Aptus Value Housing Finance stock hit the market in August last year, without much hype. It traded below its listing price of ₹333 a share for a long period and even at the current level of ₹335.4 trails its IPO price band of ₹346 – 353 apiece. Affordable housing wasn’t a fancied theme in the market back then and at nearly 7 times FY21 book, Aptus was an expensive stock. We had recommended investors to avoid the IPO owing to its valuations.

But two factors have changed in the company’s favour and investors with a 3 – 5 year horizon and a high risk appetite can consider buying Aptus stock. One is valuations. At 5.2 times FY22 estimated book, driven by a price correction and an improvement in its book value, the stock is well positioned in the affordable housing space. Secondly, with the quality candidates shrinking in the listed housing finance space and banks eating into their pie, affordable housing as a theme is once again catching the street’s attention.

Why affordable housing

Post the mega HDFC Limited - HDFC Bank merger, there may be a shortage of quality candidates in the housing finance space. Large players such as LIC Housing and PNB Housing have their respective overhangs, and this shifts focus on mid-sized players such as Repco Home Finance and CanFin Homes. But these are not a pureplay on affordable housing and hence stocks such as Aavas Financiers, Home First Finance and Aptus come to limelight.

Among the three, Aptus has a history of superior return and margin profile. This is despite having a loan book smaller than peers. Even in asset quality terms, Aptus takes a lead. The stock trades at a premium to Home First, its nearest comparable, because of its superior return ratios and its dominance in the southern states. While it is at discount to Aavas, the valuation gap between the two has narrowed recently.

Business

Incorporated in 2009, Aptus was founded by M Anandan, a former veteran in Murugappa group. WestBridge invested two years later and is the major private equity partner. Its loan book size is about ₹4,500 crore and all of it concentrated in south India. Tamil Nadu and Andhra Pradesh account for 49 per cent and 30 per cent of its loan book respectively. Aptus’ objective is to cater to the unserved and these included small-time self-employed borrowers such as carpenters, kirana shop owners, small-time vendors. The focus is largely in the rural and semi-urban areas where banks don’t have much penetration.

The company has built an in-house team for credit appraisal, risk underwriting and collection teams and this enables them have a proprietary database. Targeting the first-time home buyers, nearly 53 per cent of the loan book is generated by mortgages. Average ticket size is about ₹7 lakh. While the company can go up to 85 per cent loan to value, the average LTV is 38 per cent , largely for mortgages .

Catering to the affordable housing space, the property value of borrowers is ₹30 – 40 lakh. Lending to the unbanked gives Aptus a runway in fixing its interest rates. At an average yield of 17 per cent, maintained at all stages of disruption – whether 2016’s demonisation or the pandemic, superior yields have been Aptus’ USP. Profitability or net interest margin at 8.89 per cent is also the best in class.

That said, cost of funds at eight per cent compares higher to peers at about seven per cent. Aptus sources 51 per cent of its funds from bank and given its customer profile, risk premium ascribed by banks may be slightly higher compared to large NBFCs. 77 per cent of its loans are fixed rate book, while the remaining loan are offered at variable interest rates. A reversal in the interest rate regime may not have a far-reaching implication in its NIM, though a marginal and temporary NIM correction cannot be ruled out.

Asset quality

Was Aptus preparing itself for listing since FY21? The question is unmissable if one gives a cursory glance of its non-performing assets (NPA). Gross NPA stood at 0.7 per cent and 0.6 per cent in FY20 and FY21 respectively. Even as lenders started restructuring the troublesome accounts from September 2020, Aptus had no restructured accounts till March 2021. Nine months later, the share of restructured accounts to its total loan book stood at 1.5 per cent. Its gross and net NPAs rose to 1.53 per cent and 1.16 per cent respectively in Q3 FY22, largely led by its small business loans portfolio, where gross NPA in Q3 FY22 was 1.25 per cent, as against 0.58 per cent in home loans and 0.21 per cent in LAP portfolios.

But, its worth giving the company benefit of doubt, considering that the impact of the second wave of Covid was pronounced only in June quarter of FY22. Hence if the company decided to address the asset quality issues towards May - June 2021, its not a deviation from common practices. Also Aptus’ restructured book is at comfortable level compared to NBFCs tolerance band of two-three per cent restructured loans.

Even its NPA numbers are better than peers. However, with Q3’s provision coverage ratio at 25 per cent, investors should brace for two-three quarters of extended asset quality pain. The normalisation to one per cent gross NPA may be some years away. Much of it also depends on how fast the company is willing to grow its book. Post pandemic, loan growth rate moderated to 28 per cent CAGR, while it was around 44 per cent from FY16 – FY20.

Key risks

While geographic concentration is giving the upper hand for Aptus in terms of return ratios and valuations, it does pose risk in the long-term. Bandhan’s dependence on eastern India or the then SKS Microfinance’s Andhra Pradesh heavy loan books are a few to name on how concentration risk cannot be overlooked.

Why
Levered to affordable housing theme
Good execution track record
Stock underperformance offers opportunity

Likewise, the free float in Aptus stock is quite thin at 16.13 per cent, as shares of the promoter group and other institutional investors remain locked-in due to the regulatory requirements. The stock could be highly prone to market fluctuations.