Aptus Value Housing Finance India (Aptus), a Chennai-based non-banking finance company that’s into affordable housing, is bringing an IPO on August 10, 2021. The offer, totalling ₹2,735-2,780 crore, includes a fresh issue of ₹500 crore and a secondary stake sale of 13 per cent (pre-issue holding) by a promoter and a few PE investors (including Aravali Investment Holdings, JIH II, GHIOF Mauritius, and Madison India Opportunities IV). Post the issue, the promoter stake would be around 72 per cent.

The company lends to low- and middle-income customers (predominantly self-employed) in rural and semi-urban areas who lack access to formal credit. Amid the current buoyancy in affordable housing, the company has grown its assets under management (AUM) to ₹4,068 crore at a compounded annual growth rate (CAGR) of 34.5 per cent for the two years into FY21. Its profits after tax grew to ₹266.9 crore at CAGR of 54.7 per cent over the same period. It has strong fundamentals driven by healthy return ratios.

Aptus Value Housing Fin fixes IPO price band at ₹346-353

Having said that, in the fast-growing affordable housing space the sustainability of the company’s best-in-class metrics is uncertain. However, other parameters imbibed in their business model do lend some comfort — such as its fully secured retail-focused loan book, low loan-to-value (LTV less than 40 per cent), and quality underwriting.

While it has demonstrated a healthy performance in the past, has good revenue visibility and strong return ratios, the asking price for the IPO seems to have factored in all the positives for the stock. At ₹346-353 apiece, the company is valued 6.9-7 times its FY21 book value (post-issue), leaving very little headroom for appreciation for long-term investors. Considering the valuations, investors can avoid the issue.

Tailwinds far outweigh turbulence in housing finance industry

Its similar-sized (AUM) peer Home First Finance, which was recently listed, currently trades at 3.5 times its FY21 book value. Aptus’s premium valuations over Home First can be attributed to its better operating metrics.

Aavas Financiers, another listed player in affordable housing with reliance on self-employed customers, currently trades at 8.5 times its FY21 book. While Aptus is better than Aavas on several financial metrics (GNPA, return ratios, and so on), its current AUM is almost half that of Aavas. Repco Home Finance, another large peer, trades at just 0.99 times its FY21 book, given its below-par metrics.

Healthy return ratios

Currently, Aptus is present in four southern states — Tamil Nadu (comprising 52 per cent of AUM in FY21), Karnataka (10 per cent), Andhra Pradesh and Telangana (together 38 per cent).

The company offers home loans (52 per cent of FY21 AUM), quasi home loans (13 per cent), business loans (27 per cent), top-up loans (5 per cent) and insurance loans (covers insurance premium for borrowers — 3 per cent of AUM).

With an average ticket size of 5-15 lakh, the company has scaled its loan book to ₹4,068 crore in FY21 (up 28 per cent y-o-y).

Besides healthy yields, its strong capital base (CRAR of 73 per cent pre-issue) and low leverage (1.1 times) have helped bolster the net interest margin (NIM), which was at 9.7 per cent in FY21. Aavas and Home First posted NIMs to the tune of 7.8 and 6.7 per cent, respectively, in FY21.

The company’s strong underwriting capabilities have also helped contain credit costs (at 0.1 per cent of FY21 AUM) and bad loans (GNPA at 0.7 per cent in FY21).

Despite having 190 branches in 75 districts, the company has contained its operating expenses at 2.4 per cent of AUM in FY21. Consequently, its return on average AUM at 5.73 per cent in FY21 has exceeded that of its peers. Its return on equity (RoE), too, was a healthy 12 per cent in FY21.

However, post the issue, the RoE will drop to 11 per cent, below that of Aavas at 12.9 per cent.

Outlook and risks

The company’s business prospects look sanguine. Its retail-only, fully secured loan book with average loan-to-value below 40 per cent across product segments, and underwriting skills (focused on the savings habit of borrowers and so on) are the other positives. Besides, 60-70 per cent of the prepayments in the last three years has been from own source of borrowers (rest being balance transfers to other lenders), which vouches for the quality of customers. The company’s prepayment rates have been at 8, 7.5 and 6 per cent in FY19, FY20 and FY21, respectively.

That apart, the company is eyeing a likely credit re-rating, owing to the increase in its networth post the issue, which, coupled with its strategy to alter its current borrowing mix, could help lower the cost of borrowings.

While the company has reported a pandemic-proof performance in FY21, its collection efficiencies in FY22 so far continue to reflect resilience in its business model. The management indicated that its overall collection efficiencies dropped to 95 and 88 per cent in April and May 2021, respectively, from 100 per cent in March 2021. Thereafter, collections improved to 98 and 99 per cent in June and July 2021, respectively.

The company plans to increase its loan book by continuing to focus on underpenetrated segments. Besides, it plans branch expansions in Maharashtra, Odisha and Chhattisgarh. While its past performance has been promising, the sustainability of its best-in-class metrics could be challenged, given the risky segments it operates in and the threat of competition. While the underpenetrated segments in rural and semi-urban pockets do offer growth viability, earnings may be impacted by credit slippages.