After the recent correction in Aptus Value Housing Finance (Aptus), brokerage house YES Securities, in a recent note, reiterated its ‘buy’ call on the stock with a target price of ₹350, indicating an upside of around 39 percent from its current market price of ₹252 (as on July 6).
Aptus offers a favorable long-term risk-reward at its current valuation (2.7x PABV and 16x PE on FY25E), wherein structural business model positives seem underemphasised, said the brokerage.
“While concerns over stock supply, in the long run, are tenable, the apprehensions around management transition and business scalability appear stretched. We view the appointment of Mr. Balaji as MD (erstwhile ED & CFO) as a non-disruptive development with growth/quality execution fairly verticalized and institutionalized at Aptus, and the likelihood of Anandan guiding strategy even after the current term (ending in Dec’24) by being a Non-executive Chairman. Aptus has demonstrated regional diversification/scalability with comparable asset quality across disparate Southern markets. While existing markets can comfortably support 25-30 percent growth in coming years, the contiguous and calibrated entry/expansion in new states would aid long-run prospects,” explained the brokerage.
The stock has shed around 17 percent in 2023 YTD and 4 percent in the last 1 year. It has given negative returns in 4 of the 7 months of the current calendar year so far. The stock lost 12.8 percent in Feb, 8.5 percent in Jan, 5.2 percent in June and 1 percent in April. However, it rose 9 percent in May, 0.8 percent in July so far and 0.3 percent in March.
It has cracked over 35 percent from its all-time high of ₹395, hit in February 2022.
Earnings
In the March quarter, the company posted a 23 percent jump in its net profit at ₹135.29 crore as against ₹109.86 crore in the year-ago period. Meanwhile, its total revenue rose 31.5 percent to ₹308.37 crore during the quarter under review as compared to ₹234.34 crore in the same period last year.
In the financial year FY23, the company reported a 36 percent increase in its net profit at ₹503 crore versus ₹370 crore in FY22. Its revenue in FY23 also rose over 34 percent to ₹1,129 crore as against ₹840 crore in FY22.
Investment Rationale
Demand and Competition: As per the brokerage, demand and competition are apparently not a significant risk to growth for affordable housing financiers in general, and more so for Aptus which operates in interior demography and in a relatively lower-ticket segment. The differentiated franchise profile and significant contribution of non-housing loan products imply substantial long-term growth opportunity, it said. Also, the streamlined execution model has underpinned strong growth and scalability (37 percent AUM CAGR over FY18-23) without dilution of the yield (tapping of largely unserved customer segments and locations). Another indicator of negligible-to-low competitive pressure is the balance transfer of loans being at just 2-4 percent, it added.
Regional Diversification: Aptus has demonstrated regional diversification with comparable asset quality across disparate Southern markets/states, said the brokerage. According to YES, key drivers of such scalability are 1) well-institutionalized policies & processes, 2) verticalized/focused credit and collection functions, 3) local property underwriting & centralized credit underwriting, 4) sound HR practices of local hires, near-industry salaries, monthly incentives, etc. and 5) optimal deployment of tech in fulfillment.
The company’s foray into new markets of Odisha and Maharashtra would be facilitated by the above-mentioned practices and a contiguous expansion strategy. The portfolio scale-up would be calibrated in new markets, as Aptus is confident of sustained strong growth in existing markets with room for market share growth even in its larger states of Tamil Nadu and Andhra Pradesh, stated the brokerage.
Management Transition: The brokerage also pointed out that the recent elevation of Balaji as MD (erstwhile ED & CFO - 12 years with Aptus) is a neutral development from a growth execution standpoint. Anandan (Founder) remains Executive Chairman till Dec 2024 and may well continue to guide strategy even after as Non-executive Chairman. The company has a verticalized operating structure with each function headed by a competent person. It further noted that the company's tech team is being strengthened and investments are being incurred toward increasing sourcing contributions from customer referral app, ecosystem partner app and social media.
Strong Asset Quality: As per the brokerage, Aptus’ strong customer and property underwriting and focused collection mechanism get reflected in 1) average 30 bps credit cost in the past six years, 2) almost zero actual loan write-off in a lifetime, 3) low Gross NPAs, 4) prompt correction of 30-90 delinquency bucket after Covid second wave and 5) almost similar asset quality metrics across the four Southern states. Management expects credit cost of <50 bps to continue with GNPA expected to remain near 1 percent, it added.
Portfolio & Opex Metric: Aptus can sustain portfolio yield (with likely the same product mix) without losing meaningful business due to pricing, said the brokerage. It also added that the recent rate up-cycle caused only a limited increase in Aptus’ cost of funds (despite increased dependence on bank loans) as increasing scale, strong profitability performance and rating upgrades acted as structural deflators. Investments in distribution, people, and tech would likely drive a slight increase in Opex/AUM ratio in the near term, predicted the brokerage. However, in the longer run, Opex/AUM ratio can stabilize at a moderate level aided by scale and tech-driven productivity/efficiencies, it added.
Estimates
Structurally, portfolio spread and opex metric should remain in a narrow band underpinned by benefits from niche positioning, scale, tech investments and credit rating, predicted the brokerage. It also noted that Aptus’ strong customer and property underwriting and focused collection mechanism gets reflected in low credit cost and GNPLs, and negligible actual loan write-offs. It expects a 27-28 percent AUM CAGR and 23-24 percent earnings CAGR over FY23-26 with RoE crossing 18 percent in FY26 (without assuming further dividend payouts). At potentially 4-5x leverage in the very long run, Aptus can deliver 22-25 percent RoE, it estimated.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
