Hello all,
Aptus Value Housing listed recently in the IPO rush and the valuation is not different from many other hot IPOs. But as a method of investing, it is importatnt to understand the business first and then look at valuation in conjecture.
Aptus is a South India focussed HFC/NBFC operating in two segments, housing loans and Small business loans. It was incorporated in 2010 in TN and had since then spread to other parts of South India. It was founded by Mr Anandan, who is a CA and has worked in Murugappa group for 3 decades at leadership levels. Post his retirement he started Aptus. Salute to his entreprenuership at this stage of life. The current branch network and % AUM split is as below:
| State | No. of branches | % AUM |
|---|---|---|
| TN | 79 | 50% |
| AP | 69 | 29% |
| TEL | 29 | 11% |
| KAR | 21 | 10% |
The company has guided to move into Maharashtra, Orissa and Chhatisgarh market to reduce geographic concentration risk
Total AUM is around 4500 Cr. and recent quarter disburesements were around 420 Cr. Below is the lending profile:
| Asset Type | Contribution |
|---|---|
| Housing | 54% |
| Quasi Housing | 16% |
| SBL | 22% |
| Top Up | 4% |
| Insurance Loans | 4% |
Moreover below are some details of customer profile:
| Customer Type | Contribution |
|---|---|
| LIG | 73% |
| Self employed | 72% |
| Rural | 65% |
In short we can summarize that Aptus lends primarily to underbanked community which has limited documentary evidence of income and credit profile. 93% of loans are below Rs. 10 lacs, which is expected and provides granularity to book.
Below are some key operating parameters:
| Data | |
|---|---|
| Yield | 17.0% |
| Cost of borrowing | 7.9% |
| NIM | 9.1% |
| ROA | 7.4% |
| ROE | 14.1% |
| Opex to Asset | 2.7% |
Considering it lends to high risk individuals the yield is high, but it is low cost of borrowing which is allowing it have NIM of 9%. For reference HDFC has 5.8% as COF(it has >30% of it through low cost deposits) compared to 7.9% for Aptus while the yield is 8.1% for HDFC compared to whopping 17% for Aptus. I understand HDFC is not the right comparison since both lend to very different type of customer but it is more to understand the high yields in comparison to COF. We will do a comparison with Aavas later which is very much in similar space.
Below is the liability mix for Aptus:
| Source | Contribution |
|---|---|
| Banks | 50% |
| NHB | 29% |
| IFC/MF | 16% |
| Securitisation | 5% |
Company enjoys A+ credit rating for long term funds and intends to improve this further to reduce cost of borrowing.
As we see a large part of funding is long tenure funding from banks (SBI,Axis,HDFC etc.) and NHB, it has decent liability franchise. No funding is from short term commercial papers. Management has guided to maintain securitization at <5% which in my opinion is a good sign, people may have differing view, which is absolutely fine.
The company has gearing of just 0.9 which allows it to grow significantly from here without any capital raise, to me this is huge positive.
The company has demonstrated good return ratios and capital efficiency. Below are key figures:
| Data | |
|---|---|
| ROA | 7.4% |
| ROE | 14.1% |
| Opex to Asset | 2.7% |
| Cost to Income | 24% |
The company has brilliant RoA aided by good spreads and low credit cost. The opex to asset ratio is also good for the nature of business. As a reference HDFC has opex/asset of 0.21 and cost to income of 8% which is quite understanble since the average ticket size is 3X of Aptus and sales/branch is also significantly higher due to matured network. Since Aptus is opening new branches at fast pace, it takes time for these to generate optimum sales. This should definitely improve in future as branches season.
Now coming to most important parameters for any financial institution, risk management. The company has multiple sources of lead generation but all loan approvals are done by central team only. This avoids the practice of bad underwriting to show growth and earn incentives by field team. The entire collection and legal recovery team is also inhouse and not outsourced to have better control. The underwriting performance has been good.
| Data | In Cr |
|---|---|
| Gross St 3 | 36 |
| % portfolio | 0.8% |
| ECL provision st 3 | 9 |
| Net St 3 | 27 |
| PCR | 25% |
| NNPA | 0.60% |
| 30+ DPD | 10% |
Gross NPA are 0.8% of book and with ECL provision PCR is at 25% which is inadequate in my view, i would like this to be >50%. But if we look in absolute terms for this to reach 50%, only 9 Cr more needs to be provisioned which is quite insignificant comapred to 69 Cr reported profit for Sep’21 quarter. Maybe management is confident of this getting out of St 3. Also 30 days DPD is at 10% while 90 days is at 0.8% which shows that the company has good followup team which makes sure 30 DPD does not move into 90 DPD, also considering the customer profile(40% are new to credit) it is quite possible a lot of this is unintentional and owing to a miss in payment rather than genuine cash flow challenges or fraud.
The company has increased sales at rate of 47% and profit 66% CAGR in last 5 years.
Comparison
Aavas is the right benchmark to compare Aptus against. It also started at similar time of 2011 in Jaipur. It is predominately North and West focussed compared to Aptus which is South focussed. It is double in AUM and have 300 branches. Liability mix is also similar, but there is good difference in profitability.
| Data | Aavas | Aptus |
|---|---|---|
| AUM | 10200 | 4482 |
| Disbursement | 1364 | 421 |
| Gross ST 3 | 0.96% | 0.80% |
| NNPA | 0.72% | 0.60% |
| NIM | 7.80% | 9.1% |
| Opex to Asset | 3.2% | 2.7% |
| ROA | 3.25% | 7.4% |
| ROE | 12.20% | 14.1% |
| Yield | 13% | 17.0% |
| Cost of borrowing | 7.20% | 7.9% |
| 30+ DPD | 9% | 10% |
| Gearing | 2.8 | 0.9 |
| PCR | 26% | 25% |
As we see there is big difference in yields with COB is slightly higher for Aptus and hence Aptus is better NIMs and RoA as well. Low cost is also aiding profitability.
Both the company have ALM surplus so does not seem to be a big risk from liquidity perspective. Both the cos. have survived demonetization, NBFC crisis and Covid lending demonstrating their resilience.
But purely from profitability and growth capital availability Aptus seems to be better placed. But Aavas has been in capital market and its scrutiny for longer that lends some comfort compared to Aptus. Both have some marquee investors. But what stands out is Malabar and Sequio invested in 2019 and still hold very large position in Aptus. This if they continue to hold is a big positive but if they start liquidating their position it will be a big risk to stock price considering the large chunk they hold.
Pros:
- Demonstrated high profitable growth
- Highly experienced promoter and good management team
- Marquee promoter-investor
- Good underwriting and asset quality
- Low gearing and sufficiently capitalized
- Expanding geographical territory
Risk:
- Lending to high risk customer profile
- SBL forms significant part of assets
- Success in new geography needs to be demonstrated, it is here where most of regional players fail
- Potential growth slowdown if interest rates increase
- Regional political risks on loan waivers etc.
Valuation
The company is richly valued at 7X book. As a comparison Aavas is at 9X book and HDFC is at 3.2X. Valuations leave very little room for underperformance and as true for most financials, surprises come when least anticipated.
Invested with tracking position, will wait for 1-2 quarters performance before putting meaningful capital unless there is any large correction(5X book seems decent valuation)