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Gained growth momentum, NIMs stable; ECL provisions inched up

Aptus Value Housing Finance’s (Aptus) Q2FY23 earnings at Rs1.23bn (up 45% YoY/ 4% QoQ), translating into 8.7% RoA and 15.8% RoEs, was exactly in line with I-Sec estimates. The company gained traction in disbursements at Rs6.04bn (up 15% QoQ and 69% YoY), supported improved momentum in AUM growth at 7% QoQ and 33% YoY to Rs59.32bn. NIMs were broadly stable QoQ and core NII grew 39% YoY/7% QoQ to Rs1.91bn (in line with estimate). No lending rate hike has been effected as yet and yields were flat QoQ. Intensity of a decline in 30+dpd and improvement in stage-3 was better than expected. 30+ dpd after rising to 12.98% in Dec’21 has more than halved to 6.32% (9.91% n Mar’22, 6.48% in Jun’22). In line with guidance, Aptus inched up ECL provisions to 1.01% of loans vs 0.92% QoQ. Elevated employee cost pushed operating expenses up by 36% QoQ and 42% YoY and opex to assets rose 33bps QoQ to 2.77%.

We expect revenue and earnings to compound at >25% CAGR over FY22-FY24E and RoAUMs to sustain at >7.5% by FY24E. Assigning a valuation of 4.5x FY24E book (roll forward from Sep’23E), we revise our target price to Rs357 (earlier: Rs339). Maintain ADD.

* Sustained collection efficiency supports moderation in 30+ dpd bucket as well as improvement in stage-3: Collection efficiency after a spike in Mar’22 moderated following seasonality to 100.21% (101.17%/ 103.14%/ 98.28%/ 99.66%/ 94.98% in Jun22/ Mar22/ Dec21/ Sep21/ Jun21). 30+ dpd after rising to 12.98% in Dec’21 has more than halved to 6.32% (9.91% in Mar’22, 6.48% in Jun’22). Intensity of decline in 30+dpd has been faster than expected. Stage-2 after contracting 400bps in Jun’22 rose 31bps QoQ to 5.03% (4.72%/ 8.72%/ 11.67%/ 8.68% in Q1FY23/ Q4FY22/ Q2FY22/ Q4FY21). The company is targeting to reduce stage-2 to 4.7% in coming 1-2 quarters. However, stage-3 has declined to 1.47% (1.75%/ 1.19%/ 0.81%/ 0.67% in Q1FY23/ Q4FY22/ Q2FY22/ Q4FY21). Overall, we expect stage-3 to settle at 1.5%/1.25% in FY23E/FY24E, respectively.

* ECL coverage inched up to 1.01% (vs 0.92% in Jun’22 and 0.80% in Mar’22): Coverage on stage-3 and stage-1 was flat QoQ at 25% and 0.34%, respectively. Nonetheless, it has significantly inched up its coverage ratio on stage-2 to 6.42% from 3.46% QoQ. In line with its guidance, it increased ECL provisioning to 1.01% of loans vs 0.92% QoQ. Going ahead, the company would maintain ECL provision on the guided lines of near 1% and stage-3 coverage ratio at 25%. Despite inch up in ECL provisions, credit cost was well managed at <65bps, which was the lowest in the past six quarters and below our estimate. We expect credit cost to settle at 75bps/65bps in FY23E/FY24E, respectively.

* Gained momentum in AUM growth at 33% YoY / 7% QoQ; disbursements jumped 15% QoQ and 43% YoY: Disbursements grew 43% YoY/ 15% QoQ to Rs6.04bn that supported AUM growth of 33% YoY and 7% QoQ to Rs59.3bn. Repayment/prepayment rate was broadly stable at 3.5% (3.6% QoQ). Annualised BT-out rate is 2.5-3.0% and additionally 5% are self-employed customer accumulate accumulating savings via other money lenders and then come for a pre-closure. In terms of AUM mix, home loans constitute 58% (flat QoQ), small business loans 20%, quasi home loans 15%, top-up loans 4% and insurance loans 3%. Core strength lies in the customer profile it serves: First-time home buyers, self-employed customers (accounting 72% of its AUM vs 71% in Q1FY23), low-income group constituting 76% (76% in Q1FY23) of its customers, focused on tier-3/4 cities with 71% (68% in Q1FY23) of its AUM being from customers located in rural areas and 38% (40% in Q1FY23) of its AUM is towards customers who were new to credit.

We believe Aptus is well positioned to capitalise on growth opportunities and is equipped with the necessary ingredients, namely capital, liquidity and franchise investment to compound AUM at 28-32% CAGR over the next 3-5 years.

* No lending rate effected as yet and yields were flat QoQ; cost of funds too were up by only 2bps QoQ; NIMs moderated a tad to 9.15%: Almost 78% of its loan book is fixed in nature. Given that it is able to optimise the borrowing cost, it has not yet hiked lending rates. Hence, it has not witnessed any rise in yields post the repo rate hike by the RBI. Most floating bank borrowings are linked to 1-year MCLR and hence, repricing is happening with a lag. Any pressure of rise in funding cost in next couple of quarters will be offset by drawdown of Rs5bn of low cost NHB borrowings and refinancing of high cost IFC borrowing at lower rates. The company has enough liquidity wherein it is carrying Rs10bn of cash and cash equivalents and additional Rs5bn undrawn sanction from NHB, which is likely to provide cushion to the cost of funds in a rising interest rate scenario. Hence, management is of the view that cost of borrowing for FY23 may remain stable around the current levels of 7.7%.

NIMs moderated a tad by 2bps QoQ to 9.15% (9.17%/ 9.15%/ 8.89%/ 9.09%/ 9.03% in Q1FY23/ Q4/ Q3/ Q2/ Q1FY22). This was purely driven by funding cost rise wherein borrowing cost rose 2bps QoQ to 7.70% (7.68%/ 7.74% / 8.00% / 7.86%/ 7.96% in Q1FY23/ Q4/ Q3/ Q2/ Q1FY22) while yields were stable QoQ at 16.85% (16.85%/ 16.89%/ 16.89% / 16.95% / 16.99% in Q1FY23/ Q4/ Q3/ Q2/ Q1FY22). Company’s rating was upgraded to AA- from A+ by CARE during Q1FY23 We are expecting spreads to settle at >9.5%/>9.0% in FY23E/FY24E, respectively.

* Opex as anticipated caught up pace led by rise in employee cost; opex to assets up 33bps QoQ: Operating expenses as anticipated witnessed an increase of 36% QoQ and 42% YoY to Rs446mn. As a result, opex to assets improved 33bps QoQ and 3bps YoY to 2.77% (2.44%/ 2.53%/ 2.61%/ 2.74%/ 2.78% in Q1FY23/ Q4FY22/ Q3FY22/ Q2FY22/ Q1FY22). Rise in opex was largely attributed to employee cost which was up 49% QoQ and 38% YoY. Factors driving it include: i) Company’s salary appraisal cycle is May to April and hence, full effect of increments was reflected in Q2FY23, ii) 15% QoQ rise in disbursements also led to higher incentives to sales staff. It added 2 new branches in Q2FY23 and is looking to add another 15 branches in H2, which would keep opex to assets elevated in H2 as well. Overall, we are looking for opex to assets to settle at 2.7%/ 2.6% in FY23E/ FY24E, respectively.

* Key risks: 1) Succession planning, smooth and seamless transition post founderpromoter’s retirement; 2) rebalancing of mix in favour of housing loans.

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