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Strengthening all its key businesses; credit costs remain benign

* Aditya Birla Capital (ABCAP)’s 2QFY25 consolidated revenue grew 36% YoY to ~INR120b and consolidated PAT grew 42% YoY to ~INR10b. 1HFY25 PAT grew ~30% YoY and we expect 2HFY25 PAT to grow ~24% YoY.

* During 2QFY25, the company sold its entire stake of ~50% in Aditya Birla Insurance Brokers and recognized a gain of ~INR2b (~INR1.7b, net of tax). Adjusted for this one-off gain, consol. PAT grew 18% YoY.

NBFC: Personal loan disbursements improve and NIM moderate QoQ

* NBFC loan book grew ~23% YoY to ~INR1.15t. ABCAP’s 2QFY25 disbursements grew ~17 YoY at ~INR193b. Loans to Retail, SME, and HNI customers constitute 65% of the total loan portfolio. Management guided for ~25% AUM CAGR over the next 2-3 years.

* Asset quality continued to improve with GS2 + GS3 assets declining ~20bp QoQ to ~4.3%. During the quarter, there was a decline in Stage 3 PCR because of an increase in the proportion of secured loans in its loan mix, which rose to ~74%. The management shared that there was no decline in its Stage 2 PCR and that the company will continue to make provisions based on its ECL model.

* Net Interest Margin (NIM) contracted ~25bp QoQ, primarily due to a compression in yields driven by a reduction in the Personal and Consumer (P&C) loans to 14% (PY: ~21%). The company has fully discontinued disbursements of small-ticket unsecured loans and has also taken several steps to calibrate the sourcing of P&C loans from digital partners.

Housing Finance: Strong AUM growth; PCR on Stage 3 shore up to ~41%

* The HFC reported a broad-based growth across customer segments, with ~113% YoY growth in disbursements to ~INR40b. Loan book grew ~51% YoY to ~INR232b.

* NIM remained largely stable QoQ at ~4.2%. 2QFY25 RoA/RoE stood at 1.5%/11.5%.

* Asset quality improved with GS2 and GS3 declining ~40bp QoQ to ~2.2%. PCR improved ~6pp QoQ to ~41%.

Asset Management: Healthy SIP inflows; QAAUM grows ~23% YoY

* The Quarterly Average AUM (QAAUM) rose 23% YoY to ~3.83t. Individual monthly average AUM grew 28% YoY to INR2.03t as of Sep'24.

* The domestic equity mix stood at ~47.1% (PQ: ~46%). The monthly SIP inflows grew ~47% YoY to ~INR14.2b in Sep’24.

Life Insurance: Individual FYP grows ~33% YoY; stable 13th month persistency

* Individual FYP grew 33% YoY to ~INR15.8b in 2QFY25, while renewal premium grew 12% YoY to INR39.4b in 2QFY25.

* Net VNB margin stood at 7.4% in 2QFY25. ~13M persistency was stable at ~88% in Sep’24.

Health Insurance: Market share among SAHIs improves

* GWP in the health insurance segment grew 39% YoY to ~INR21.7b, with Retail premium posting ~51% YoY growth. The combined ratio improved to 113% (from ~119% in 2QFY24).

* Market share among Standalone Health Insurers (SAHIs) rose from 10.7% in the previous year to 11.9% in Sep’24.

Highlights from the management commentary

* ABCAP raised ~INR30b of equity capital in Jun'23, and received ~INR5.7b of capital from the stake sale in the AMC business and ~INR1.7b from the stake sale of the Insurance broking business. Till now, ABCAP has infused ~INR6b in the Housing business and ~INR21b in the NBFC business.

* The management guided for NIM to exhibit improvement in the NBFC, driven by a gradual increase in the proportion of unsecured loans in the loan mix.

Valuation and view

* ABCAP continued to exhibit an improvement in operational metrics in 2QFY25. The remaining quarters of FY25 will see an uptick in growth, benign credit costs, and better return ratios across businesses.

* We expect a consolidated PAT CAGR of ~26% over FY24-27E. 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 RoE of ~14.3% by FY27. Reiterate BUY with an unchanged SoTP (Sep’26E)-based TP of INR270.

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