Target: ₹260
CMP: ₹176.40
Aditya Birla Capital (AB Capital) remains a top pick for us and is poised to double in value over the next three years, making it one of our rising stars.
The growth in Assets Under Management (AUM) has slowed down to 20 per cent from a peak of over 40 per cent, primarily due to a sharp decline in the personal loans segment. AB Capital faced a setback when one of its digital partners had to cut ties with a large fintech partner, impacting its business significantly.
Over the past year, margins have decreased and credit costs have risen, mainly driven by the unsecured loan business. As a result, the Return on Assets (ROA) has dropped from 2.4 per cent to 2 per cent.
As an AAA-rated Non-Banking Financial Company (NBFC) that is cost-conscious and maintains low cost ratios, we believe that a sustainable ROA of 2.3-2.4 per cent is achievable once the unsecured NPL cycle stabilizes. With an expected recovery in unsecured personal loan growth and improved margins due to a declining interest rate environment, we anticipate a rebound in ROA.
The recent underperformance presents an attractive opportunity to invest in an AAA-rated NBFC with a sustainable ROA of 2.3% at a valuation of 0.9x FY27E Price-to-Book Value. Key catalysts for future growth include increasing margins from falling interest rates, growth in higher yielding unsecured loans, and lower credit costs leading to improved ROA.
Published on March 20, 2025.
