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We initiate coverage on Aditya Birla Capital (ABCAP) with a BUY recommendation and Mar-24E TP of Rs200/share (+29% upside), based on SOTP-based valuation methodology. Our positive view on the stock is underpinned by three factors: 1) The lending business (NBFC and HFC) has hit upon the right business model (categories, acquisition channel and unit economics), with a right to win. This will manifest into an impressive 26% loan-book CAGR, supporting a similarly sturdy 31% profit CAGR through to FY25E. 2) The Life Insurance business has withstood regulatory shocks and now owns a diversified distribution channel, which will focus on driving growth beyond urban centers. We estimate 20% VNB margin, with industry-leading growth. Likewise, the company’s AMC business maintains dominance (is in the top-tier) and is favored by the notably cyclical movement in market share. Health Insurance remains in a growth phase. 3) The most vital trigger, in our view, remains the dynamism of the new management, which indeed intends to capitalize on its “low cost liability” edge and its right to win, together with shedding its ultra-conservatism on growth (not risk). Despite the higher growth in insurance businesses putting some strain on reported profit, we see consolidated PAT clocking ~30% CAGR over FY22-25E to reach Rs33bn.

* Intent to complement the ingredients: With one of the most competitive costs of funding and being among the few household brand names in the country, the Aditya Birla Group always had the right ingredients for attaining success in the financial services business. Now, with the new Management’s focus on forging partnerships (in the digital and the physical worlds) and exploiting the Aditya Birla Group synergies, ABCAP is on the right track to deliver profitable growth. Its ‘One ABC’ approach, towards addressing the complete financial needs of the customer while driving synergy across ABC entities, will not only expand the target customer base for ABCAP, but also increase its customer wallet share.

* Lending businesses seem to have cracked the code of profit with growth: Despite the cost-of-fund advantage (average FY19-22 CoF: 7.5%), the lending businesses of ABCAP have, for years, seen a slower growth pace (FY19-22 loan-book CAGR: 2%), largely owing to realignment of customer & product segment focus and due to gaps at senior leadership positions in the lending businesses. Now, having ascertained the various distribution modes (including own branches, One ABC branches and Digital & Physical ecosystem partnerships), in-place management and homing-in on the focus product-segments (Unsecured Retail and SME), the lending business has accelerated its growth and is well poised to maintain the growth momentum. The big shift from the past is that the company is open to most customer segments and channels, as long as yields take care of Opex and credit cost, to deliver a healthy RoA.

* Despite the difficult external environment, the Insurance & AMC businesses are much stronger and promising: Today, fitted with its diversified distribution (banca, direct, digital and agency) network, the company is well on track to capitalize on its strong brand, by penetrating beyond urban centers and delivering ~20% VNB margin while growing faster than the industry. Health Insurance business has seen impressive progress since inception, and maintains focus on gaining scale (2.7% health premium market share in 9MFY23) by keeping a close watch on distribution and product needs. ABSLAMC is among the top domestic mutual funds, in Assets Under Management (AUM) terms. With the regulatory changes, macro volatility and launches of fresh fund-houses becoming the new order of the day, ABCAP is adapting well to this novel operating environment and suitably meeting the emerging challenges; this should allow it to stabilize growth & market share in coming years.

* Diversified offering available at attractive valuation; initiate with BUY: With material presence across lending (NBFC and HFC), Investing (AMC and Broking) and Protecting (Life Insurance, Health Insurance and Insurance Broking), ABCAP is currently trading on FY24E P/B of ~1.6x for ~13% RoE. We value ABCAP using SOTP-based valuation (NBFC: FY24E P/B of 2.2x; HFC: FY24E P/B of 2x; AMC: MCap of Rs109bn; Life Insurance: FY24E P/EV of 1.5x; Health Insurance: Rs86bn based on the ADIA Deal valuation and others at Rs15bn). We apply 20% holding-company discount on listed and not fully-owned entities. Based on the SoTP valuation method, we peg our Mar-24E TP at Rs200/share, implying ~29% upside. For its diversified offering and competitive positioning of companies in their respective domain, we see ABCAP as a core holding in the India portfolio.

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