Aptus Value Housing Finance - IPO Note

Aptus Value Housing, as the name suggests, is a 12 year old housing finance company with focus on lower and middle-income groups. The focus is largely on self employed persons in semi-urban and rural areas, without access to the traditional banking channels for home loans. Aptus only offers loans directly to the retail customers and does not have any builder funding in its books.

The company is essentially South-based and predominant in the non-urban centres of Tamil Nadu, Andhra Pradesh, Karnataka and Telangana. Despite being in the business of lending to vulnerable segments, Aptus has managed to keep its NPAs in check and has not resorted to any loan restructuring. It counts among its shareholders, prominent names like Westbridge, Madison, Malabar Investments and Steadview Capital. In the OFS, promoters will be selling part of their stake and institutional investors will also participate. 

Aptus Value Home Finance IPO Details
 

_{Data Source: IPO Filings}

Here are some of the key merits of the business model
•    Avoiding builder loans keeps their loans to small ticket sizes
•    Major exposure to South India, where default rates have traditionally been low
•    Most small borrowers cannot afford credit downgrades, ensuring timely payments 
•    Aggressive growth strategy as is evident in doubling of AUM in 2 years
•    Maximum loan ticket size Rs.25 lakhs and average ticket Rs.7.5 lakhs

A quick look at the financials of Aptus Value Housing Finance

A quick glance at the financials of Aptus tells the story of a company that has not only shown aggressive growth but has also managed risk in the midst of this growth. Over the last two years, revenues and AUM have doubled while the profits have grown at a much faster pace. Net margins of Aptus have expanded from 34.5% in FY19 to 41.9% in FY21.
 

_{Data Source: Company RHP}

The business model addresses a very emotional need for most Indian households; of having their own home. Having an own home is considered the ultimate form of security for the family. This sentiment is more prevalent in the rural and semi-urban areas. It also provides a form of long-term social security for people in business who do not have access to any other form of social security.

Aptus will use the IPO funds to boost its capital base. Aptus already has healthy capital adequacy of 73% and the IPO will boost it further. That would be essential to grow the loan book aggressively.

Investment Perspective for Aptus Value Housing Finance

The company has grown aggressively while keeping quality of assets intact. That is the challenge in the lending business and risk management has been of a high order. However, the current pricing values the stock at around 65X FY21 earnings. Here are some key pointers.

a)    While Home loans constitute 50% of the book, the balance 50% is accounted for by loans against property and business loans. The company tries to keep LTV at the optimum level so as to minimize risk on a per unit basis.

b)    The gross NPA ratio stays at around 0.68% in FY21 with net NPAs of around 0.49%. This is an extremely low level of bad loans in the housing business. With a 73% capital adequacy, Aptus has the buffers to absorb any shocks in the market.

c)    Some of the financials are flattering. For example, the average gross yield on the loan book has been above 17% while the average cost of borrowing has been under 10%. With NIMs of 10.10% and operating expenses ratio of just 21%, it has room for profits.

There have been some concerns on valuation of around 65X P/E ratio. However, the company has been growing at over 35% and with its expanding footprint, they have an important niche to cater. Over a 2-year perspective, this stock can still provide attractive returns. However, one cannot overlook the regulatory risk inherent in this business.