Aditya Birla Capital - Thoughtful (inclusive) conglomerate business evolution commands premium - ICICI Securities

We initiate coverage on Aditya Birla Capital (ABCL) with BUY rating as we appreciate the group's thoughtful business evolution as one of the most counter-cyclical diversified conglomerates. With mainstream businesses achieving significant economies of scales, strategic focus on granularity, retailisation, clear funding cost advantage, operating and financial leverage efficiencies, now there is improved visibility on better return-ratio trajectory in not only individual businesses, but also on a consolidated basis. Valuing each business separately, we arrive at SoTP-based TP of Rs171 (~40% upside). Initiate coverage on the stock with 'BUY'.

- A thoughtful 'conglomerate' business evolution: ABCL has over the past one decade seeded, nurtured and evolved as one of the most counter-cyclical diversified conglomerates. Its mainstream businesses such as lending, AMC, insurance, broking etc. have achieved market leadership and significant economies of scale. ABCL's blend of businesses that are at different stages of lifecycle - established (NBFC, AMC), transformational (HFC, life insurance) and incubating (health insurance) - make it uniquely positioned to capture the opportunities emerging from some irreversible trends in financial services space.

- Unique business proposition flowing from group synergies: ABCL is a unique business proposition given: 1) Strong parentage (flow of capital, funding cost benefit, degree of comfort), 2) balanced & lower risk lending portfolio (akin to banks), 3) broad-based offerings (13 business lines) across customers' lifecycle, 4) synergy potential (20mn customers across group) to leverage group relationships to make the whole more than sum of its parts, and 5) multi-channel distribution ecosystem.

- Operating metrics are looking up - Calibrated risk-adjusted growth with improved return ratios: The group has demonstrated its ability not only in building economies of scale but at the same time structurally paving the road towards granularisation, retailisation, diversification within various business segments. It will sustainably follow structural strategy over the next 3 years of rebalancing its NBFC portfolio in favour of retail + SME and its HFC portfolio is skewed more towards affordable segment + informal segment. Also, given the clear advantage of low funding costs, operating and financial leverage efficiencies, now there is a visible trajectory of improvement in return ratios in each business as well as on a consolidated basis. Further franchise investment, cross-sell/up-sell and leveraging digital, data and analytics will aid it to make further respectable mark in RoE profile.

- Conglomerate commands premium; initiate coverage with 'BUY'. We believe established businesses (NBFC, AMC) will be key value drivers (>70% of SoTP) with transformational businesses (life insurance, HFC) providing an additional kick and incubating businesses (ARC, health insurance) offering option value. We arrive at SoTP-based TP of Rs171 (~40% upside). We initiate coverage on the stock with 'BUY'.

Shares of Aditya Birla Capital Ltd was last trading in BSE at Rs.129.85 as compared to the previous close of Rs. 123.65. The total number of shares traded during the day was 814925 in over 5564 trades.

The stock hit an intraday high of Rs. 130.7 and intraday low of 122.7. The net turnover during the day was Rs. 104374031.

Source : Equity Bulls

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