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Steady quarter; pro forma GNPLs decline

* PAT grew 15% YoY to INR2.9b in 3QFY21, led by healthy performance in the HFC and AMC segments. However, the same was offset by muted performance in the NBFC segment. In 9MFY21, PAT has been largely flat at INR7.5b.

* The Lending business witnessed healthy business recovery with total disbursements (including HFC) jumping 18% YoY to INR51b. The company restructured 1.9% of its loan book (including Housing Finance).

Loan book stable; pro forma GNPL ratio declines

* Contrary to the declining trend over the past six quarters, the loan book remained stable QoQ at INR457b. The share of Retail and SME lending increased ~100bp sequentially to 53%. Within Retail lending, the share of unsecured loans declined 400bp YoY to 47%.

* As the company resolved INR5.5b GNPLs in 3QFY21, pro forma GNPL ratio improved 40bp QoQ to 3.1%. However, PCR declined 600bp QoQ to 39%, while Stage 1/2 provisions were steady at 1%. Collection efficiency improved to 96.4% in Dec’20 from 92% in Oct’20. ABCAP restructured 1.5% of loans.

* NIM + fees remained largely stable at 5.2% in the NBFC segment. Excluding some one-off adjustments, NIM would have improved 30bp to 5.6%. The cost of funds is down to a multi-quarter low of 7.5%.

* In the Housing Finance business, the loan book was down ~2% QoQ to INR119b. Pro forma GNPL ratio jumped 75bp QoQ to 1.9%, while PCR declined to 34% from 37%. The company restructured 3.2% of the loan book. It has 0.7% Stage 1/2 provisions on the Balance Sheet.

* Over the next three years, ABCAP targets to grow its NBFC loan book at 15-17% CAGR, with the share of Retail AUM increasing to 65% from 53% at present. It expects to deliver over 2.5%/16% RoA/RoE by FY24.

AMC segment – equity share stable; cost rationalization continues

* After an 11% sequential increase in 2QFY21, QAAUM increased 7% to INR2.7t in 3Q. The share of equity AUM is largely stable at 33%. SIP registrations rose 28% QoQ and were almost at prior year levels. SIPs now comprise 43% of equity AUM v/s 37% YoY.

* The company continues to cut operating costs – total opex is down 11-12% in 3Q/9MFY21. PBT margin improved 3bp QoQ to 30bp (fresh high).

* Over FY21-24, ABCAP targets 12-15% AUM CAGR, with the share of equity funds increasing to 40% from 34%. This should drive 15% PBT CAGR along with 35-40% RoE (v/s 33% currently).

Strong performance in the Life Insurance business

* The Life Insurance business continues to outperform peers on growth. Individual FYP has grown 6% YoY in 9MFY21 to INR13.4b for the company (v/s a decline of 8% YoY for the industry).

* The product mix in 9MFY21 is as follows: ULIP – 31% (up 200bp YoY), Traditional – 59% (down 100bp), and Protection – 10% (down 100bp).

* The 13th/61st month persistency ratios have improved 200bp to 84%/50% in 9MFY21. Net VNB margin improved 80bp YoY to 5.9% in 9M and is expected to touch 10% in FY21.

* Over FY21-24, the management is targeting 15-18% CAGR in individual FYP, with an increase in the share of Protection Products to 12-15%. Opex-topremium ratio is likely to decline 150bp to 12.5% by FY24E. With this, the net VNB margin should improve to 16% in FY24E from 10% in FY21E.

Highlights from management commentary

* The company lent out INR3.31b under the ECLG scheme in the NBFC segment in 3QFY21 and even lower in HFC.

* The management expects credit costs of ~1.25% going forward

Valuation and view

The past 1-2 years have been challenging for the company, with a run-down in the loan book and emergence of asset quality stress due to certain large-ticket accounts. While the moratorium rate of 28% (Phase II) was higher than that of some peers, eventual pro forma GNPL performance is better than most peers (sequential decline for ABCAP v/s an increase for others). The resolution of some stressed corporate accounts in 3QFY21 is also positive. With the worst on asset quality and growth behind, the coming years would see an uptick in growth and return ratios. The Asset Management business is likely to have an average year as the industry combats redemption pressure in equities. However, the company has been able to offset revenue pressure by cutting costs, thus managing a healthy profitability. The Life Insurance segment is on a robust trajectory. The business continues to witness improved performance in persistency as well on VNB margin. The drag on consolidated PAT from other segments will continue to decline over the next 1-2 years, thus improving overall profitability. We expect consolidated PAT to grow at 26% CAGR over FY20-23E (off a lower base). As most business segments have gained scale and are highly profitable, there could be value-unlocking opportunities in the medium term. Buy with a TP of INR140 (FY23E SoTP-based).

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