Why Aptus Value Housing Finance is a promising buy

Aptus Value Housing Finance stock hit the market in August last year, without too much hype. It has traded below its listing price of ₹333 per share for a long time and even at the current level of ₹335.4, it is following its IPO price range of ₹346-353 each . Affordable housing was not a fancy theme in the market at the time and at almost 7 times the FY21 pound, Aptus was an expensive stock. We had recommended investors avoid the IPO because of its valuations.

But two factors have changed in the company’s favor and investors with a 3-5 year time horizon and high risk appetite may consider buying Aptus shares. One is ratings. At 5.2 times the estimated book for FY22, buoyed by a correction in prices and an improvement in its book value, the stock is well positioned in the affordable housing space. Second, with quality applicants dwindling in the listed housing finance space and banks munching on their pie, affordable housing as a topic is once again gaining attention from the streets.

Why affordable housing

After the HDFC Limited – HDFC Bank mega merger, there might be a shortage of quality candidates in the field of housing finance. Large players such as LIC Housing and PNB Housing have their respective overhangs, and this focuses on mid-sized players such as Repco Home Finance and CanFin Homes. But this is not a pure game about affordable housing and as a result stocks such as Aavas Financiers, Home First Finance and Aptus are in the spotlight.

Of the three, Aptus has a history of superior performance and margin profile. This despite having a smaller loan portfolio than its peers. Even in terms of asset quality, Aptus takes the lead. The stock trades at a premium to Home First, its closest peer, due to its superior yield ratios and dominance in southern states. Although it is at a discount to Aavas, the valuation gap between the two has recently narrowed.


Incorporated in 2009, Aptus was founded by M Anandan, a former Murugappa Group veteran. WestBridge invested two years later and is the lead private equity partner. The size of his loan portfolio is around ₹4,500 crore and everything is concentrated in South India. Tamil Nadu and Andhra Pradesh represent 49% and 30% of its loan portfolio respectively. Aptus’ goal is to meet the needs of the unserved, including small independent borrowers such as carpenters, kirana store owners and small vendors. The focus is largely on rural and semi-urban areas where banks do not have much penetration.

The company has set up an in-house team for the credit assessment, risk underwriting and collections teams, which allows them to have a proprietary database. Targeting first-time buyers, almost 53% of the loan portfolio is generated by mortgages. The average note size is around ₹7 lakh. While the company can go up to 85% loan to value, the average LTV is 38%, mostly for mortgages.

Catering to affordable housing space, borrowers property value is ₹30 – 40 lakh. Lending to the unbanked gives Aptus a track to set its interest rates. With an average return of 17%, sustained through all stages of disruption – whether it’s the 2016 demonization or the pandemic, top returns have been Aptus’ USP. Profitability or net interest margin at 8.89% is also best in class.

That said, the cost of funds at 8% compares to its peers at around 7%. Aptus sources 51% from a bank and given its customer profile, the risk premium assigned by banks may be slightly higher than that of large NBFCs. 77% of its loans are fixed rate, while the other loans are offered at variable interest rates. A reversal of the interest rate regime might not have a profound implication on its MNI, although a marginal and temporary correction of the MNI cannot be ruled out.

Asset quality

Was Aptus preparing to list since FY21? The question is unavoidable if one takes a quick look at its non-performing assets (NPA). Gross NPA stood at 0.7% and 0.6% in FY20 and FY21 respectively. Even as lenders began to restructure troublesome accounts from September 2020, Aptus had no restructured accounts until March 2021. Nine months later, the share of restructured accounts in its total loan portfolio stood at 1.5%. Its gross and net NPAs increased to 1.53% and 1.16% respectively in Q3 FY22, primarily driven by its small business loan portfolio, where gross NPA in Q3 FY22 was 1.25%, compared to 0.58% for home loans and 0.21 percent. cent in LAP wallets.

But, it’s worth giving the company the benefit of the doubt, given that the impact of the second wave of Covid was only pronounced in the June quarter of FY22. Therefore , if the company decided to resolve the asset quality issues around May-June 2021, this is not a deviation from common practice. Aptus’ restructured portfolio is also comfortably within the NBFC’s tolerance range of 2-3% restructured loans.

Even its NPA numbers are better than those of its peers. However, with a third-quarter provision coverage ratio of 25%, investors should prepare for two or three quarters of protracted asset quality issues. Normalization to one percent gross NPA may take a few years. It also largely depends on how quickly the company is willing to grow its portfolio. Post-pandemic, loan growth rate moderated to 28% CAGR from around 44% from FY16 to FY20.

Main risks

Although geographical concentration gives Aptus the upper hand in terms of yield ratios and valuations, it presents a long-term risk. Bandhan’s reliance on East India or SKS Microfinance’s Andhra Pradesh heavy lending books are a few to name the concentration risk that cannot be overlooked.


Focused on the theme of affordable housing

Good execution record

Equity underperformance offers an opportunity

Similarly, Aptus shares’ free float is quite thin at 16.13% as shares of the promoter group and other institutional investors remain locked in due to regulatory requirements. The security could be very sensitive to market fluctuations.

Published on

April 16, 2022

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