Aptus Value Housing Finance

South-focused housing financier

Delivering profitability with strong asset quality, but regional concentration, high business competition, growth sustainability and second covid wave are challenges

Aptus Value Housing Finance is Chennai based retail focused housing finance company catering to affordable housing segment primarily serving low- and middle-income self-employed customers in the rural and semi-urban markets of India.

The company is one of the largest housing finance companies in south India in terms of AUM, which started operation on 25 June 2010. AUM of the company has increased at robust CAGR of 35% to double from Rs 2247.23 crore end March 2019 to Rs 4067.76 crore end March 2021. The company serviced 58,069 active loan accounts end March 2021.

The company offers home loans to its customers for the purchase and self-construction of residential property (51.7% of loan book), home improvement and extension loans (21.89%), loans against property and business loans (26.41%) end March 2021.

The company only offers loans to retail customers and does not provide any loans to builders or for commercial real estate. The company targets first time home buyers where the collateral is a self-occupied residential property. The loans to self-employed customers accounted for 72.05% of AUM and salaried customers for 27.95% end March 2021. About 99.46% of AUM relates to customers belonging to the low- and middle-income groups, earning less than Rs 50,000 per month and 39.88% of customers were new to credit.

About 61.9% of AUM relates to customers located in rural regions. The maximum loan ticket size is Rs 25 lakh, while the average ticket size was Rs 6.2 lakh end March 2021. The home loans, loans against property and business loans had an average loan-to-value of around 39% at the time of sanctioning of the loans.

Since the inception of the company, it has not restructured any loans or written-off any loan receivable and Gross NPAs is lower at 0.68% end March 2021. The company has kept credit cost in check at below 0.14% during the last three years.

The company has implemented a robust risk management architecture which is reflected in asset quality. The company conducts all aspects of lending operations in-house including sourcing, underwriting, valuation and legal assessment of collateral and collections, which enables it to maintain direct contact with customers, reduce turn-around-times and the risk of fraud.

The company has leveraged technology in various facets of operations and has robust systems and processes to assist it with underwriting and collections functions and to monitor asset quality. These systems and processes are also technology enabled with a view to ultimately digitize the entire life cycle of a loan from origination to closure. The company has also implemented digitized collection models, which has led to an increase in collection efficiencies.

The company has a network of 190 branches covering 75 districts in the states of Tamil Nadu (accounting for 52.27% of AUM), Andhra Pradesh 27.33%, Karnataka 9.93%, and Telangana 10.47%. The employee base of the company 2021 stands at 1,913 end March 2021.

M. Anandan is founder and Chairman and Managing Director of the company with over 40 years of experience in the financial services sector and has previously served as the managing director of Cholamandalam Investment and Finance Company, part of the Murugappa Group and was also managing director of Cholamandalam MS General Insurance Company.

The important shareholders of the company include WestBridge Crossover Fund, LLC, Malabar India Fund Limited (an affiliate of Malabar Investments), SCI Investments VI (an affiliate of Sequoia Capital), Madison India Opportunities IV (Madison India Capital) and Steadv iew Capital Mauritius Limited (an affiliate of Steadview Capital Management). The company has and expects to continue to benefit from strong capital sponsorship and professional expertise of marquee shareholders.

The financing requirements historically have bee n met from several sources, including refinancing from the NHB, financing from IFC, term loans, working capital loans and issuance of non-convertible debentures (NCDs) to meet capital requirements. The company also monetizes loans through securitization to banks and financial institutions, which enables to optimize cost of borrowings, liquidity, and capital.

The borrowings of the company were Rs 2515.07 crore and average cost of borrowings was 9.11% end March 2021, with an average cost of incremental borrowings at 7.70% in FY2021. The credit ratings were ICRA A+ (Stable) and CARE A+ (Stable). The company had a positive asset-liability position across all maturity buckets.

The capital adequacy ratio is robust at 73.63%, with Tier I capital comprising 73.78% and Tier II capital comprising (0.15)% end March 2021.

The housing shortage in India is estimated to increase to 100 million units by 2022, of which 95% of the household shortage will be from the lower income group and economic weaker section, while the remaining 5% will be from the middle-income group or above. This customer segment offers significant growth opportunities, and the company intends to continue to focus on low and middle-income self-employed customers in rural and semi-urban markets.

The company intends to continue to expand presence in an on-ground contiguous manner to achieve deeper penetration in existing regions. The company also intends to expand its branch network in large housing markets in the states of Maharashtra, Odisha, and Chhattisgarh.

Objects of the Offer

The initial public offer (IPO) consists of a fresh issue to raise Rs 500 crore issuing 1,44,50,867 shares at lower price band of Rs 346 per share and 1,41,64,306 shares at the upper band of Rs 353 per share.

Further, the offer of sale (OFS) comprises issuance of 6,45,90,695 shares to raise Rs 2234.84 crore at lower price band and Rs 2280.05 crore at upper price band.

Among the promoters, Padma Anandan (individual promoter selling shareholder), is offering 19,762,495 equity shares, Aravali Investment Holdings, up to 28,379,135 equity shares and JIH II, LLC 9,997,855 equity shares.

The issue is to be made through the book-building process and will open on 10 August 2021 and will close on 12 August 2021.

The company proposes to utilize the net proceeds from the offer for augmenting equity capital base to meet future capital requirements arising out of growth in business.

Strengths

The company is one of the largest housing finance companies in south India in terms of AUM end March 2021. The four southern states of Tamil Nadu, Andhra Pradesh, Karnataka, and Telangana have high per-capita incomes, better financial literacy and GDP growth rates offering high growth potential.

The company has robust risk management architecture from origination to collections leading to superior asset quality across economic cycles.

The company has the lowest cost to income ratio among the peers with operating expenses to net income ratio at 21.80% in FY2021.

The company has maintained stable asset quality and credit cost and has not restructured or written-off any loans receivable since the inception.

The company primarily targets customers whose sources of income are more resilient to economic cycles.

An average loan-to-value is conservative at around 39% at the time of sanctioning of the loan.

The company has grown business by increasing the customer base, while maintaining low average loan ticket sizes. As of March 2021, the average ticket size of home loans was Rs 7.2 lakh, loans against property Rs 7.1 lakh and business loans Rs 6.2 lakh.

The company operates business in a centralized manner and has set up separate internal verticals for sales, legal, technical and collection functions who report independently to head office.

The company has also entered arrangements with insurance companies to offer credit shield insurance and property insurance to customers.

The company has set up a robust collections management system through a collections team comprising over 311 personnel end March 2021.

The collection efficiency has been strong in the range of 99.4-99.8% for the last three years.

The company sources customers directly through the sales team, which comprised over 1,085 personnel end March 2021. Legal and technical team comprised over 206 personnel.

The company has and expects to continue to benefit from strong capital sponsorship and professional expertise of marquee shareholders.

The company has established a track record of financial performance with industry leading profitability.

Loan portfolio also qualifies for priority sector lending.

Risks

The Coronavirus pandemic (COVID-19) has had certain adverse effects on business and there is significant uncertainty regarding the duration and long-term impact of the COVID-19 pandemic, as well as possible future responses by the Government

The business depends on the ability to raise both debt and equity from various external sources on suitable terms and in a timely manner. Recently, certain NBFCs and HFCs in India have defaulted in the repayment of their borrowings, which has adversely affected the availability and cost of funds to NBFCs and HFCs in general.

The company primarily serves customers in the low and middle-income groups with 72.05% of AUM from self-employed customers. This customer segment often does not have credit histories or formal income proofs and are exposed to various risks such as business failure, insolvency, lack of liquidity, loss of employment or personal emergencies such as the death of an income-generating family member.

The self-employed customers to whom the company lends are often considered to be higher credit risk customers due to their increased exposure to fluctuations in cash flows due to adverse economic conditions.

A substantial portion of customers at 36.75% of AUM and 39.88% of customers were new to credit, which generally may have higher risk of non-payment or default.

The operations are primarily focused on the states of Tamil Nadu contributing 52.3% of AUM and Andhra Pradesh serving 27.3% of AUM. Tamil Nadu and Andhra Pradesh also accounted for 144 branches out of 190 branches. Any adverse developments in these regions could have an adverse effect on business

The company has experienced considerable growth in recent years and the company has significantly expanded operations and branch network and the company may not be able to sustain such growth in the future.

The housing finance industry in India is highly competitive and there is steep competition from banks, other HFCs, small finance banks and NBFCs and the entrance of new competitors, which may have more resources, a wider branch and distribution network, access to cheaper capital and superior technology.

The Indian housing finance industry is extensively regulated by the RBI and NHB and any changes in laws and regulations applicable to HFCs could have an adverse effect on business.

The company has not filed for any intellectual property protection for mobile applications. Further, the company has not filed an application and does not hold a valid trademark for the corporate logo, which adversely affects ability to protect such intellectual property.

Valuation

The annualized EPS on post-issue equity works out to Rs 5.4 for FY2021. At the price band of Rs 346 to Rs 353, P/E works out to 64.2-65.5 times of FY2021 EPS.

Post-issue, the book value (BV) will be Rs 50.1 at upper price band, while the adjusted BV (ABV) stands at Rs 49.7 net of net stage 3 assets.

The scrip is being offered at price to Adj BV multiple of 7.1x at the upper price band.

Among peers housing finance companies with focus on affordable housing segment, Aavas Financiers is trading P/Adj BV multiple of 8.7x, Repco Home Finance is trading at P/Adj BV of 1.1x, Can Fin Homes is trading at P/Adj BV multiple of 3.0x and Home First Finance is trading at P/Adj BV multiple of 3.8x

In terms of P/E, Aptus Value Housing Finance is offered at 65.5x at upper price band. Aavas Financiers is trading at PE of 70.4x, Home First Finance at 50.7x, and Can Fin Homes at 16.2x and Repco Home Finance at 6.8x.

Despite challenging environment due to covid pandemic, Aptus Value Housing Finance has posted strong 28% growth in the AUM in FY2021. Among peers, the loan growth of Aavas Financiers is strong at 21% and Home First Finance at 14%. However, the AUM growth for Repco Home Finance was slow at 2% and Can Fin Homes at 7% in FY2021.

On margins front, the net interest margins for Aptus Value Housing Finance have been robust in double digits at 10.1% for FY2021 compared with Aavas Financiers at 7.7%, Home First Finance at 5.0%, Can Fin Homes at 3.9% and Repco Home Finance at 4.7%.

On asset quality front, Aptus Value Housing Finance has maintained strong asset quality with net NPA ratio at 0.5%. Since the inception of the Company, it has not restructured any loans or written-off any loan receivables. Even during first covid wave, the company did not restructure any loan and loan book under moratorium was only at 1.5%. Among the peers, the net NPA ratio of Home First Finance stands at 1.2%, Can Fin Homes 0.6%, Aavas Financers at 0.7% and Repco Home Finance at 2.2% end March 2021.

The company, being in the affordable housing finance segment, the focus is on customers in the low and middle-income groups which are prone to various risks. Further, the self-employed customers are often considered to be higher credit risk customers due to their increased exposure to fluctuations in cash flows and to adverse economic conditions.

The company has posted strong growth across most business parameter during last three years. The sustainability of the same performance going forward is a major concern amid rising competition in this segment. The second covid during the first quarter of FY2022 has primarily impacted retail and rural segment, which is the focus area of the company. The company needs to sustain strong loan growth and maintain stable asset quality and profitability to support premium valuation.