AB Capital: a case of growing mismatch in fundamentals and price movement

Confidence on the stock remains high despite systemic concerns

The Aditya Birla Capital (AB Capital) stock has caught the fancy of many investors, explaining why it lately registered a 52-week high of Rs 114. However, the 22 per cent rally in three months finds little support from fundamentals.

The September quarter (Q2) results indicated that the pressure that non-banking finance companies (NBFCs) have been reeling under for about a year, lingers for AB Capital as well. With growth in its diversified businesses such as life insurance and asset management remaining muted, these subsidiaries too haven’t been of much help to AB Capital’s numbers.

What explains the divergence in stock price movement and fundamentals is a ray of hope that with the share of lumpy wholesale loans gradually coming down, the earnings profile may improve.

However, paring exposure to these loans isn’t happening in a hurry considering the present market conditions. The share of wholesale loans to AB Capital’s NBFC book remains elevated at 46 per cent in Q2 (49 per cent a year ago). The larger concern is that of growth.

The NBFC business accounts for 68 per cent of AB Capital’s net worth and in the early years, it grew upwards of 60 per cent. This has mellowed to less than 30 per and loan growth sequentially fell to one per cent in Q2 marking the weakest show in many quarters.

While slow growth could be attributed to rundown of wholesale book, this aspect could keep the overall run-rate muted in the medium-term. Retail and small business loan books grew by 14 per cent year-on-year in Q2, though nearly 50 per cent of growth in retail loans came from unsecured loans. Therefore, how the quality of newly acquired retail and small business loans pans out requires monitoring.

Even at current levels, gross non-performing assets (NPA) ratio of the NBFC business is on an upward trajectory and touched 1.85 per cent in Q2 (increase of 15 basis points sequentially). The company has guided from another 15 basis points increase in Q3. Profitability, too, seems to be under pressure with net interest margin slipped to 5.34 per cent in Q2 from 5.39 per cent in Q1. To sum up, there’s little to be cheerful about with AB Capital’s numbers.

Nonetheless, six of eight analysts polled on Bloomberg retain their ‘buy’ recommendation on the stock. This is despite concerns on the company’s construction financing, loan against property and structured credit businesses. While the prolonged period of underperformance has lately been reversed for the stock, how long the momentum can sustain is questionable.