building liability franchise Tier-1 Leverage Next 3 years CAGR (%) ` mn AUM PAT NIM (%) ROA (%) ROE (%) ratio (%) (%) AUM PAT Gruh Finance FY14 70,090 1,770 4.3 2.8 15 11 32 24 19 Aavas FY20 77,961 2,491 7.5 3.1 54 4 13 21 20 Source: Company, Ambit Capital research estimates Exhibit 92: GRUH: Sustainable asset growth while maintaining profitability drove shareholder returns

20 GRUH (trailing P/BV)

15

10

5 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-13 May-14 May-15 May-16 May-17 May-18 May-19 May-13 Source: Bloomberg, Ambit Capital research

Relative valuations – Faster growth and low cyclicality than peers drive premium Across periods of the last 3/5/7 years Aavas was able to grow ~2.5x of peers such as Gruh, CanFin, PNB Housing and Repco while maintaining asset quality, which drives its premium. Niche positioning in deeper geographies backed by superior liquidity make Aavas less cyclical than peers. We believe Aavas’ ability to gradually gain market share in the underpenetrated Indian housing segment at far better profitability than peers should sustain its premium multiples. High near-term growth would sustain expensive multiples though they may fade over the longer term as higher base catches up for earnings. Aavas’ RoAA is highest amongst peer group (~3.8% vs peer average of ~2.4%) though RoE is low on an absolute basis (~12.2%) given lower leverage (~3.9x vs peer average of ~4.8x). Aavas trades at a higher premium to other lenders like private banks and prime HFCs due to much faster earnings growth (63% for Aavas over FY17-20 vs 20-22% for well-run private banks and 3-9% for prime HFCs). Over the next 2-3 years, we estimate Aavas earnings to compound at a CAGR of ~20%, higher than 8-18% for the peer group. Key risk to Aavas’ multiples is inability to cut opex as anticipated, which could put pressure on profitability.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 58 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Exhibit 93: Aavas trades at a premium to peers and most other BFSI favourites given visibility around growth longevity and superior profitability EPS Up/ P/B P/E ROA ROE Mcap Price CAGR Reco. TP (`) (US$bn) (`) FY20- (Down) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E 22E Housing Financers

LIC Housing Finance 2.9 418 BUY 485 16% 1.0 0.9 7 10 -5% 1.4% 0.9% 15.4% 10.1% Aavas Financers 2.6 2,405 BUY 2,950 23% 8.0 7.0 70 56 16% 2.6% 2.7% 12.1% 13.2% PNB Housing Finance 0.9 399 NA NA NA 0.8 0.7 9 7 1% 1.0% 1.1% 9.4% 10.1% Can Fin Homes 1.1 603 NA NA NA 3.1 2.6 18 16 13% 2.1% 2.1% 18.9% 17.5% Repco Home Finance 0.3 319 NA NA NA 1.0 0.9 7 6 3% 2.3% 2.4% 15.0% 14.3% Average 2.8 2.4 22 19 6% 1.9% 1.9% 14.2% 13.1%

Auto Financers

Shriram Transport 4.9 1,406 BUY 1,551 10% 1.6 1.5 15 13 -1% 2.0% 2.1% 12.2% 11.8% M&M Finance 3.6 210 BUY 197 -6% 1.6 1.5 26 19 -20% 0.9% 1.8% 7.0% 8.4% Cholamandalam 6.3 560 BUY 527 -6% 4.5 3.8 26 22 37% 2.4% 2.6% 18.7% 18.5% Magma Fincorp 0.4 115 NA NA NA 1.1 1.0 23 15 68% 0.9% 1.3% 4.6% 7.1% Sundaram Finance 3.9 2,540 NA NA NA 4.6 4.1 36 29 14% 2.2% 2.5% 13.9% 15.5% Average 2.7 2.4 25 19 19% 1.7% 2.1% 11.3% 12.3%

Consumer financers

Bajaj Finance 45 5,379 NA NA NA 8.9 7.3 70 38 21% 2.9% 4.5% 13.5% 20.7% Shriram City Union Finance 1.3 1,437 NA NA NA 1.2 1.1 10 8 2% 2.8% 3.4% 11.5% 12.8% Muthoot Finance 6.9 1,238 NA NA NA 3.4 2.7 13 11 22% 6.7% 6.7% 28.0% 26.5% Manappuram 1.8 157 NA NA NA 1.9 1.5 8 7 22% 5.6% 7.0% 26.3% 25.0% Satin Creditcare 0.1 242 NA NA NA 0.4 0.4 6 0 NA 1.0% 2.6% 4.4% 11.9% Average 3.1 2.6 22 13 17% 3.8% 4.8% 16.7% 19.4%

Wholesale Lenders

Edelweiss Capital 1.1 82 NA NA NA 1.3 1.2 -24 23 2% -0.5% 0.8% -3.8% 3.3% L&T Finance 3.4 101 NA NA NA 1.4 1.3 21 11 0% 1.0% 1.8% 7.0% 11.9% JM Financial 1.2 91 NA NA NA 1.3 1.2 15 12 6% 3.7% 4.7% 9.1% 10.3% Average 1.3 1.2 4 15 3% 1.4% 2.4% 4.1% 8.5%

Source: Source: Bloomberg, Ambit Capital research; Note: For companies not in our coverage universe we have taken consensus estimates

Exhibit 94: Aavas has grown its AUM at CAGR of ~63% and has generated average RoA of ~2.9% since inception

Performance summary of Aavas Financiers since inception

100 RoA (%, RHS) NIMs (%, RHS) Gross NPAs (%, RHS) AUM (Rs bn) 10.00%

80 8.00%

60 6.00%

40 4.00%

20 2.00% 1.0% 0.8% 0.6% 0.5% 0.5% 0.5% 0.5% 0.2% 0 0.00% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21

Source: Company, Ambit Capital research

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Exhibit 95: Key financial parameters over the last seven years (` mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20 Net Interest Income 203 429 756 1,275 2,812 4,237 5,080 NII Growth (%) 111 76 69 121 51 20

Net Profit 63 191 328 571 931 1,759 2,491 EPS 2.0 5.5 8.2 11.1 15.9 23.7 31.8 AUM growth (%) 129 107 99 60 51 46 31 Gross NPAs (%) 0.22 0.52 0.55 0.79 0.46 0.47 0.46 Credit costs (% of AAUM) 0.34 0.38 0.31 0.43 0.09 0.22 0.28 Provisioning Coverage 16 18 23 24 15 21 26 Tier-1 (%) 24 21 27 46 56 64 54 Leverage (x) 7.1 8.2 9.2 6.4 4.4 3.8 4.1 RoAA (incl. off-BS) 2.2 3.1 2.3 2.3 2.4 3.0 3.1 ROE (%) 15.0 24.3 21.5 14.8 10.3 11.6 12.7 Source: Company, Ambit Capital research Key risks to our BUY thesis More than anticipated deterioration in asset quality in FY22 led by lockdown: Aavas’ FY21YTD annualized credit cost increased to 0.61% vs FY17-20 average of 0.26%. Expectations of credit cost in FY22 coming down from peak of FY21YTD are factored in current valuations. Any delay in anticipated revival of economic activity could elevate credit costs in FY22, which has potential to derate the stock.

Exhibit 96: Expect credit cost in FY22 to be higher than historical average but lower than FY21E peak

Credit cost as a % of on-book loans (bps)

43 44 38 36 36 34 31 33 28 22

9 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E Source: Company, Ambit Capital research Sharp rise in portfolio churn: Aavas in the last five years has done well to restrict portfolio churn. In FY20, overall repayments came down to ~18% vs 25% in FY16. In FY21E, expect repayments to be lower at ~12.5% given six months of first half had option to avail moratorium. Further downward movement of interest rate (unlikely) could result in a higher repayment rate which can hamper AUM growth. For FY22, we factor repayment rate of ~19%. Inability to replicate past success in newer geographies: Aavas has presence in 11 Indian states/UTs with above 50% tehsil-level coverage in four of them (Rajasthan, Maharashtra, Gujarat and Madhya Pradesh), which together constituted ~88% of the portfolio as of Dec’20. Management has guided to bring down the share of these four states to ~80% over the next 3-4 years. This would require Aavas to start expanding in newer states. Ability to maintain asset quality while growing in newer geographies would be a key monitorable. Exit of existing private equity investors: Lake District Holdings and Partners Group, the two private equity promoters cumulatively hold ~51% stake in the company. This makes Aavas vulnerable to change in shareholding at any point in time. Change in holding could result in change in strategy. Whilst we believe well-run businesses have a high probability to attract good promoters, possibility of change in ownership remains a key risk over the longer term.

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Catalysts AUM growth of >20% in FY22: >20% AUM growth in FY22 would imply high likelihood of earnings growth of >20%. This would be a key positive catalyst for the stock given current valuations. Material decline in stressed loans: Pre-Covid, credit cost for Aavas was in the range of 0.09-0.30%. In FY21YTD, annualized credit cost increased to 0.6% with 1+DPD increasing to ~8.2% vs 2.4-6.3% between FY17-20. Decrease in 1+DPD assets below 4% would be a key re-rating trigger for the stock. Margin maintenance/expansion in FY22: As the loan base for Aavas expands and it enters newer geographies, we expect margins to decline. We factor 18bps margin compression in FY22. Despite this, if Aavas is able to maintain or expand its margin, it would aid in stock re-rating.

Exhibit 97: Explanation of our flags on the front page Segment Score Comments We did not come across anything unusual in the reported financials and believe financials are a true representation Accounting GREEN of the health of the company. Even disclosure levels are better than those of the peer group. Aavas has reported fairly stable earnings growth and has also met its earnings and growth guidance over the last 12 Predictability GREEN months. The company’s disclosures provide adequate granularity on the business on a quarterly basis. Earnings momentum GREEN In the past six months, consensus has increased FY21/22E EPS by 11%/9%. Source: Ambit Capital research

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Annexure Majority of the board dominated by nominee directors Currently, there are 9 directors on the board of which one director is executive director; three directors are independent directors while five directors are nominee directors. Of five, three directors are nominated by Kedaara Capital and 2 directors are nominated by the Partners Group. Whist nominee directors are considered as independent directors, they are typically appointed by financial creditors. However, in case of Aavas, they are appointed by the shareholders and hence, the composition of the board looks skewed towards non-independent directors.

Exhibit 98: Board dominated by nominee directors Name Designation Background . Holds a Bachelor's degree in Science (Electrical Engineering) from the University of Southern California. . Has completed the Harvard Business School YPO President Program Chairman and Mr. Sandeep Tandon Independent Director . Has served as the Managing Director of Tandon Advance Device Private Limited and as a Director on the Board of Accelyst Solutions Private Limited . At present, acting as the Executive Director of Syrma Technology Private Limited and serves as a Director in various private companies . Has more than 19 years of experience in the field of retail financial services Mr. Sushil Kumar MD and CEO Agarwal . Previously worked with ICICI Bank and Kotak Mahindra Primus Limited . Qualified Chartered Accountant (10th Rank in Final) and Company Secretary . Holds a bachelor's degree in commerce from the Madurai Kamaraj University and is a qualified Chartered Accountant Mrs. Kalpana Iyer Independent Director . Previously associated with Citibank N.A., India as its senior vice-president, during which she was responsible for women's banking and microfinance business . At present, she is acting as a Managing Director of Svakarma Finance Private Limited . She is the Founder, MD and CEO of Waterfield Advisors, India’s largest independent Multi-Family Office that advises on assets of ~US$3.5bn Mrs. Soumya Rajan Independent Director . Previously worked at Standard Chartered Bank India for 16 years, where she headed their Private Banking Division from 2008 to 2010 . Was recognised by AIWMI in 2019 amongst India’s Top 100 Women in Finance. . He is appointed by Lake District and Kedaara AIF-1. Non-executive nominee . Holds a bachelor's degree in commerce from the University of Mysore and has also completed his Mr. K R Kamath Director fellowship with the Indian Institute of Banking and Finance . Was previously associated with Punjab National Bank and Allahabad Bank as its chairman and managing director . He is appointed by ESCL and Master Fund Non-executive nominee . Holds a post-graduate diploma in management from Indian Institute of Management at Mr. Vivek Vig Director Bangalore . Previously served as the managing director and chief executive officer of Destimoney Enterprises Limited and has also acted as a director on the board of PNBHOUSI. . He is appointed by Lake District and Kedaara AIF-1. He is the Co-Founder and Partner of Kedaara Capital Non-executive Promoter . Worked with McKinsey & Company, Bill & Melinda Gates Foundation etc Mr. Nishant Sharma nominee Director . Holds an M.B.A. from Harvard Business School, and a Dual Degree (B.Tech. and M.Tech) in Biochemical Engineering and Biotechnology from Indian Institute of Technology, Delhi . Also holds Economic Times 40 under 40 Award given to business leaders in India. . He is appointed by ESCL and Master Fund . Previously associated with Matrix India Asset Advisors Private Limited as its vice-president and with Non-executive Promoter Mr. Manas Tandon TPG Capital India Private Limited as its director nominee Director . Holds a bachelor's degree in technology (electrical engineering) from the Indian Institute of Technology, Kanpur and a master's degree in business administration from the Wharton School, University of Pennsylvania . He is appointed by Lake District and Kedaara AIF-1

Mr. Kartikeya Dhruv Non-executive Promoter . Holds a bachelor's degree in arts (economics) from the Dartmouth College, New Hampshire and a master's degree in business administration (finance and entrepreneurial management) from the Kaji nominee Director Wharton School of the University of Pennsylvania . Currently serves as a director at Kedaara Capital Advisors LLP. Source: Company, Ambit Capital research

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Organization structure on the lines of a larger player Organizational structure is designed to handle large balance sheet size. Aavas has separate team for sales, origination and collections. One drawback in the current structure is risk management team does not report independently to the board. Exhibit 99: Organization structure designed to scale from inception

BOARD

CEO

Risk Business Collection IT HR & Admin Operation Data Science CFO Office Management

Chief Business Chief Technology Chief Credit National HR Data Science Chief Financial Collection Head Ops Head Officer Officer Officer Head Head Officer

Business IT infra and People Central Ops Field Collection Technical Head Accounts Acquisition Network Head Processes head

Legal Recovery IT Application HR Payroll and Training Legal Head State Ops Head Internal Audit head and Support Compliance

Marketing RCU Head Admin Head KPO Head CS

Budget & Analytics

Treasury

Source: Company, Ambit Capital research

Exhibit 100: Various options under PMAY scheme

PRADHAN MANTRI AWAS YOJANA (PMAY)

Launched in June, 2015 Launched in April, 2016

Pradhan Mantri Awas Yojana – Urban Pradhan Mantri Awas Yojana - Gramin (Rural) (Ministry of Housing and Urban Poverty Alleviation) (Ministry of Rural Development) 20 million houses by 2022 30 million houses by 2022

Subsidy for Erstwhile Indira Awas Yojana ‘In Situ’ Slum Credit Linked Subsidy Affordable Housing Beneficiary-led To provide environmentally safe and secure pucca Rehabilitation Scheme (CLSS) through Partnership House Construction houses to every rural household by 2022

Economically Weaker Middle Income Middle Income Low Income Group Financial assistance of Rs.0.12mn for plain Section (EWS) Group-I Group – II ▪ (Rs.0.3mn p.a- (Income up to Rs.0.3 Rs.0.6 mn p.a- (Rs.1.2mn p.a- areas; Rs.0.13mn for hilly areas Rs.0.6mn p.a) mn p.a) Rs.1.2mn p.a) Rs.1.8mn p.a) ▪ Provision of toilets at Rs.12,000

Property size Property size Property size Property size ▪ 90/95 days of unskilled wage labor under (Carpet area sq-mt) - 30 (Carpet area sq-mt) - 60 (Carpet area sq-mt) - 160 (Carpet area sq-mt) - 200 MGNREGS

Maximum eligible Loan Maximum eligible Loan Maximum eligible Loan Maximum eligible Loan ▪ Additional loan up to Rs.70,000 amount - Rs0.6mn amount - Rs0.6mn amount - Rs0.9mn amount - Rs1.2mn

Interest subsidy of Interest subsidy of Interest subsidy of Interest subsidy of 6.5% 6.5% 4% 3%

Subsidy under CLSS- Subsidy under CLSS- Subsidy under CLSS- Subsidy under CLSS- Rs267,280 Rs267,280 Rs235,068 Rs230,156

Source: GoI, NHB, Ambit Capital research

March 24, 2021 Ambit Capital Pvt. Ltd. Page 63 [email protected] 2021-03-29 Monday 16:21:34 Aavas Financiers

Financials Income Statement ` mn FY18 FY19 FY20 FY21E FY22E FY23E FY24E Net Interest Income 2,812 4,237 5,080 5,902 6,918 8,545 10,244 Interest Income 4,743 6,839 8,690 10,558 12,379 14,884 17,946 Interest Expense 1,931 2,603 3,610 4,656 5,462 6,339 7,702 Non-Interest Income 201 270 341 371 426 549 695 Total Income 3,014 4,507 5,421 6,273 7,344 9,094 10,939 Operating expenses 1,645 1,841 2,247 2,456 2,741 3,059 3,518 Pre Provisioning 1,369 2,666 3,174 3,817 4,603 6,035 7,421 Profit Provisions 26 89 153 296 263 362 448 PBT 1,343 2,577 3,020 3,521 4,339 5,673 6,973 Less:Tax 412 818 529 810 998 1,418 1,743 Net Profit 931 1,759 2,491 2,711 3,341 4,254 5,230 Source: Ambit Capital research estimates Balance Sheet ` mn FY18 FY19 FY20 FY21E FY22E FY23E FY24E Networth 11,899 18,370 20,979 23,691 27,032 31,286 36,516 Borrowings 27,376 36,533 52,524 66,100 74,845 89,814 112,874 Other Liabilities 1,126 1,366 3,077 3,085 4,199 8,737 11,127 Total Sources of funds 40,401 56,268 76,580 92,875 106,075 129,837 160,517 Investments 45 45 45 45 45 45 45 Loan Book 33,334 47,245 61,808 72,637 89,101 109,529 135,993 Other Assets 7,022 8,978 14,727 20,193 16,929 20,263 24,479 Total Application of 40,401 56,268 76,580 92,875 106,075 129,837 160,517 funds Source: Ambit Capital research estimates Key Ratios % FY18 FY19 FY20 FY21E FY22E FY23E FY24E AUM growth (%) 51.2 45.9 31.2 20.2 20.4 21.4 22.6 Dil Consol EPS growth 43.2 48.7 34.5 8.7 23.2 27.3 22.9 (%) Net interest margin 8.3 8.5 7.4 6.9 6.7 6.8 6.7 (NIM) (%) Cost to income (%) 54.6 40.8 41.5 39.1 37.3 33.6 32.2 Opex (% of AAUM) 4.86 3.68 3.27 2.86 2.66 2.45 2.31 Gross NPAs (%) 0.46 0.47 0.46 1.05 1.35 1.60 1.85 Credit costs (% of 0.09 0.22 0.28 0.44 0.33 0.36 0.36 AAUM) Provisioning Coverage 15.2 21.3 26.1 45.0 47.0 50.0 50.0 Capital adequacy (%) 61.6 67.8 56.0 50.8 48.7 47.0 44.5 Tier-1 (%) 55.9 64.3 53.9 49.0 47.0 45.4 42.8 Leverage (x) 4.4 3.8 4.1 4.6 4.8 4.9 5.2 Source: Ambit Capital research estimates Valuation Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E BVPS (`) 203 247 268 302 345 399 466 Diluted EPS (`) 15.9 23.7 31.8 34.6 42.6 54.3 66.7 RoAA (incl. off-BS) 2.4 3.0 3.1 2.6 2.7 3.0 3.0 ROE (%) 10.3 11.6 12.7 12.1 13.2 14.6 15.4 P/E 151.3 101.7 75.6 69.5 56.4 44.3 36.1 P/BV 11.8 9.7 9.0 8.0 7.0 6.0 5.2 Source: Ambit Capital research estimates

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Institutional Equities Team Research Analysts Name Industry Sectors Desk-Phone E-mail Nitin Bhasin - Head of Research Strategy / Cement / Home Building / Mid-Caps (022) 66233241 [email protected] Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 [email protected] Alok Shah, CFA Consumer Staples (022) 66233259 [email protected] Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 [email protected] Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 [email protected] Ashwin Mehta, CFA Technology (022) 6623 3295 [email protected] Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 [email protected] Deep Shah, CFA Media / Telecom / Oil & Gas (022) 66233064 [email protected] Dhruv Jain Mid-Caps (022) 66233177 [email protected] Jashandeep Chadha, CFA Metals & Mining / Cement (022) 66233246 [email protected] Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 [email protected] Karan Kokane Automobiles / Auto Ancillaries (022) 66233028 [email protected] Mitesh Gohil Banking / Financial Services (022) 66233197 [email protected] Nikhil Mathur, CFA Healthcare (022) 66233220 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 [email protected] Prasenjit Bhuiya Agri & Chemicals (022) 66233132 [email protected] Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 [email protected] Satyadeep Jain, CFA Metals & Mining / Cement (022) 66233246 [email protected] Shreya Khandelwal Banking / Financial Services (022) 6623 3292 [email protected] Sumit Shekhar Economy / Strategy (022) 66233229 [email protected] Udit Kariwala, CFA Banking / Financial Services (022) 66233197 [email protected] Vamshi Krishna Utterker Technology (022) 66233047 [email protected] Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 [email protected] Vinit Powle Strategy / Forensic Accounting (022) 66233149 [email protected] Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 [email protected] Sales Name Regions Desk-Phone E-mail Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 [email protected] Bhavin Shah India (022) 66233186 [email protected] Dharmen Shah India / Asia (022) 66233289 [email protected] Abhishek Raichura UK & Europe (022) 66233287 [email protected] Pranav Verma Asia (022) 66233214 [email protected] Shiva Kartik India (022) 66233299 [email protected] USA / Canada Hitakshi Mehra Americas +1(646) 793 6751 [email protected] Achint Bhagat, CFA Americas +1(646) 793 6752 [email protected] Singapore Srinivas Radhakrishnan Singapore +65 6536 0481 [email protected] Sundeep Parate Singapore +65 6536 1918 [email protected] Production Sajid Merchant Production (022) 66233247 [email protected] Sharoz G Hussain Production (022) 66233183 [email protected] Jestin George Editor (022) 66233272 [email protected] Richard Mugutmal Editor (022) 66233273 [email protected] Nikhil Pillai Database (022) 66233265 [email protected] Babyson John Database (022) 66233209 [email protected]

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Aavas Financiers Ltd (AAVAS IN, BUY)

2,500

2,000

1,500

1,000

500

0 Jun-20 Jun-19 Apr-20 Apr-19 Oct-20 Oct-19 Oct-18 Feb-21 Feb-20 Feb-19 Dec-20 Dec-19 Dec-18 Aug-20 Aug-19

Aavas Financiers Ltd

Source: Bloomberg, Ambit Capital research

March 24, 2021 Ambit Capital Pvt. Ltd. Page 66

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Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark Investment Rating Expected return (over 12-month) BUY We expect this stock to deliver more than 10% returns over the next12 month SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being NOT NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock. POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. Ambit Capital Private Ltd. research is disseminated and available primarily electronically, and, in some cases, in printed form. The following Disclosures are being made in compliance with the SEBI (Research Analysts) Regulations, 2014 (herein after referred to as the Regulations). Disclosures . Ambit Capital Private Limited (“Ambit Capital or Ambit”) is a SEBI Registered Research Analyst having registration number INH000000313. Ambit Capital, the Research Entity (RE) as defined in the Regulations, is also engaged in the business of providing Stock broking Services, Portfolio Management Services, Merchant Banking Services, Depository Participant Services, distribution of Mutual Funds and various financial products. Ambit Capital is a subsidiary company of Ambit Private Limited. The details of associate entities of Ambit Capital are available on its website. . Ambit Capital makes its best endeavor to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by Ambit Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. Ambit Capital and its affiliates/ group entities may or may not subscribe to any and/ or all the views expressed herein and the statements made herein by the research analyst may differ from or be contrary to views held by other businesses within the Ambit group. . This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and Ambit Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss howsoever directly or indirectly, from any use of this Research Report. . If this Research Report is received by any client of Ambit Capital or its affiliates, the relationship of Ambit Capital/its affiliate with such client will continue to be governed by the existing terms and conditions in place between Ambit Capital/ such affiliates and the client. . This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should aware of and take note of such restrictions. . Ambit Capital declares that neither its activities were suspended nor did it default with any stock exchange with whom it is registered since inception. Ambit Capital has not been debarred from doing business by any Stock Exchange, SEBI, Depository or other Regulated Authorities, nor has the certificate of registration been cancelled by SEBI at any point in time. . Apart from the case of Manappuram Finance Ltd. where Ambit Capital settled the matter with SEBI without accepting or denying any guilt, there is no material disciplinary action that has been taken by any regulatory authority impacting research activities of Ambit Capital. . A graph of daily closing prices of securities is available at www.nseindia.com and www.bseindia.com Disclosure of financial interest and material conflicts of interest . Ambit Capital, its associates/group company, Research Analyst(s) or their relative may have any financial interest in the subject company. Ambit Capital and/or its associates/group companies may have actual/beneficial ownership of 1% or more interest in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Ambit Capital and its associate company (ies), may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as an advisor or lender/borrower to such company (ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. However the same shall have no bearing whatsoever on the specific recommendations made by the Analyst(s), as the recommendations made by the Analyst(s) are completely independent of the views of the associates of Ambit Capital even though there might exist an apparent conflict in some of the stocks mentioned in the research report. Ambit Capital and/or its associates/group company may have received any compensation from the subject company in the past 12 months and/or Subject Company is or was a client during twelve months preceding the date of distribution of the research report. . In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, Ambit Capital or any of its associates/group company or Research Analyst(s) may have: . managed or co-managed public offering of securities for the subject company of this research report, . received compensation for investment banking or merchant banking or brokerage services from the subject company, . received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report. . received any compensation or other benefits from the subject company or third party in connection with the research report. . Ambit Capital and / or its associates/group company do and seek to do business including investment banking with companies covered in its research reports. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Additional Disclaimer for Canadian Persons About Ambit Capital: . Ambit Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities. . Ambit Capital's head office or principal place of business is located in India. . All or substantially all of Ambit Capital's assets may be situated outside of Canada. . It may be difficult for enforcing legal rights against Ambit Capital because of the above. . Name and address of Ambit Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2 Canada. . Name and address of Ambit Capital's agent for service of process in the Province of Québec is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada. About Ambit America Inc.: . Ambit America Inc. is not registered in Canada . Ambit America Inc. is resident and registered in the United States. . The name and address of the Agent for service in Quebec is: Lavery, de Billy, L.L.P., Bureau 4000, One Place Ville Marie, Montreal, Quebec, Canada H3B 4M4. . The name and address of the Agent for service in Toronto is: Sutton Boyce Gilkes Regulatory Consulting Group Inc., 120 Adelaide Street West, Suite 2500, Toronto, ON Canada M5H 1T1. . A client may have difficulty enforcing legal rights against Ambit America Inc. because it is resident outside of Canada and all substantially all of its assets may be situated outside of Canada.

Additional Disclaimer for Singapore Persons . Ambit Singapore Pte. Limited is a holder of Capital Market services license and an exempt financial adviser in Singapore, as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore. In Singapore, Ambit Capital distributes research reports. . Persons in Singapore should contact either Ambit Capital or Ambit Singapore Pte. Limited in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of "Accredited Institutional Investors” as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore. Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform either Ambit Capital or Ambit Singapore Pte. Limited.

March 24, 2021 Ambit Capital Pvt. Ltd. Page 67

Aavas Financiers

Additional Disclaimer for UK Persons . All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be reproduced, redistributed or copied in whole or in part for any purpose. . This report is a marketing communication and has been prepared by Ambit Capital Private Ltd. of Mumbai, India (“Ambit Capital”). Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. Ambit is an appointed representative of Aldgate Advisors Limited which is authorized and regulated by the Financial Conduct Authority whose registered office is at 16 Charles II Street, London, SW1Y 4NW. . In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(5) (persons who have professional experience in matters relating to investments) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended). . Ambit Capital is not a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule 15a-6. . Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes should inform them about, and observe any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any such other jurisdictions. . This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. . The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment decisions. Further information is available upon request. No member or employee of Ambit accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents. . The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors. . Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and its affiliates may from time to time render advisory and other services, solicit business to companies referred to in this Report and may receive compensation for the same. Ambit has a restrictive policy relating to personal dealing. Ambit has controls in place to manage the risks related to such. An outline of the general approach taken in relation to conflicts of interest is available upon request. . Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. . Ambit may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.

Additional Disclaimer for U.S. Persons

THIS RESEARCH REPORT IS BEING DISTRIBUTED IN THE US TO MAJOR INSTITUTIONAL INVESTORS UNDER RLE 15a-6 AND UNDER A GLOBAL BRAND OF AMBIT AMERICA AND AMBIT CAPITAL PRIVATE LTD. . The Ambit Capital research report is solely a product of Ambit Capital Private Ltd. and may be used for general information only. The legal entity preparing this research report is not registered as a broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and/or the independence of research analysts. . Ambit Capital is the employer of the research analyst(s) who has prepared the research report. . Any subsequent transactions in securities discussed in the research reports should be effected through Ambit America Inc. (“Ambit America”). . Ambit America Inc. does not accept or receive any compensation of any kind directly from US Institutional Investors for the dissemination of the Ambit Capital research reports. However, Ambit Capital Private Ltd. has entered into an agreement with Ambit America Inc. which includes payment for sourcing new MUSSI and service existing clients based out of USA. . Analyst(s) preparing this report are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Therefore the analyst(s) may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by the research analyst. . In the United States, this research report is available for distribution to major U.S. institutional investors, as defined in Rule 15a – 6 under the Securities Exchange Act of 1934. Additionally, this research report is available to a limited number of individuals as Globally Branded research, as defined in FINRA Rule 2241. This research report is distributed in the United States by Ambit America Inc., a U.S. registered broker and dealer and a member of FINRA. Ambit America Inc., a US registered broker-dealer, accepts responsibility for this research report and its dissemination in the United States. . This Ambit Capital research report is not intended for any other persons in the USA. All major U.S. institutional investors or persons outside the United States, having received this Ambit Capital research report shall neither distribute the original nor a copy to any other person in the United States. In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative of Ambit America Inc., by phone at 646 793 6001 or by mail at 370, Lexington Avenue, Suite 803, New York, 10017. This material should not be construed as a solicitation or recommendation to use Ambit Capital to effect transactions in any security mentioned herein. . This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. . Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have or have had positions, may “beneficially own” as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of the equity securities or may conduct or may have conducted market-making activities or otherwise act or have acted as principal in transactions in any of these securities or instruments referred to herein. . Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have managed or co-managed a public offering of securities or received compensation for investment banking services or expects to receive or intends to seek compensation for investment banking or consulting services or serve or have served as a director or a supervisory board member of a company referred to in this research report. . As of the date of this research report Ambit America Inc. does not make a market in the security reflected in this research report.

Analyst(s) Certification . The analyst(s) authoring this research report hereby certifies that the views expressed in this research report accurately reflect such research analyst's personal views about the subject securities and issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. . The analyst (s) has/have not served as an officer, director or employee of the subject company in the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report. . The analyst(s) does not hold one percent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report. . Research Analyst views on Subject Company may vary based on fundamental research and technical research. Proprietary trading desk of Ambit Capital or its associates/group companies maintains arm’s length distance with the research team as all the activities are segregated from Ambit Capital research activity and therefore it can have an independent views with regards to Subject Company for which research team have expressed their views.

Registered Office Address: Ambit Capital Private Limited, 449, Ambit House, Senapati Bapat Marg, Lower Parel, Mumbai-400013 Compliance Officer Details: Sanjay Shah, Email id: [email protected], Contact Number: 91 22 68601965 Other registration details of Ambit Capital: SEBI Stock Broking registration number INZ000259334 (Trading Member of BSE and NSE); SEBI Depository Participant registration number IN-DP-CDSL- 374-2006; SEBI Portfolio Managers registration number INP000002221, SEBI Merchant Banking registration number INM000012379, AMFI registration number ARN 36358.

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March 24, 2021 Ambit Capital Pvt. Ltd. Page 68 [email protected] 2021-03-29 Monday 16:21:34