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Good quarter, Strong commentary

Pick-up in disbursements and improvement in asset quality were key highlights

Aptus delivered an in-line performance which was characterized by acceleration in disbursement momentum, sustained strong AUM growth, stable portfolio spread and marginal improvement in asset quality. Annualized RoA/RoE for the quarter was 8.1%/17%. Disbursements at Rs7.45bn, higher 15% qoq and 23% yoy, broke-out from the range of Rs6-6.6bn of the preceding four quarters. The acceleration in business activity has been a function of controlled attrition in TN market, addition of branches in other markets and renewed focus on growing SBL. AUM grew 7% qoq and the annual growth was maintained at 28% yoy. Portfolio spread was largely stable at 8.8% even as CoF increased by 11 bps qoq. There was an improvement in portfolio yield with the co. having taken a rate increase of 50 bps w.e.f Sept 1st. Opex was significantly higher qoq due to a) addition of significant branches and employees, b) higher variable payouts on higher business and 3) strengthening of middle management in business and support functions (across IT, Credit, Finance & Technical). There was a decline of 50bps/30bps/10bps in 1+ dpd/Stage-2/Stage-3 loan assets with sequential improvement in collection efficiency. Credit cost was at annualized 3 bps; while coverage on Stage-3 was maintained, it was enhanced on Stage-2 loans.

Management remains confident of 30%+ AUM growth, steady margins, and moderate credit cost

Aptus expects further increase in its disbursement run-rate in coming quarters, aided by stabilized attrition in TN and significant branch additions. Co. plans to add 30-35 branches p.a. and it added 20 branches in H1 FY24 (all in Q2). The distribution expansion strategy would be a combination of increasing penetration in existing markets (AP, TL & KTK) and commencing/scaling-up operations in contiguous markets (OR & MH). Management targets ~Rs32bn disbursements in the current year (30% growth yoy), ~Rs22bn expected under HFC and ~Rs10bn estimated under the NBFC. Loan pre-closure/BT Out rate has been stable at near ~8%/~2.5% annualized for the past many quarters. Portfolio Spread is expected to be maintained between 8.5-9%. Increase in lending rates by 50 bps from Sep 1st and availment of relatively lower-costing NHB borrowings of Rs3bn should help in keeping the spread stable. Management expects collection efficiency to improve further in coming quarters and is focused on improving the Stage2 bucket. Bounce rates have been stable in the range of 15-20%.

Remains a structural BUY; strong growth/quality at palatable valuation

Our FY24/25 earnings estimates are broadly unchanged, and we expect a delivery of 27.5% AUM CAGR and 24% earnings CAGR over FY23-26. With structural uptick in leverage and continuance of dividend payout, the RoE is expected to reach 21% in FY26. Aptus’ business model can deliver 23-25% RoE on optimal leverage of 4-5x. Growth and competition/pricing are less of an issue for the co. as it operates in deeper markets and in customer/ticket-size segment which is below peers. The diversified product mix of Aptus also implies better growth prospects. We believe that long-term investment risk-reward is favourable at current valuation of 3x PABV and 15x PE on FY26 estimates. Aptus remains our most preferred pick in affordable housing space.

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