Buy Aditya Birla Capital Ltd for the Target Rs.325 by Motilal Oswal Financial Services Ltd
Defying the trend: Resilient asset quality amid peer weakness
Consol. PAT grew 10% YoY; asset quality outperformance in a challenging landscape
* Aditya Birla Capital’s (ABCAP) 1QFY26 consolidated revenue grew 10% YoY to ~INR113b, and consolidated PAT also grew ~10% YoY to ~INR8.35b.
* Overall lending book (NBFC and Housing) grew 30% YoY to ~INR1.66t.
* Total AUM (AMC, Life insurance, and Health insurance) grew ~20% YoY to INR5.53t. Mutual fund quarterly average AUM grew 14% YoY to INR4.04t.
* Life Insurance Individual first year premium (FYP) grew ~23% YoY to INR7.95b, and Health Insurance GWP grew ~30% YoY to INR13.5b.
NBFC: AUM rises ~22% YoY; NIM contracts ~10bp QoQ
* NBFC Loan book grew ~22% YoY and 4% QoQ to ~INR1.31t. 1QFY26 disbursements grew ~18% YoY to ~INR158b.
* The company reported a sequential improvement in asset quality, with GS2 + GS3 assets declining ~10bp QoQ to ~3.7%. Management has undertaken several proactive measures in the unsecured lending segment over the past few quarters, particularly in response to emerging stress in small-ticket unsecured loans, which comprise ~1.3% of the total NBFC loan book.
* The company shared that though it will keep growing its business loans, it plans to remain cautious and slow down in small-ticket unsecured loans. While GS3 in the Unsecured MSME segment (<10% of the NBFC loan book) rose ~70bp QoQ to 5.4%, ~53% of its GS3 book in this segment is covered under the Government Guarantee Schemes, where the company can make a claim (which takes 12-18 months to be processed) and recover ~75% of the principal outstanding.
* NIM contracted ~10bp QoQ to 6%, primarily due to a lower proportion of unsecured loans in the mix, which continued to put pressure on yields. However, the company has resumed growth in the P&C segment, with healthy disbursements growth by 65% YoY/30% QoQ. With an improvement in unsecured loans in the mix, NIM is expected to improve in the subsequent quarters.
HFC: Robust growth in HFC AUM; GS2+GS3 declines ~5bp QoQ
* The HFC loan book grew 70% YoY to ~INR346b, and disbursements in 1QFY26 grew 76% YoY to ~INR54b. Management expects the current business momentum to sustain and has guided for a significant improvement in RoA to ~2.0-2.2% over the next 8-10 quarters. This improvement is expected to be driven by better operating leverage, partially offset by a decline in NIMs, while credit costs are expected to remain broadly stable.
* NIM rose ~10bp QoQ to ~4.15%. RoA/RoE stood at ~1.6%/12.3%.
* Asset quality improved, with GS3 declining ~5bp QoQ to ~0.6%. PCR declined ~260bp QoQ to ~52.4%.
Asset Management: QAAUM rose ~14% YoY
* The mutual fund quarterly average AUM (QAAUM) rose 14% YoY to INR4.03t. Individual monthly average AUM grew 10% YoY to INR2.04t as of Jun’25.
* The equity mix stood at ~44.6% (PQ: ~44.3%). Monthly SIP inflows grew ~4% YoY to ~INR11.4b in Jun’25. Equity QAAUM grew ~11% YoY to INR1.8t
Life Insurance: Individual FYP grew ~23% YoY; 13th month persistency stood at 87%
* Individual FYP grew 23% YoY to ~INR7.95b in FY25, while renewal premium grew 18% YoY.
* Net VNB margin stood at ~7.5% in 1QFY26. 13M persistency stood at ~87% in Jun’25. Value of new business (VNB) grew 27% YoY to INR660m.
* Management has guided for a ~20-22% CAGR in individual FYP over the next three years, with a continued focus on expanding the VNB margin to >18%.
Health Insurance: Market share among SAHIs improves
* GWP in the health insurance segment grew 30% YoY to ~INR13.6b. The combined ratio stood at 111% (from 112% in 1QFY25).
* ABHI’s market share among standalone health insurers (SAHIs) rose ~200bp YoY to 14.5% in Jun’25
Highlights from the management commentary
* Capital adequacy stood at around 18.1%, with Tier-1 at 15.6%. The company infused ~INR2.5b into its HFC business in 1QFY26. It remains well-capitalized to meet its funding needs over the next 9-12 months and will evaluate an equity capital raise later this year.
* Management highlighted that Udyog Plus now contributes ~30% of ABCAP’s unsecured business loan portfolio. Further, the company added 67 branches during the quarter, bringing the total to 1,006 co-located branches under the One ABC proposition.
Valuation and view
* ABCAP continued to exhibit an improvement in operational metrics during the quarter. Loan growth remained healthy across both the HFC and NBFC segments, accompanied by a further improvement in asset quality. While there were some slippages in the Unsecured small-ticket MSME segment, management shared that a good proportion of such loans are covered under the CGTMSE guarantee scheme.
* NIM in the NBFC business witnessed some contraction during the quarter. However, the management guided for NIM improvement in the subsequent quarters, supported by a favorable shift in its product mix.
* We expect a consolidated PAT CAGR of ~24% over FY25-27. The thrust on crossselling, investments in digital, and leveraging ‘One ABC’ will lead to healthy return ratios, even as we build in a consolidated RoE of ~14% by FY27. Reiterate BUY with an SoTP (Mar’27E)-based TP of INR325.
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