Recommendation From Finance Investment Sector

This section gives a recommendation of a stock having stock margin padding price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon

Aditya Birla Capital Ltd (ABCL)

GROW YOUR CAPITAL WITH ABCL

HERE IS WHY
Strong operating performance
High margins
Stable asset quality

Aditya Birla Capital Ltd. (ABCL) is the financial services platform of the Aditya Birla Group. It has a strong presence across various verticals such as life insurance, asset management, private equity, corporate lending, structured finance, project finance, general insurance broking, wealth management, equity, currency and commodity broking and more.

On the consolidated financial front, the company's total income from operations rose to Rs.4,729.82 crore in Q4FY19 from Rs.4,202.97 crore in Q4FY18, posting a YoY growth of 12.54 per cent. EBITDA stood at Rs.1,470.67 crore in Q4FY19 as against Rs.1,207.65 crore in Q4FY18, marking an increase of 21.78 per cent. Net profit dropped to Rs.188.29 crore in Q4FY19 from Rs.248.82 crore in Q4FY18, registering a fall of 24.33 per cent. However, EPS increased to Rs.1.17 in Q4FY19 from Rs.0.94 in Q4FY18, thereby rising 24.47 per cent. 



The company witnessed strong profit growth across businesses of lending as well as asset management. In the former category, NBFC lending was up 26 per cent YoY while HFC lending grew 3.2x YoY. The asset management business registered a growth of 19 per cent YoY as its profit rose to Rs180.21 crore, with total assets under management (AUMs) of Rs2,65,109 crore. Loans recorded a growth of 20 per cent YoY and 5 per cent QoQ to Rs51,700 crore. The share of high-yielding SME and retail loan book climbed to 50 per cent, thereby rising 300 bps YoY. The cost of funds declined to 8.2 per cent in Q4FY19 from 8.3 per cent in Q3FY19. These factors collectively resulted in the highest-ever-margin of 5.25 per cent in Q4FY19. ABCL reported stable asset quality QoQ with GNPAs at 1.05 per cent. The company’s exposure to IL&FS stands at Rs.2.2 billion and its coverage ratio on the same stands at 27 per cent. In the life insurance business, the value of new business margin improved to 9.5 per cent, while the EV growth came in at 15 per cent YoY to Rs.4,900 crore. Life insurance premium grew 60 per cent, bolstered by a tie-up with HDFC Bank. This resulted in the addition of market share of 125 bps to 4.2 per cent. ABCL has tied-up with 10 bank partners in health insurance and the business is expected to break even in 2022. Across tenures, ABCL reported a persistent improvement of 2 to 3 per cent. Furthermore, the combined ratio in health insurance improved to 149 per cent in FY19 from 188 per cent in FY18.

In the near term, the asset management business is likely to remain under pressure due to regulatory changes. However, the healthy traction in the lending business and the improvement in profitability of new ventures are expected to enhance the overall profitability of the company. We are heartened by the company’s strong performance in terms of cost of funds, robust growth rates and stable asset quality, despite the liquidity crunch faced by NBFCs in H2FY19. Its strong NIM performance and improvement in the insurance business regardless of the tough business environment is a testimony of its ability to sustain core operating performance. Thus, we urge our reader-investors to BUY this stock. 




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