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Operating performance gathers momentum; company poised for RoE improvement

Aditya Birla Capital reported consolidated PAT of Rs3.75bn in Q4FY21 (up 2.6x YoY and 30% QoQ) – ahead of our expectations. Q4FY21 earnings showed the company’s ability to structurally pave the growth path while simultaneously undergoing granularisation, retailisation and diversification within business segments. In the lending business, there was a 7% QoQ portfolio growth (after consolidation phase), improvement in NIM (~6%) and uptick in RoA/RoE profile (2.2%/12.5%). Growth in HFC business was skewed towards the affordable segment. Operating performance of the life insurance business gathered momentum in line with industry trends. Health insurance losses too narrowed to Rs2bn in FY21 (Q4FY21 combined ratio at 107%). Further investment in franchise, cross-sell and leveraging digital, will aid it improve RoE profile. Maintain BUY.

* Aditya Birla Finance (ABFL) – rebound in NIMs and surge in RoA/RoE: Disbursements more than doubled YoY (up 53% QoQ) helping ABFL move out of the consolidation phase. Share of retail+SME+HNI in the overall book inched up to 56% -- getting closer to the target of 65% by FY24E. Core NIM improved QoQ from 5.04% to 5.54%. With resolution of a further Rs1.75bn of corporate assets in Q4FY21, stage-3 assets declined QoQ to 2.68% (vs 3.07% in Q3FY21). Rebound in NIM to ~6%, cost to income at 32%, and controlled credit cost at 1.22%, aided sharp boost to RoA to 2.2% (vs 1.7% in Q3FY21) and RoE to 12.5% (vs 9.5% in Q3FY21).

* Aditya Birla Housing (ABHL) – skewed towards affordable housing: Disbursements picked momentum (up 47% YoY / 36% QoQ) with 52% skewed towards affordable housing. The rising mix of the higher yielding affordable housing to 27% (18% in FY20), supported margin expansion – up 17bps QoQ and 77bps YoY to 3.85%. Collection efficiency deteriorated to 95.2% in Mar’21. Stage-3 assets came off marginally to 1.83% (from 1.9%) and ABHL has restructured 4% of loans (56% classified in stage-1). With an improving NIM profile and controlled credit cost at 0.8%, the company reported RoA of 1.2% and RoE of 10%.

* Life insurance APE and net VNB grew 17% YoY/75% in FY21. Performance in H2FY21 gathered momentum in line with industry trend and protection growth / net VNB margin in Q4FYF21 was 23%/ 19.4% YoY. Performance metrics such as opex ratio (19.2% in FY21), persistency (13th/61st month at 84%/15%) and VNB margin (16% in FY21) continued to show positive momentum. We expect APE to clock 17% CAGR between FY21-FY23E with VNB/EV reaching Rs4.8/80bn by FY23E. Health insurance narrowed losses to Rs2bn in FY21 with Q4FY21 combined ratio at 107%. The rising severity of covid/non-covid claims remains a temporary overhang.

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