Aptus Value Housing Finance trades 30% below IPO price: Time for Ambit's contrarian call?

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26 Aug, 2025 12:21

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When Chennai-based Aptus Value Housing Finance Ltd went public in August 2022, investors were willing to buy the stock at a steep valuation of 7 times its book value of FY21. The stock was an expensive buy at that time, which became apparent after it made a tepid listing on the bourses.

Since then, the stock has trailed its issue price and is down 30.6 percent so far. This drop has pulled down valuations and Aptus trades at a modest three times its FY24 estimated book value. Compared with peers such as Aavas Financiers Ltd (4.4 times) and Home First Finance Company Ltd (3.1 times), Aptus looks cheap.

Ergo, when talk that Cholamandalam Investment and Finance Company Ltd, a large non-banking financial company with housing finance ambitions, was looking to buy Aptus began swirling last week, investors thought little before driving the stock up by more than 10 percent. After all, the valuations made it easier to take a bite this time. Analysts at CLSA believe that the acquisition of Aptus would boost return on assets for Cholamandalam and fast-forward the lender’s home loan growth plan by two to three years. Both firms have denied that they are in talks for a deal of such sort. The denial has, of course, made Aptus shares give up gains, dropping more than 5 percent on February 9.

Do beaten-down valuations justify buying Aptus, whether it is market investors or even a potential buyer such as Cholamandalam?

Growth engine

Most brokerages have a buy rating on the stock currently and the calls for faith in its growth potential have not receded. 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 percent loan growth. “Moreover, among AHFCs, few larger AHFCs like Aavas, Aptus, Home First are growing faster and gaining share,” the report said.

What works for Aptus is the fact that it has had a precision focus on giving home loans to low- and middle-income self-employed individuals in the southern states. While the competition in the home loan segment is intense, to say the least, Aptus’s market doesn’t have the same intensity. That explains why the lender has 8 percent market share and is continuing to grow. To be sure, its loan growth in the third quarter of FY23 was an impressive 41 percent. The management, in its post-earnings interaction with analysts, reiterated the high growth path. “We are working with a growth rate of around 25 to 30 percent in our loan book going forward,” chairman and managing director M Anandan had said during the interaction on February 3. The lender is looking to expand geographically to other states, besides targeting greater penetration in its current markets.

Also, its underwriting track record is encouraging despite catering to a segment that banks and other lenders see as high risk. The HFCs bad loan ratios have been low notwithstanding the impact of the pandemic. For the third quarter of FY23, Aptus reported stage 3 assets ratio of 1.44 percent.

But there are challenges for the affordable housing market and lenders that cater to this segment that investors must not ignore. Ambit Capital has a sell rating on the stock and the brokerage’s arguments must be heeded.

Moving interest rates

The biggest challenge for non-bank lenders is their cost of borrowing during an upward interest rate cycle. For Aptus, the trouble is more because its reliance on banks for funding is the most among its peers with 62 percent share. While credit ratings have seen an upgrade, Aptus’s rating at AA- doesn’t give it access to a wide range of investors or even reduce its cost of funds. Indeed, the lender’s cost of funds has already shown an increase to 7.9 percent by Q3FY23 from 7.7 percent in the corresponding quarter of FY22.

By extension, this would mean pressure on margins. Moreover, Aptus has 58 percent of its loan book priced at a fixed interest rate. Fixed rate loan books tend to limit the pass-through of interest rate hikes by lenders while the transmission of policy rate hikes onto cost of funding is quicker. This in turn pressures margins. “Fixed rate books are not good during a rising interest rate cycle because these lenders cannot reprice the loans quickly. That is the concern regarding margins for these affordable housing players,” said an analyst, requesting anonymity.

This is one of the concerns flagged by Ambit analysts. In a January 12 report, the brokerage said that the growth expectations of the company are ambitious. “We see competition, increasing credit costs, weak non-south execution are key challenges/risks to scaling up,” the report said. Of course, the premium valuation further added to the argument that Aptus is not worth the trouble. At the time of the report, the shares were trading at Rs 299 a piece and Ambit had given a target price of Rs 245.

Aptus shares are at Ambit's target price after the 30 percent fall in market valuation, but Ambit’s sell rating hasn't changed. Perhaps investors need to pay heed to the contrarian call here as a sobering FY24 awaits the financial sector amid slowing growth. As for being acquired by another NBFC, the current market valuation of Aptus makes it attractive for an ambitious player.