Sum of the parts tends to be a tad complicated for investors and, hence, holding companies seldom command as much valuations as they ought to. But, in case of Aditya Birla Nuvo (ABNL), investors could expect a sizeable valuation re-rating in the near-term thanks to its life insurance and fast-growing lending businesses. This has already started reflecting in ABNL — the holding company of Birla Sun Life Insurance (BSLI). Its share price has seen a 19 per cent surge in the past two weeks following HDFC Life-Max Life deal, which has renewed investor interest in the life insurance space.
The recently concluded HDFC Life-Max Life set a steep valuation benchmark at 2.8 times FY18 embedded value. Embedded value is the key metric for valuing a life insurance companies and represents the sum of present value of future profits and net asset value of the business. Given that analysts currently peg BSLI at 1.2-1.8 times FY17 embedded value, investors could expect more upside for ABNL’s stock.
However, Nidhesh Jain of Investec Capital Services points out that BSLI is only one portion of ABNL’s revenues (25 per cent in FY16) and investors can expect more re-rating from the non-banking financial company (NBFC) arm. The NBFC business, which accounted for 7.5 per cent of ABNL’s revenues in FY14, has seen its share in the pie increase to 15.5 per cent in FY16. Analysts consider the NBFC arm to be a fast-growing business of ABNL as well as the most profitable one given its 27 per cent contribution to earnings before interest and taxes of the consolidated ABNL. The NBFC business, which caters to segments such as corporate finance and infrastructure lending, is valued at Rs 285 per share (22 per cent of ABNL’s share price) by analysts at Morgan Stanley.
With these factors in place, analysts feel the financials vertical would be the key value driver for ABNL going forward. That said, Idea Cellular (ABNL holds 23.7 per cent stake) and the manufacturing verticals will also contribute to ABNL’s valuations.