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Strong performance, succession addressed and palatable valuation

Aptus delivered an in-line performance characterized by resumption of strong disbursements momentum (attrition in TN impacted originations in Q3), robust AUM growth (up 7% qoq/30% yoy - marginal BT Out), resilient portfolio spread (only a
marginal decline), pick-up in distribution investments (highest branch addition since listing), and significant improvement in GNPLs (restrained credit cost despite coverage increase). RoA/RoE were stable at 8.4%/16.3% respectively.

Addressing the succession decision well ahead of time, the Board elevated Mr. P Balaji (CFO & ED) to the post of Managing Director (term of 5 years) and Mr. M Anandan has been redesignated as Executive Chairman for his remaining term till Dec’24. Mr. John Rayappa (CRO) has been appointed as the CFO.

Our FY24/FY25 earnings estimates remain largely unchanged. We estimate AUM/earnings CAGR of 26%/23% over FY24-25 with avg RoA delivery of 7.2% and RoE surpassing 17% by FY25. Structurally high growth prospects and return metric
(20-24% RoE on gearing of 2.5-3x) make valuation of 2.8x FY24 P/ABV palatable. We retain BUY with 12m PT of Rs350. Trajectory of AUM growth and cost ratios would be closely watched in the coming quarters.

Stepping the peddle on network addition and small business loans

After being slightly impacted by increased attrition in TN region during the preceding quarter, the disbursement run rate increased sequentially to Rs6.6bn from Rs6bn. AUM growth was stronger in AP and TL markets which grew by 9% and 14% respectively over Q3 FY23. Portfolio growth in TN was marginally better than previous quarter, and this along with addition of 4 new branches in the state indicated stabilization of attrition issue. Significant branches were added in AP and TL regions too in Q4 FY23, where growth has been robust over the past couple of years. Aptus plans to add 40 branches in FY24 (23 in FY23), which will comprise addition of 2-3 in OR, entry in MH by opening a couple of branches and increasing network significantly in KTK and TL. There is no plan to add more branches in TN and AP as these states have been widely covered. During the quarter, the co. also stepped the peddle on Small Business Loans which grew 29% qoq after being largely steady in past three quarters.

Spread was stable; opex rises on distribution investments

Aptus’ CoF has seen a limited increase of 40 bps in this rate cycle (20 bps in Q4 FY23) owing to about 60% borrowings being on fixed rate, floating rate borrowings from banks mainly linked to 1-year MCLR and credit rating upgrade calibrating the credit
spread on bank loans by 25-50 bps. Consequent to this, the co. has raised its lending rate only once by 50 bps in Nov’22 (notably, 77% of loan portfolio is on fixed rate). Aptus is not planning another rate hike, as it does not expect any significant increase in CoF hereafter. Opex growth in the quarter was higher at 12.5% qoq/54% yoy, due to significant number of branches added. Opex/Asset ratio has seen an increase since the start of FY23.

Asset quality improves

The 30+ dpd portfolio/GNPLs declined from 6.3%/1.4% to 5.9%/1.15% with marginal write-offs (Rs30mn), depicting strong collections, significant NPL recoveries and controlled flow fwd. ECL coverage on Stage-1 and Stage-2 assets was marginally raised.
Credit cost for the quarter was benign at 50 bps.

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