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Stable management, in-house ops, tight control on asset quality to drive earnings

We met Aptus Value Housing Finance’s (Aptus) newly appointed MD Mr. P Balaji and Sales, IT and collection head to get a sense of the underlying business trend in AHFC space and how Aptus is placed to sustain ~30% AUM growth in medium term. Our interaction with the top management suggests that with stable management team and focused approach (founder owning ~25% in company and would hold executive chairman position till Dec’24), 100% in-house operations helping in lowering customer churn and maintaining customer quality, AUM mix driving steady 17% yield (one of the highest within AHFC space) and tight control on asset quality, the company is well positioned to outpace industry AUM growth and sustain industry- leading profitability in medium term. It delivered 30% AUM growth and >8% RoA in FY23.

The 30+ dpd bucket, after rising to 12.98% in Dec’21, has steadily declined to 5.9%, thereby, reflecting its borrower resiliency and its strong credit model. GNPL further moderated to 1.15% and NNPL to 0.86% with PCR at 25% as on Mar’23. Maintain BUY with TP of Rs325, as we value the stock at 4.0x on Sep-24 BVPS.

* 100% in-house operation to build unique ‘Aptus culture’. Since its inception in 2010, Aptus has built its organisation in two key pillars – a) contiguous expansion strategy - go deeper in existing states and then tap new states and b) preference for in-house operations, right from customer sourcing to collections, to build unique ‘Aptus culture’ (thrive for highest customer satisfaction). Its customer sourcing channel includes 231 branch network, customer and referral app and social media advertising, thereby, ensuring 100% customer acquisition via own channel and 0% from DSA / builders. Its full in-house team consists of 1,346 employees in sales, 257 in credit, 220 in legal & technical and 437 in collections. Further, Aptus always promotes internal talent to higher roles – currently most of its Branch Managers and state heads are internally grown people.

* SBL – key focused product given high yield at 21% and amongst very few HFCs having separate NBFC license. The management highlighted that while home loan would continue to remain its largest loan product, incrementally, it would focus on scaling small business loans. This is led by significantly high yield at 21% vs 14-15.5% yield in home loans and flexibility in growing SBL business at an accelerated pace given Aptus is amongst very few HFCs to also have a separate NBFC for SBL business. Its superior yields return ratios are likely to be much higher than its consolidated RoA of >8% in FY23. SBL would be carve out as a separate vertical for focused approach.

* Underpenetrated branches in existing states, entry into new states like Odisha and Maharashtra to drive growth in coming years. It added 23 branches in FY23 and is planning to add 30 more branches in FY24. Of the incremental branches, it would open 2-3 branches in new states like Odisha and Maharashtra while balance branches will be set up in Telangana and Karnataka. Further, of its total 231 branches as on March’23, 61 branches have <3-year vintage of which 27 branches are only <1-year-old. AUM per branch for <1-year-old branches stands at Rs16.4mn, Rs175mn for branches with 1-3-year vintage and Rs359mn for branches with >3-year vintage. Aptus is strategically planning to deploy higher sales officers in <3-year-old branches to improve branch productivity and the same would drive AUM growth in near term.

* Contiguous expansion strategy with clear focus on attaining leadership position in states where it operates. Aptus started its housing finance journey from Tamil Nadu in 2010 and since then it strategically opted contiguous expansion approach rather than entering states that are far away from existing operating states. It focuses on going deeper in one state and attain leadership position with focus on having at least 1 branch for every 70-80 kilometres. As on Mar’23, it has 86 branches each in Tamil Nadu and Andhra Pradesh and is gradually expanding in neighbouring states like Telangana and Karnataka with 36 and 21 branches, respectively. Further, it opened 2 branches in Odisha in FY23 and is also planning to open 2-3 branches in Maharashtra in FY24. Deep presence enables closeness to customer which in turn ensures quicker customer service and thus higher referrals.

* Asset yield at 17%, one of the highest within AHFC space, a key enabler to industry-leading RoA at >8%. Aptus’ blended portfolio yield is much higher at 17% as compared to 13.1% for Aavas and Home First. Favourable AUM mix with non- home loan (yields between 15-21%) contributing 42% of total AUM and share of new-to-credit customers at 38% (not price sensitive) are key enablers for Aptus’ higher asset yield.

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

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