Shares of Aditya Birla Capital Ltd rose as much as 4% on Thursday, March 20, hitting an intraday high of ₹177.40.
The move comes after global brokerage firm Macquarie predicted that the stock would hit ₹260 levels, implying a potential upside of over 50% from Wednesday’s closing levels.
Macquarie currently assigns an ‘outperform’ rating to the stock.
AB Capital’s stock has declined 31% from its all-time high of ₹246.90 hit in June last year. Macquarie believes the stock’s recent underperformance has provided a good ‘buy’ opportunity.
The brokerage said AB Capital is one of its top picks and is on track to double in three years.
What is the reason for the underperformance?
AB Capital’s assets under management (AUM) growth has declined from 40% at its peak to 20% currently. The main reason for this decline is the sharp slowdown in its personal loan business.
A key factor behind this slowdown is AB Capital’s excessive dependence on digital partners. One of these partners faced a major issue, which forced AB Capital to completely stop doing business with a large fintech partner.
Also, during the last 12 months, margins have come down and credit costs have increased mainly due to the unsecured loan business. This has resulted in the return on assets (ROA) declining from a peak of 2.4% in June 2023 to 2% now.
“AB Capital is banking on India’s SME growth story, with its SME loan book expected to grow at 25-30% CAGR over the next three years. With the new CEO joining a few years ago, growth and profitability metrics are expected to improve over the medium term,” it said, adding that valuations remain attractive at current levels.
As an AAA-rated NBFC that is also cost-conscious, AB Capital maintains a low cost ratio. The brokerage believes its sustainable RoA will be around 2.3-2.4% once the unsecured NPA cycle normalises.
“We believe growth in unsecured personal loans should pick up, and margins should improve due to the falling interest rate cycle, which will aid RoA recovery. Despite the sharp slowdown in personal loans, overall loan growth is running at 20% and is expected to accelerate,” it said. According to the brokerage, key catalysts include rising margins driven by falling rates, growth in high-yield unsecured loans and declining credit costs, all of which should contribute to higher ROA.
All 10 out of 10 analysts who have coverage on Aditya Birla Capital have a ‘buy’ rating on the stock. Investec has the highest target on the Street at ₹265, followed by Macquarie at ₹1,100.
Shares of Aditya Birla Capital Ltd closed 3.40% higher at ₹176.60 on Thursday. The stock is unchanged on a year-to-date basis.
