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Company Overview:

“Aptus Value Housing Finance” is a retail-focused housing finance company that primarily serves low and middle-income self-employed customers in the rural and semi-urban markets of India. The company offers home loans to retail customers to purchase homes, construct residential property, house improvement and extension, loans against property, and business loans. It undertakes all types of lending activities such as sourcing, underwriting, valuation, and legal assessment of collateral, credit assessment, and collection. The company’s only segment being providing long term housing finance, loans against property, and refinance loans. Geographically, it derives revenue from southern India (ex. Kerala), Tamil Nadu, AP, Telangana and Karnataka.

Investment Argument:

Best in class ROA: The Company has consistently delivered ROA of more than 6% since FY16. A high capital base and lower leverage keeps the ROE at a standard level of above 12%. A best in class ROA led by superlative NIMs (despite higher COF) along with controlled operating expenses (C/I ratio: ~22%). We believe the company’s ROA will stay above 7% in coming years driven by exceptional NIMs of above 9%. However, we believe, the yields (YOA: 17% on 2QFY22) may squeeze marginally. Nevertheless, lowering COF (7.9% on 2QFY22) may keep the spread (as well as NIMs) intact. We are expecting NIMs of above 10% in FY22E. The reducing operating margin (C/I: 21% on 2QFY22) is likely to deliver 30% PPOP growth for FY22E. We estimate a ROA/ROE of 7%/15% for FY22E.

Collection efficacy level high; Negligible NPA formation: Collection efficiency improved to precovid level and stood at 99.7% in Sept’21 compared to 95% in Jun’21. Further, 30+ DPD loan also declined to 10.1% in Sept’21 from 11% in Jun’21, which is still higher vs. the low of 8.7% in Mar’21. The management expects further improvement in 30+DPD in the coming quarters. The company’s Gross Stage – 3 stands a 0.8% of loan portfolio. Despite covid and various lockdowns the collection efficiency remain robust and asset quality remained unharmed. We are expecting a Gross stage – 3 of 60bps and Net Stage – 3 of 20bps for FY22E. Furthermore, we estimate an ECL provision (PCR) of 26%. A lower stress is likely to keep the credit cost in check, which may translate into better profitability in coming years.

Robust Capital position; Strong ALM: Aptus has healthy capital position (Tier 1: ~100% of RWA) post equity infusion. The capital won’t be a concern for balance sheet growth. We believe, the company will clock a credit growth of ~25% in coming years. Aptus has comfortable liquidity position with cash & cash equivalents of ₹7.4bn (as on Sep’21) and ₹8.2bn available for business up-to March’22. The company also has strong ALM practices. As on Sep’21, Aptus carries an ALM surplus of ₹8.3bn for <3months and ₹2.1bn for 1 – 3 Years.

Outlook and Valuation:

Aptus would continue to command a premium valuation, as it delivers best-in-class ROA among its peers, led by continued focus on affordable housing in Tier-II/III cities along with rigorous underwriting practice, which has helped it to withstand covid-led disruptions. We expect strong AUM growth, stable NIM of 10.6% and opex at 2.2% of average asset will help Aptus to deliver strong PAT (27% CAGR) over FY21-FY24E. We value the company at 7.1xFY24E book value and arrive at target price of ₹477.

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