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Strong performance across most businesses

* Consolidated revenue grew 21% YoY to INR72b in 2QFY23. Consolidated PAT (after minority interest) grew 30% YoY to ~INR4.9b in the quarter.

* The management has been steadfast, exhibiting high agility in its journey toward its FY24 targets, a large majority of which, has either been achieved or will be over the course of FY23.

NBFC: Continued improvement in share of SME, HNI, and Retail

* Loan book grew to ~INR650b, up 36% YoY in 2QFY23. Retail, SME, and HNI loan book grew 50% YoY, with its proportion in the mix growing to 65% (PY: 59%) in the quarter.

* 2QFY23 disbursements were robust at ~INR125b, up 2.3x YoY with Retail, SME, and HNI contributing 70% of disbursements.

* NIM and fees improved to 6.6% (up 35bp YoY), aided by growth in retail. Asset quality was largely stable QoQ with GS3 at 3.1%

Housing Finance: Affordable segment continues to gain momentum

* The company reported a broad-based growth across customer segments with 24% YoY growth in disbursements to INR12.4b in 2QFY23. Loan book grew 10% YoY to INR 124.5b with 94% retail in the mix. The proportion of affordable Housing improved to 41% (PY: 33%) in the quarter.

* NIM improved to ~5.1% (up 90bp YoY) in 2QFY23, with CIR ratio at ~41%.

* GS3 (as per RBI norms) was largely stable, sequentially at 3.6%. Collection efficiency for the quarter stood at 99.3%

AMC segment: Improvement in domestic equity share

* Quarterly Average AUM (QAAUM) stood at INR2.83t in 2QFY23. Domestic equity QAAUM grew 3% YoY to ~INR1.2t.

* Domestic equity mix expanded to ~42% (PY: ~39%), while the total retail folios remained flat QoQ at 8.1m. Passive AUM stood at INR169b in 2QFY23.

Life Insurance: Improving VNB margin and healthy 13th month persistency

* Individual FYP for 2QFY23 grew 16% YoY to INR 6.4b, while Renewal premium grew 14% YoY to INR29.5b, out of which, 77% was collected digitally. Group business grew 23% YoY to INR12.8b.

* Net VNB margin improved ~470bp YoY to 12.3% in 1HFY23.

* The 13th month persistency exhibited sustained improvement to 86% (PY: 83%)

Health Insurance: Gaining market share among SAHIs

* GWP grew 62% YoY to ~INR6.4b in 2QFY23, with Retail and rural contribution improving to 66% in the total business. The Health Insurance business continues to build scale with focus on expenses, leading to improvement in combined ratio in 1HFY23 to 112% (PY: 114%).

* Market share among Stand-Alone Health Insurers (SAHIs) expanded ~260bp YoY to 11% in 1HFY23. Net loss reduced to INR760m from INR1b the previous year.

Highlights from the management commentary

* NBFC: Total branches stand at 221 with 62 new branches opened in 1HFY23. The management targets to open a total of 325 branches by the end of FY23.

* Life Insurance: Net VNB margin for 2QFY23 expanded ~470bp YoY to 12.3% in 1HFY23. The company targets to achieve net VNB margin of >18% by FY23.

* Health Insurance: Combined ratio declined to 112% in 1HFY23 (PY: 114%) while claims ratio stood at 56-57%.

Operational metrics continued to improve; reiterate Buy

* ABCAP has exhibited significant improvement in operational metrics across all other business segments in 2QFY23. With the worst on asset quality behind, the coming years will see an uptick in its growth, lower credit costs, and better return ratios.

* The Asset Management business is likely to churn out better profitability, driven by an improvement in revenue as well as cost rationalization. VNB margin and persistency margin in the Life Insurance business continues to improve. The drag on consolidated PAT from other segments such as Health Insurance will fall, improving the overall profitability.

* We expect consolidated PAT to register a CAGR of 27% over FY22-24. The thrust on cross-selling, investments in digital, and leveraging ‘One ABC’ will lead to healthy return ratios, even as we build in a consolidated FY24 RoE of ~14%. We reiterate our Buy rating, with a SoTP (Mar’24E) based TP of INR155, implying a potential upside of 21%.

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