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Some of the parts > Sum of the parts?

With its mature balance sheet business (NBFC) at an inflexion point and an annuity cash cow business (AMC) operating on an auto-pilot mode, Aditya Birla Capital (ABCL) is at the cusp of a credible makeover, driving consolidated return ratios closer to franchise potential over the next three years. We believe that ABCL’s current valuations do not adequately factor in the successful repositioning of its lending businesses towards retail and granular loans, which is likely to drive a sustainable improvement in franchise earnings. We initiate with a BUY and an SOTP-based target price of INR155 - we value the AMC business at INR240bn (7.2% of Mar’23 AUM) and the NBFC business at INR170bn (1.85x Mar’23 ABVPS)

* Asset management - built for sustainable speed: With an extremely strong distribution network, Aditya Birla Sun Life AMC (ABSLAMC) emerges as a formidable force in our proprietary AMC Franchise Scorecard. ABSLAMC operates the fifth-largest mutual fund and one of the most profitable AMC franchises (operating profit at 24bps of AAUM). With its share of higheryielding equity within the AAUM poised to rise ~250bps to 38% by FY23E and the resulting operating leverage (OP as bps of AAUM to improve from 23bps to >25bps), ABSLAMC's earnings trajectory is likely to be stronger (3-year NOPLAT CAGR at 19%). We value ABSLAMC at INR240bn, implying 7.2% of Mar'23 AUM, a marginal premium over NAM-INDIA, the closest comparable franchise on our proprietary AMC Franchise Scorecard (AMC-FS).

* Re-architectured NBFC business at inflexion point: Aditya Birla Finance (ABFL), the flagship NBFC business within ABCL, is poised for +200bps RoE reflation over FY20-23E, driven by a best-in-class liability franchise and a shift in asset mix towards retail and granular lending. Our lateral checks with lenders, rating agencies and loan syndicators suggest that ABFL’s strong liability franchise, anchored by its parentage, has historically allowed the company to build a relatively low-risk, low-yielding wholesale book (43% of loans). We expect the share of wholesale lending to decline to ~38% by FY23E as a result of ‘right-sizing’ of the legacy wholesale portfolio, thus driving a reflation in asset yields and, consequently, RoEs (12.6% in FY23E). We value ABFL at INR170bn (1.85x Mar’23 Adj NW). We argue that the re-positioning of the NBFC business and the ROA reflation are not factored in the current valuations.

* Reducing drag from investment-phase businesses: With its mature businesses at an inflexion point and reducing drag from investment-phase businesses, Aditya Birla Capital (ABCL) is at the cusp of a makeover, driving consolidated return ratios closer to franchise potential over the next three years. We initiate with a BUY and an SOTP-based target price of INR155 - we value the AMC business at INR240bn (7.2% of Mar’23 AUM) and the NBFC business at INR170bn (1.85x Mar’23 ABVPS) - these two businesses contribute ~75% of the aggregate SOTP-based valuation

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