Aditya Birla Capital shares: Macquarie says stock can double in 3 years. Here's why

Macquarie has initiated coverage on Aditya Birla Capital Ltd (AB Capital) with an ‘Outperform’ rating and a target price of Rs 230 per share. The NBFC stock, which is not widely tracked by  Street, can double in three years, the foreign brokerage said. Calling it "The next big diversified NBFC story", Macquarie said Aditya Birla Capital (ABCL) is poised to show strong growth in loans and earnings driven by its lending (NBFC and HFC) and savings (life insurance) businesses in the next several years.

Macquarie said an improvement in profitability in NBFC and insurance segments as key catalysts for the stock. Following the report, shares of Aditya Birla Capital Ltd climbed 8.52 per cent to hit a high of Rs 197.30.

"We value AB Capital at a target price of Rs 230 using a sum-of-parts methodology. About 85 per cent of our SOTP is derived from NBFC (1.9 times FY25F BV), HFC (1.4 times FY25F BV) and life insurance business (FY24FEV+15 times FY25F VNB). We also attribute a 20 per cent holding company discount to listed subsidiaries ABSL AMC and Aditya Birla Money," Macquarie said.

The foreign brokerage said it is factoring in no discount for ABFL on account of the merger announced with the listed ABCL. It suggested a potential fair value of Rs 345 per share for AB Capital in the next three years. 

Macquarie cited moats such as strong parentage and AAA rating, providing access to competitive funding. It said the NBFC is leveraging the ABG group and ABCL ecosystem for cross-selling and upselling in NBFC, insurance, and other segments. Besides, it noted that Aditya Birla Capital has a diversified product suite and distribution mix avoiding concentration risk in terms of product segment dependency.

"In our view, the SME segment, in particular, is expected to show a strong over 30 per cent AUM CAGR over the next three years; and a strong senior leadership is providing confidence on underwriting and asset quality," Macquarie said.

Macquarie said ABFL may deliver an AUM CAGR of 28 per cent over FY23-26E with over 10 bps return on asset (ROA) expansion (2.4 per cent in FY26E) which is higher than our expectations for other top NBFCs.

Similarly, it expects a 17 per cent VNB CAGR (FY24E-26E) for Aditya Birla Sun Life Insurance, which higher than the 15 per cent average for listed private peers.

"Despite this, implied valuations remain subdued at 1.5x FY25F P/B for Aditya Birla Finance (57 per cent SOTP contribution) and 1.5 times FY25P/EV for Aditya Birla Sun Life Insurance (21 per cent SOTP contribution) and provide potential for substantial re-rating," it said.