Buy Aditya Birla Capital; target of Rs 84: Motilal Oswal

Motilal Oswal 's research report on Aditya Birla Capital

ABCAP’s 4QFY20 consol. PAT plunged ~44% QoQ/YoY to INR1.4b while FY20 PAT was up 6% YoY to INR9.2b. PAT for NBFCs has plummeted 33%/40% QoQ/YoY to INR1.37b due to (a) loans declining 9%/2% YoY/QoQ to INR470b, and (b) higher credit cost (2.7% v/s 0.5% in 4QFY19), led by COVID related provision of INR1.6b and 90bp QoQ rise in GS3 to 3.6% (+30% to INR17b). - Other businesses: (a) HFC loans were flat QoQ and up 6% YoY to INR121b, (b) AMC AAUM grew 1%/2% QoQ/YoY to INR2.67t; 4QFY20 PAT declined 24% QoQ/YoY to INR1b, impacted by mix change and INR200m MTM loss on the investment book, (c) Life Insurance business reported EV of INR51.9b (+6% YoY)and RoEV of 13.2%. 13th month persistency improved to 83% (v/s 81% a quarter ago), and (d) Health Insurance combined ratio improved to 134% (v/s 149% a year ago) and stood at 117% in 4QFY20.

Outlook

We expect the company to consolidate operations in the near term and to focus on liquidity, asset quality and cutting flab in the system. New businesses like ARC and Health Insurance are showing strong traction. While large profit contributors – Lending and the AMC business – would remain under pressure, reduction in losses for new businesses and capital raise at Holding Company level should lead to ABCAP reporting flat YoY profit in FY21. Nevertheless, consolidated RoEs are likely to be moderate at 7-8%. Maintain Buy with SOTP of INR84 (v/s INR105 earlier).

Aditya Birla Capital 08062020

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