Aditya Birla Capital: High on diversification, not much on conviction

Lending businesses accounting for about half of its valuations remain laggards

Nearly two years ago, when Aditya Birla Capital (AB Capital) stock was listed following its demerger with Grasim Industries at Rs 250 a share, there was a lot of optimism around it, since it was the only non-banking financial company (NBFC) with a presence across categories – insurance, asset management company (AMC), housing finance (HFC) and pure-play lending. But over time, the enthusiasm has faded away, with the stock crashing by 67 per cent since its listing in September 2017. Ironically, the financial conglomerate’s lending business, accounting for 48 per cent of its total valuations, could be responsible for the tepid show.

In September quarter (Q2), while the other businesses such as life insurance and AMC displayed improvement in their operational metrics, the lending operations showed little signs of betterment. For instance, led by product launches, the life insurance business grew faster than industry average in Q2. Likewise, while the AMC business lost in market share in a few segments, cost control measures aided the overall profitability. On the other hand, loan growth has been very tepid for the lending business, with the NBFC arm posting 5 per cent year-on-year decline in assets under management and HFC business remaining flat during this period. Though moderately better than Q1’s bad loan, Q2’s gross non-performing assets (NPA) ratio at 3.46 per cent for the NBFC and 1.24 per cent for the HFC businesses don’t instill confidence on the quality of loan books. Gross NPA ratios of these businesses was well-below a per cent in FY19.

The problem with AB Capital’s lending businesses lies in the construct of its portfolios. Over 44 per cent of the NBFC’s business draws support from corporate loans. Loans to small and medium enterprises (SMEs), presently throwing much pain for banks account for 28 per cent of the book, while the retail segment, share of which was 20 per cent in Q2 has risen from 16 per cent a year-ago. A faster progress in diversification efforts may have helped keep the asset quality under check.

Likewise, while the HFC portfolio is recaliberating in favour of affordable housing loans (21 per cent of HFC loans), the share of individual loans is only 50 per cent, while loan against property accounts for a fourth of the book. Compared to top rated HFCs the loan mix isn’t very favourable for AB Capital.

Hence, despite being a financial conglomerate, AB Capital’s delayed diversification efforts in its lending business is hurting the stock price. Analysts at JM Financial note that improvement in profitability trend for the lending business is the key for re-rating, while those at Motilal Oswal Financial Services say the AMC business may be muted in FY21 due to redemption pressure.