Shift To Secured Lending In NBFC Segment Anticipated To Improve Earnings Stability

Key Takeaways

• Strategic investments in digital initiatives and a shift to secured lending enhance efficiency, customer acquisition, and earnings stability.
  
• Omnichannel distribution and focus on housing finance growth boost market reach, leveraging government initiatives for increased revenue.
  
• Challenging macroeconomic conditions and rising costs may negatively impact Aditya Birla Capital's profitability and growth prospects.

Catalysts

Through its subsidiaries, provides various financial products and services in India and internationally.

• The company's focus on growing its Housing Finance Company (HFC) portfolio, which saw a 62% year-on-year growth, is expected to leverage government measures like PMAY and investments in affordable housing, likely leading to increased revenue from this segment.
  
• Strategic investments in digital platforms and data analytics are expected to drive customer acquisition and operational efficiency, which could improve net margins through reduced operational costs and enhanced cross-selling opportunities.
  
• The shift in product mix within the NBFC segment, with an increased focus on secured lending and reducing exposure to unsecured loans, is anticipated to maintain asset quality, thus potentially enhancing earnings stability.
  
• The omnichannel distribution architecture, including the ABCD app and Udyog Plus platform, is expected to broaden market reach and enhance penetration in Tier 3 and Tier 4 towns, boosting revenue growth and customer base expansion.
  
• The amalgamation of Aditya Birla Finance with Aditya Birla Capital aims to streamline operations and capital utilization, which could lead to improved efficiency and higher returns, positively impacting the company's earnings outlook.

Aditya Birla Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aditya Birla Capital's revenue will grow by 19.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.8% today to 10.7% in 3 years time.
• Analysts expect earnings to reach ₹53.1 billion (and earnings per share of ₹20.31) by about April 2028, up from ₹37.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.24%, as per the Simply Wall St company report.

Aditya Birla Capital Future Earnings Per Share Growth

Risks

• The Indian macroeconomic environment is challenging, with issues such as moderating urban demand, tight liquidity conditions, and high capital market volatility, which could potentially impact Aditya Birla Capital's revenue and earnings.
  
• The depreciation of the Indian rupee and ongoing food inflationary pressures could increase operational costs and squeeze profit margins, making it difficult to maintain current earnings levels.
  
• The decline in the GDP growth rate, coupled with slow CapEx offtake, suggests a sluggish economic environment, which may hinder the company's growth prospects and revenue generation.
  
• The decrease in the consolidated profit after tax compared to the previous year despite an increase in revenue indicates potential underlying profitability issues that could affect net margins negatively.
  
• The increase in credit costs and stage 2 asset quality metrics in the NBFC segment could signal rising default risks, which may lead to higher provisions and adversely impact net margins and profitability.

Valuation

• The analysts have a consensus price target of ₹246.444 for Aditya Birla Capital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹265.0, and the most bearish reporting a price target of just ₹220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹494.2 billion, earnings will come to ₹53.1 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 21.2%.
• Given the current share price of ₹181.95, the analyst price target of ₹246.44 is 26.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.