Buy Aditya Birla Capital Ltd For Target Rs.78.50 - HDFC Securities
ABCL is the holding company of all the financial services businesses of the Aditya Birla group and aims to be an end-to-end financial services provider. It has built a strong and diversified loan book with presence across SME/Retail/HNI (Q1FY21-50.3%), SME, Large/Mid corporates (Q1FY21-45.4%) and others (Q1FY21-4.5%) through its financing arms ABFL and ABHFL. It is gaining market share in its asset management business and its insurance business is growing above the industry average. Some of its nascent stage businesses have huge growth potential and can add meaningful value to the consolidated valuation in the coming years. Its strategic significance to the ABCL Group is reflected in the regular capital support from the parent (Rs 4783cr in the last four years).
Improvement in sentiments towards the shadow banking space could lead to re-rating of the NBFC and HF businesses as both the businesses have stood out in the recent tough industry environment with prudent asset liability management, adequate liquidity buffers and improving ROEs.
Valuations and View:
The past four to six quarters have been challenging for the company, with the rundown of the loan book and emergence of asset quality stress due to certain large ticket accounts. Its SME/retail segments have high risk-adjusted profitability. Its Return on equity is lower than the cost of equity due to the recent stress. The key monitorable in the next few quarters will be how the lending portfolio behaves once it is free of moratorium in September.
The company could focus on strengthening the balance sheet, liquidity, and cost cutting. The softness in the Lending segment could be compensated by better performance in other segments. The Life Insurance segment is on a robust trajectory. A sharp drop in wholesale funding rates and availability of funding to NBFCs, can benefit ABCL disproportionately.
We expect some moderation in consolidated PAT in FY21E on account of slowdown in lending business and redemption pressure in the AMC business. PAT growth is likely to pick up from FY22E onwards. We have valued the company on SOTP basis, the lending business contributes major portion of the total valuation. We feel investors could buy the stock on dips to Rs.63 and add more at Rs.55 for base case fair value of Rs 72 and bull case fair value of Rs 78 in 2 quarters.
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