Buy Aditya Birla Capital Ltd For Target Rs. 315 By JM Financial Services
In 1QFY26, Aditya Birla Capital (ABCL) reported an adj. PAT of INR 6.8bn (+9%/+3% YoY/QoQ) which was 3% above JMFe, leading to RoA/RoE of 1.9%/11%. NII growth of +4%/+9% QoQ/YoY was supported by strong AUM growth (+4%/+22% QoQ/YoY) primarily led by high-yielding P&C segment (+6%/+2% QoQ/YoY). Lower other income (-7%/+13% QoQ/YoY) was offset by lower than expected opex (-1%/+11% QoQ/YoY, -5% JMFe) leading to a in-line PPoP (+6%/+9% QoQ/YoY, +2% JMFe). Credit costs remained largely steady at ~1.3% (+12bps QoQ). Management guided for P&C segment to contribute to better margins going forward while it remains cautious on lending in unsecured business loans. The housing sub reported healthy quarter with PAT beat of +7% led by strong AUM growth of +70%/+11% YoY/QoQ. ABSLAMC reported a strong quarter with PAT growing +18%/+22% QoQ/YoY) to INR 2.8bn. ABSLI (Aditya Birla Sun Life Insurance) also reported a good set of numbers with strong 27% YoY VNB growth, and ~110bps YoY margin expansion to 7.5%, even as it cut down on group business in 1Q. The company is showing consistent growth led by “One ABC” focus and “Udyog plus” platform which is also leading to operating leverage (1.7% opex/AAUM vs 1.9% QoQ). In addition, the credit guarantee on its unsecured loan segments offer comfort on asset quality which aids in keeping credit costs contained. We expect core NBFC business to return avg RoA/RoE of 2.1%/12.7% over FY26E/FY27E. We value ABCL at 1.8x FY27E adj. book and value subs at INR 136 leading to revised TP of INR 315 (based on SOTP). Maintain BUY.
* NBFC business (ABCL-standalone) – largely in-line operating performance; healthy growth:
ABFL reported NII of INR 16.2bn (+6%/+9% QoQ/YoY) supported by strong AUM growth (+4%/+22% QoQ/YoY). CoF (calc.) and yields (calc.) were largely stable QoQ resulting in broadly stable NIMs (+4bps QoQ). Lower non-interest income (- 7%/+13% QoQ/YoY) was offset by lower than expected operating expenses (-1%/+11% QoQ/YoY, -5% JMFe) leading to largely in-line PPoP of INR 13.1bn (+6%/+9% QoQ/YoY, +2% JMFe). Credit cost was in-line with expectations at 1.3% vs 1.2% QoQ which resulted in PAT of INR 6.8bn (+3%/+9% QoQ/YoY, +3% JMFe). Strong AUM growth was primarily led by growth in the high-yielding P&C segment (+6%/+2% QoQ/YoY) supported by strong disbursement growth (+29%/+65% QoQ/YoY). Growth was moderate in the secured (+4%/+27% QoQ/YoY) and corporate (+4%/+28% QoQ/YoY) segments. However growth in the unsecured businesses moderated sequentially to +4% QoQ (vs. +8% QoQ in 4Q25). Management highlighted partial build-up of stress in the unsecured portfolio, specifically in STUL (small-ticket unsecured loans) which forms ~1.3% of the overall AUM. However, management is confident of keeping it in check owing to proactive action on this portfolio in-terms of stricter underwriting measures. Also within the unsecured business portfolio, 53% of stage 3 assets in the segment is covered under govt. guarantee scheme which provides confidence. Management remains confident that further growth in the P&C and unsecured business loans segments should drive the margins up going forward. GS3/NS3 inched up marginally (+3bps/+12bps QoQ) at 2.27%/1.35%. GS3 was down -30bps QoQ at 2.5% for P&C business, -10bps QoQ at 2.2% for corporate/mid-market. However, it was up +70bps QoQ at 5.4% for the unsecured business and +10bps for the secured business. Adjusting for the loans which are secured by govt schemes, GS3 for unsecured loans stands lower at 2.5% (-5bps QoQ). Overall stage-3 PCR was down -380bps QoQ at ~41%. Management highlighted that the unsecured loans which are covered under govt scheme, 75% of principal is covered and PCR of ~35-36% is sufficient on this book. We expect the margins to grow from here with further growth in the P&C segment, while CoFs tailwinds from rate cuts should also aid margin benefit. We build in EPS CAGR of 17% led by AUM CAGR of 23% over FY25-27E.
* ABHFL – PAT beat led by strong AUM growth: AUM growth during the quarter was healthy at +11%/+70% QoQ/YoY led by strong disbursements of INR 54bn (+7%/+74% QoQ/YoY) in-spite of seasonal headwinds. Loan growth was broad based with construction finance (+16%/+109% QoQ/YoY), Prime LAP (+12%/+92% QoQ/YoY), Affordable HL (+11%/+62% QoQ/YoY), Affordable LAP (+10%/+81% QoQ/YoY) and Prime HL growth (10%/+49% QoQ/YoY). Calc. NIMs was broadly stable at 4.6% with both yields (calc.) and CoF (calc.) largely stable. NII growth of +13%/+64% QoQ/YoY (+3% JMFe) was supported by the strong AUM growth. Lower than expected opex (+2%/+42% QoQ/YoY, -6% JMFe) led to a strong PPoP beat (+27%/+95% QoQ/YoY. +13% JMFe). Higher provisions (+79% JMFe) offset the PPoP beat leading to an overall PAT beat of +7% JMFe (INR1.2bn, +27%/+92% QoQ/YoY). Asset quality improved marginally as GS-3 declined 4 bps QoQ to 0.6% and GS-2 was largely flat QoQ at 0.72%. PCR on stage 3 declined to ~52% (vs 55% QoQ). We value ABHFL at 1.8x FY27E BV implying a value of INR 36/share in return for 1.6%/16% avg RoA/RoE over FY26E/FY27E.
* Aditya Birla Sun Life AMC – A strong quarter and outlook: ABSL AMC reported strong 1QFY26 results –. core revenues grew (16% YoY, 4% QoQ) and PAT grew (18% QoQ, 22% YoY) to INR 2.8bn. Other Income grew (64% YoY, 24% QoQ) to INR 1.2bn - equity AUM grew (11% YoY, 13% QoQ) to INR 1,889bn, ahead of QAAUM growth of (10% YoY, 6% QoQ), indicating strong momentum for 2Q and the rest of FY26. We expect ABSL AMC to report a 15% EPS CAGR over FY26 - FY28e, value the AMC at 20x FY27e PAT of INR 12.4bn.
* Insurance subs reported strong numbers: ABSLI (Aditya Birla Sun Life Insurance) reported strong 27% VNB YoY growth, with ~110bps YoY margin expansion to 7.5%, even as it cut down on group business in 1Q. The company is targeting margins of 18%+ in FY26, against 18.0% in FY25, with consistent 20-25% growth. The insurer had added Axis Bank as a partner in FY25 and is adding Equitas Bank in FY26. We value it at 1.6x FY27e EV of INR 190bn. Meanwhile, the health insurance subsidiary reported a strong growth of 40% in gross premiums (on a like-to-like basis) and reported a PAT loss of INR 360mn, down 29% YoY. It had reported a full year PAT of INR 50mn – its first, in FY25. We value the business at 1.5x trailing GWP (Gross Written Premiums) of INR 49.4bn
* Maintain BUY with SOTP based TP of INR 315: The company is showing consistent growth led by “One ABC” focus and “Udyog plus” platform which is also leading to operating leverage (1.7% opex/AAUM vs 1.9% QoQ). In addition, the credit guarantee on its unsecured loan segments offer comfort on asset quality which aids in keeping credit costs contained. We expect core NBFC business to return avg RoA/RoE of 2.1%/12.7% over FY26E/FY27E. We value ABCL at 1.8x FY27E adj. book and value subs at INR 136 leading to revised TP of INR 315 (based on SOTP). Maintain BUY.
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