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Poised for stable quality return profile; significantly undervalued

Aditya Birla Capital’s earnings trajectory in Q2FY22 improves visibility of superior and quality earnings trajectory led by its strategy of granularisation, retailisation and diversification within business segments. Consolidated PAT of Rs3.77bn in Q2FY22 (up 43%YoY) driven by superior NIM profile, normalised credit cost and stable ‘cost to income’, makes it confident to guide for >Rs15bn of PAT in FY22. Scale-up of retail+SME mix (in NBFC), affordable housing mix (in HFC) and optimised borrowing cost suggest it is on track to achieve its FY24 targets a year earlier. Further investment in franchise, cross-sell and leveraging digital, will aid it improve RoEs. The stock seems significantly undervalued and our target price of Rs169 provides significant upside potential. Maintain BUY.

* Aditya Birla Finance (ABFL) – FY24 targets to be achieved a year earlier: An improved NIM profile (~6.23%), stable ‘cost to income’ (~30%) and normalised credit cost (1.2%), provided a leg-up in RoA profile at 2.4% and RoE at 13.2.0%. Share of retail+SME inched up to 59% (56% in FY21). Launching new products, including small-ticket and digital ecosystem niche products (BNPL, checkout EMIs, etc.) helped double the customer count. Stage-3 assets were flat QoQ at 3.64% and stage-2 sticky at 7.7%; restructured pool has risen to 3.9% of advances (added 0.79% in Q1FY22). Credit cost in Q2FY22 normalised to 1.24% (1.7% in Q1FY22).

* Aditya Birla Housing (ABHL) – disbursements rebounded; 77% sourcing through direct channels: Disbursements witnessed strong rebound (up 3x QoQ / 1.4x YoY) and affordable housing proportion increased to 33%. It plans to expand tier 3/4 presence to >70% (57% currently). 77% of sourcing was through direct channels. Collection efficiency stayed put at 96% in Sep’21 and there was no improvement in stress pool. Incremental restructuring of 2.5% took cumulative restructured pool to 7.5%. An improving NIM profile at 4.32%, ‘cost to income’ at 36% and normalised credit cost at 0.55%, supported RoA/RoE at 1.8%/13.9%.

* Aditya Birla Sun Life Insurance (ABSLI) - Need better growth on individual premiums; FY24 targets remain on track: ABSLI remains committed to deliver its FY24 targets in terms of VNB, margins, protection mix and cost efficiency. However, growth in individual premiums have underperformed private peers and partnership distribution continues to lag the proprietary in terms of protection mix. Persistency has increased across cohorts (13th month / 61st month at 83% / 51%). We factor in Rs3.2bn / Rs4.6bn VNB in FY22E /FY23E with VNB margins of 12% / 15%.

* Aditya Birla Sun Health Insurance (ABHI) – Group business led the growth: ABHI maintained good traction in overall growth largely driven by ‘value-accretive group business’. Distribution expansion, data-driven hyper personalised underwriting and innovative product strategy are business moats. Target to achieve breakeven by Q4FY22 remains unchanged.

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