Aditya Birla Capital disappoints despite strong potential

However, asking price of 1.8x its FY20 book value a key positive for stock

Seldom do strong names fail to catch the interest of the Street. However, Aditya Birla Capital (AB Capital) is an exception. Despite its grand demerger and listing in 2017, the stock trades 60 per cent lower than its listing price, at Rs 248 apiece.
 
A large part of the value erosion could be attributed to the liquidity crunch that hit the non-banking financial companies (NBFCs) in September last year and its Rs 390-crore exposure to IL&FS group firms. This is about less than a per cent of its NBFC loan book.
 
However, given the NBFC arm's role in the overall business (it accounts for over 60 per cent of AB Capital's net worth), the overhang may remain. That said, raising funds hasn't been an issue for the business. The company had, in its Q2 results commentary, said that liquidity was adequate for six months. However, from 0.7 per cent a year ago, the gross non-performing assets (NPA) ratio climbed to about a per cent in Q2.
 
While this is quite contained as compared to peers, the increase in NPAs justifies concerns on asset quality. Its housing finance company (HFC), too, witnessed an increase in NPAs. Analysts at Deutsche Bank say the asset quality trend, particularly in the HFC business, is a tad discomforting for a relatively less seasoned book.
 
Another concern is the huge escalation in operating costs. Cost-to-income ratio for the NBFC and HFC businesses stood at 34 per cent and 70 per cent, respectively, in Q2. Both numbers fail to instil any confidence.
 
Given that they are in a maturing phase, cost may remain high. The NBFC business is being reworked to a more retail model from a wholesale one, which could remain a drag on its profitability. Its asset management company posted slow growth, dragged by fixed income or debt funds.
 
On the positive side, its recent tie-up with HDFC Bank as its bancassurance partner helped the company outperform the industry with 76 per cent growth in individual premiums, as against 13 per cent growth by the industry.
 

The value of new business margins are gradually improving. AB Capital's health insurance business may take three years to mature, according to the company.
 
For now, its benign asking price (1.8 times its FY20 book value) is the key positive for the AB Capital stock. This is why most analysts polled on Bloomberg remain positive.