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Our Take:

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 (Q3FY21-53%), Large/Mid corporates (Q3FY21- 43.3%) and others (Q3FY21-3.7%) 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. Listing of its AMC business could unlock value for ABCL while grant of a banking license would further re-rate the stock.

On October 29, 2020, we had initiated coverage on the stock with a recommendation to ‘Buy on dips to Rs 63 and add more at 55’ (Link). However the company reported strong performance and the stock surged post our recommendation. Taking into the consideration its strong growth potential, we are re-initiating coverage on the stock.

View & Valuation:

We believe that ABCL’s current valuations do not adequately factor in the successful re-positioning of its lending businesses towards retail and granular loans, which is likely to drive a sustainable improvement in franchise earnings. 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 at current levels for a Base Case target of Rs 117 and a Bull Case target of Rs 126 in 2 quarters.

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