Brokerage firm Ambit Capital does not agree with many of its peers with buy recommendations on Aptus Value Housing Finance stock
When Chennai-based Aptus Value Housing Finance Ltd went public in August 2022, investors were ready to buy the stock at valuations of over 7 times FY21 book value. The stock was an expensive buy at the time, which became apparent after it made a sluggish listing on the exchanges.
Since then, the stock has retraced its issue price and is down 30.6 per cent year to date. The fall has pulled down valuations and Aptus is trading at a modest three times its FY24 estimated book value. Compared to peers like Aavas Financiers Ltd (4.4x) and Home First Finance Company Ltd (3.1x), Aptus looks cheap.
Ergo, when Cholamandalam Investment and Finance Co Ltd, a large non-banking financial company with housing finance ambitions looking to buy Aptus, began to fizzle out last week, investors thought little before pushing the stock above 10 per cent. . Ultimately, valuations made it easy to bite this time. Analysts at CLSA believe that the acquisition of Aptus will boost return on assets for Cholamandalam and accelerate the lender’s home loan growth plan by two to three years. Both the companies have denied that they are in talks for such a deal. The denial, of course, has sent Aptus shares plummeting, plunging more than 5 percent on February 9.
Do the beaten-down valuations justify buying Aptus, be it market investors or even potential buyers like Cholamandalam?
Most brokerages currently have a buy rating on the stock and have not lost faith in its growth potential. Jefferies India Pvt Ltd recently highlighted the growth factor again in its report on Affordable Housing Finance Companies (AHFCs). It expects these lenders to show 19-20 per cent loan growth. “Additionally, in AHFCs, some of the larger AHFCs such as Awaas, Aptus, Home First are growing rapidly and gaining share,” the report said.
What works for Aptus is the fact that it has a precise focus on home loans to low and middle income self-employed individuals in the southern states. While competition in the home loan segment is intense, to say the least, the Aptus market does not have the same intensity. This explains why the lender has an 8 percent market share and continues to grow. To be sure, its loan growth in Q3 of FY23 was an impressive 41 per cent. Management reiterated the higher growth path in its conversation with analysts after earnings. “We are working on a growth rate of around 25 to 30 per cent in our loan book,” Chairman and Managing Director M Anandan had said during an interaction on February 3. Greater penetration in your existing markets.
Also, its underwriting track record is encouraging despite catering to a segment that banks and other lenders view as high risk. Bad loan ratios of HFCs have remained low despite the impact of the pandemic. For the third quarter of FY23, Aptus recorded a Stage 3 asset ratio of 1.44 per cent.
But there are challenges to the affordable housing market and lenders that cater to this segment that investors should not ignore. Ambit Capital has Sell rating on the stock and the rationales of the brokerage should be taken into account.
floating interest rates
The biggest challenge for non-bank lenders is their cost of borrowing during rising interest rate cycles. The problem is compounded for Aptus because its dependence on banks for funding is the highest among its peers with a share of 62 per cent. While credit ratings have seen improvements, Aptus’ rating at AA does not give it access to a wider range of investors or reduce its cost of funds. In fact, the cost of funds has already seen an increase to 7.9 per cent in Q3 of FY23 from 7.7 per cent in the corresponding quarter of FY22.
By extension, this would mean pressure on margins. In addition, Aptus has 58 per cent of its loan book at fixed interest rates. Fixed rate loan books tend to limit the pass-through of interest rate hikes by lenders, while policy rate hikes are transmitted quickly at the cost of funding. This puts pressure on margins. “Fixed rate books are not good during rising interest rate cycles because these lenders cannot reprice loans quickly. That is the concern regarding margins for these affordable housing players,” said an analyst requesting anonymity.
This is one of the concerns pointed out by Ambit’s analysts. In a report dated January 12, the brokerage said the company’s growth expectations are ambitious. “We see competition, rising credit costs, weak non-south performance as key challenges/risks to scaling,” the report said. Of course, the premium valuation further bolsters the argument that Aptus isn’t worth the hassle. At the time of report, the shares were trading at Rs 299 per share and Ambit had given a target price of Rs 245.
Aptus shares are at Ambit’s target price after 30 per cent fall in market valuation, but Ambit’s sell rating is unchanged. Perhaps investors need to heed the contrarian call here as FY24 awaits the financial sector amid slowing growth. As far as getting acquired by another NBFC is concerned, the current market valuation of Aptus makes it attractive for an aspiring player.