This article first appeared on GuruFocus .
Release Date: November 11, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
Positive Points
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AAVAS Financiers Ltd ( BOM:541988 ) received a positive outlook revision from CARE Ratings, indicating potential for a future rating upgrade to AA+.
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The company reported a strong 36% quarter-on-quarter and 21% year-on-year growth in disbursements during Q2 FY26.
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Asset quality remains robust with gross non-performing assets (GNPA) stable at 1.24% and 1-day past due (DPD) improving to 3.99%.
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Net profit for Q2 FY26 grew by 11% year-on-year, driven by an 18% growth in net interest income.
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The company is expanding its branch network, with plans to add 20 to 25 branches in the second half of the year, enhancing its presence in Tamil Nadu and other regions.
Negative Points
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The cost-to-income ratio remains relatively high at 43.7%, although it has shown some improvement.
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Incremental business yields are lower than the existing portfolio, leading to a slight compression in overall yields.
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There are localized asset quality pressures in specific regions such as Karnataka and Madhya Pradesh, requiring cautious monitoring.
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Employee attrition remains a challenge, although it has improved slightly compared to the previous year.
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The company faces competitive pressures in maintaining its pricing strategy amidst a potential softening of interest rates.
Q & A Highlights
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Warning! GuruFocus has detected 6 Warning Signs with BOM:541988.
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Q: Why has the spread expanded over the last two quarters despite a slight decline in yields? Where do you see yields settling in the near term? A: (CFO) Our incremental business yield is lower than our existing portfolio, which naturally pulls down the blended portfolio yield. In the current environment, we are focusing on better quality, lower-risk customers, even if it means a slight compression in yields. We are also focusing on higher-yielding segments and maintaining pricing discipline. We will continue to evaluate the cost of funds and adjust our PLR as necessary based on market conditions.
Q: When do you expect the cost-to-income ratio to converge towards the industry average? A: (CFO) The current movement in the OpEx to asset ratio is largely operational and timing-related. We have made investments in branch and distribution expansion, which temporarily elevates the cost-to-asset ratio. As disbursement scales and technology benefits accrue, we expect the operating efficiency to improve steadily, aiming to bring the OpEx to asset ratio below 3% over the medium term.
Q: Can you explain the recent improvement in assignment income? A: (CFO) Our assignment volumes have remained consistent, but the rates have improved significantly. We used to do assignments at around 8.5% last year, and now we are doing them at 7.5%, which is a 100 basis points saving. This has positively impacted our income generation from assignments.
Q: Are there any specific geographic areas or customer segments showing stress in asset quality? A: (CRO) We have observed some stress in specific geographies like Karnataka and Madhya Pradesh due to industry-related disruptions and microfinance issues. However, these are localized and not material at the portfolio level. We have taken corrective actions, such as tightening credit filters and slowing down disbursements in affected areas.
Q: What are the key drivers for your aspirational target of achieving 20%+ annual growth over the next five years? A: (CEO) Our growth will be driven by geographic expansion, employee productivity enhancement, and investment in technology and sourcing channels. We plan to expand our branch network, improve productivity, and leverage digital channels to achieve our growth aspirations.
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
