Aptus Value Housing Finance – Balance act between Housing Finance and Micro Finance

Company Name – Aptus Value Housing Finance India Ltd (Aptus)

Current Share Price – INR 271 (July 19, 2023)

Market Cap – INR 13,478 cr

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1. What is interesting about the stock?

Home is where love resides, memories are created, friends and family belong, and laughter never ends.

We have a strong emotional need for a home. Bare necessities for a person – Roti, Kapda, and Makaan !! (Food, Clothes, and House)

Owning a house holds significant importance in Indian culture, society, and family life. It is considered a crucial milestone and a symbol of stability and success. The Indian culture places a strong emphasis on family ties and traditions, and having a house allows extended families to come together for celebrations, festivals, and important life events. For some Indian families, owning a house is seen as a prerequisite for providing a good education for their children and securing their future, including arranging marriages. Additionally, many Indians consider owning a house an essential part of retirement planning. It ensures a comfortable living space during their golden years, reducing financial worries in old age.

Home is the least risky product (due to this emotional connection) for any finance company as can be seen by a couple of facts:

• Post COVID-19, home loan collection rates were 95-98% in June 2021 vs unsecured loans at 80-85% and auto loans at 85-90%

• Average credit cost (a proxy for riskiness) for housing finance companies was 0.9% (average FY19-21) vs auto finance companies at 1.7% and micro-finance companies at 2.9%

So, this makes the housing finance sector quite lucrative for finance companies, leading to higher competition and lower rates vs. other kinds of loans.

Aptus Value Housing Finance India Ltd, a retail-focused housing finance company (HFC), was incorporated in December 2009. The Company was founded by its current promoter, Chairman and Managing Director, M. Anandan and the other promoter is WestBridge Crossover Fund.

The Company got listed on the stock exchange on August 24, 2021.

Aptus offers customers home loans for the purchase and self-construction of residential property, home improvement, and extension loans; loans against the property; and business loans, which accounted for 58%, 15%, and 21% respectively of its AUM of INR 6,738 cr (as of March 31, 2023). Its target borrowers are from the low to middle-income segments, with an average ticket size of less than INR 10 lakh.

Aptus is primarily focused on self-employed customers (71%) with limited or no documentary evidence of their income and with limited access to funding from banks and larger HFCs – 38% of the customers are new to credit.

Aptus is rural-focused with a geographical presence by adopting a strategy of contiguous expansion across regions and is focused on achieving deeper penetration in its existing markets.

Aptus’ wholly-owned subsidiary, Aptus Finance India Private Limited, extends mortgage loans to small and medium enterprises.

The value proposition that differentiates Aptus are:

• Focus on customer profile – low-income, self-employed, new-to-credit customers in rural markets: Aptus has a higher yield (17-18%) vs other housing finance companies as this segment is largely untapped

• 100% in-house sourcing and evaluation: Key to managing the NPL ratio in the untapped market

• Contiguous expansion in southern states – helps in managing the cost-to-income ratio as the penetration level at each branch improves

  • Tamil Nadu – 43% of AUM as of March 31, 2023

  • AP – 35%

  • Telangana – 14%

  • Karnataka – 8%

Aptus has a higher yield on loans (17%) vs Home First or Aavas at 10-12% driving higher RoA (~8%) vs the competition. RoA and spreads (~8%) of Aptus are closer to a microfinance company than a housing finance company.

The question is whether this kind of RoA and spread can be sustained. Microfinance companies faced challenges in the collection and subsequently got impacted by political interference which triggered regulation to cap interest rates.

Why invest in Aptus?

• Experienced management team and marquee shareholder

• Focus on the untapped market segment

• Low D/E ratio – Company may not need additional equity infusion in near-term

• Loan-to-value (LTV) ratio of less than 50% for ~84% of the portfolio (lower ratio would lead to lower delinquency) vs typical level of 70-80%

2. Key Historical Financials

• Revenue is growing 25-30% since FY20 with strong RoA

• Cost to income ratio of ~20% - which is lower even compared to large banks

• Profit growth in Q4FY23 is slower than revenue growth as the Company has not been able to completely pass the increase in the cost of funding to the borrowers

• RoE of 16% - can further improve as the Company uses debt to fund disbursement in the near term leading to a higher D/E ratio

• Gross NPA of ~1.15% and Net NPA of 0.9%

3. What is my view on company valuation?

Aptus IPO was subscribed 17.2x – significantly oversubscribed by institutional and non-institutional investors (~34x) but a lukewarm response from the retail investors (1.35x). Company issued shares at INR 353 and the share has traded mostly below the issue price. The current price is ~25% discount to the IPO price.

Aptus trades at a P/BV of 4x and P/E (TTM) of 27x. Aavas Financiers trades at a P/BV of 3.7x and P/E (TTM) of 28x & Home First trades at a P/BV of 4x and P/E (TTM) of 32x. Aptus’s valuation is in line with other retail-focused housing finance companies but, on a fundamental basis, a P/BV valuation of 4x is high for any financial services company.

Due to its dominant position in the low-ticket informal housing finance market, the Company has the ability to price its offerings competitively and generate higher yields, which is beneficial for maintaining profit margins. Nevertheless, the loan portfolio carries higher risk and requires continuous monitoring to maintain asset quality. While the stock has a limited trading history, it may be a desirable investment option for high-risk investors seeking superior return ratios. Long-term investors can evaluate entering the stock at a 10-15% discount to the current price.

4. What are the risks to the investment analysis?

Risks to the analysis are:

• A highlighted proportion of non-housing loan (NHL) books; exposure to borrowers with modest credit profiles

• Limited portfolio seasoning

• Geographically concentrated operations make the company vulnerable to political interventions

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About the Author

Insignificant investor.

Disclosure

I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.