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Aptus delivered an in-line performance wherein spread compression was partially offset by lower-than-estimated credit cost. AUM growth was marginally below expectation on account of lower disbursements (flat qoq) and higher portfolio run-off (annualized rate 15.5% v/s avg 13% of past 4Qs). Asset quality witnessed improvement with 30+ dpd declining by 20 bps qoq to 6.3% (though slight increase in abs. terms, but write-off was negligible). RoA/RoE were largely maintained at 8.5%/16% respectively.

Growth expected to remain in 25-30% range

Disbursements during the quarter were slightly impacted by increased attrition in the TN region (portfolio grew by <3% qoq). The home market accounts for 44% of AUM. With requisite people/positions replenished now, Aptus expects disbursements performance to be better in Q4 FY23. In other southern states, the business velocity remains strong particularly in AP which has been consistently growing ahead of overall loan growth supported by persistent addition of branches. The co. has also been adding employees in many of the existing branches. Pre-closure rates have been under control; annualized 5-6% from own money and 2-3% core BT Out. Management believes that AUM growth of 25-30% pa can be maintained even without tapping any new states. Co. would be adding 15-20 branches every year.

Spread witnesses some compression; asset quality improves

With 78% of loan portfolio on fixed rate (through the tenor) and Aptus having taken its first rate hike only in Q3 FY23, the overall portfolio yield was largely unchanged. CoB increased by 20 bps qoq reflecting major reliance on banks, significant incremental borrowing from NHB in the quarter and benefits from recent credit rating upgrade. Portfolio spread came-off by 15 bps qoq to 9%. Growth in Stage-2 and Stage-3 assets was below the overall loan book, depicting strong collections and controlled flow fwd. This along with negligible write-offs drove modest credit cost of 50 bps. ECL coverage on Stage-2 assets was marginally enhanced.

Valuation palatable in context of long-term growth/RoE trajectory

Our FY23/FY24 earnings estimates undergo upgrades of 5-6%. We estimate AUM/earnings CAGR of 27%/26% over FY22-25 with avg RoA delivery of 7.3% and RoE reaching 17% by FY25. Structurally high growth prospects and return metric (20- 24% RoE on gearing of 2.5-3x) make valuation of 3.4x FY24 P/ABV palatable. We retain BUY with 12m PT of Rs380. Trajectory of AUM growth and cost ratios would be closelywatched in the coming quarters.

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