Edelweiss-Aditya Birla Cap (Init Cov) - 2018 PDF

INITIATING COVERAGE
`
ADITYA BIRLA CAPITAL
Exclusively inclusive
India Equity Research| Banking and Financial Services
We initiate coverage on Aditya Birla Capital (ABCL) with ‘BUY’ as: 1) strong EDELWEISS 4D RATINGS
parentage, balanced & lower risk lending portfolio (akin to banks) and cross- Absolute Rating BUY
sell initiatives position it to capture emerging opportunities; and 2) a Rating Relative to Sector Outperform
promising blend of established (NBFC, AMC), transformational (HFC, life Risk Rating Relative to Sector Medium
insurance) and incubating (health insurance) businesses render it a Sector Relative to Market Overweight
sustainable & scalable model. ABCL’s diversified business model shares
similarities with other successful financial entities like Bajaj and HDFC, which
MARKET DATA (R: ADTB BO, B: ABCAP IN)
bolsters our conviction. However, execution of business strategy is the key CMP : INR 139
risk to potential valuation re-rating. Valuing each business, we arrive at Target Price : INR 199
SOTP-based TP of INR199 (>40% upside). 52-week range (INR) : 264 / 140
Share in issue (mn) : 2,201.0
Unique positioning; strategic initiatives entail multiplier effect M cap (INR bn/USD mn) : 318 / 4,714
ABCL offers a unique proposition given: 1) strong parentage (capital flow, funding cost Avg. Daily Vol.BSE/NSE(‘000) : 4,262.5
benefit); 2) synergy potential (10mn customers across group businesses; further >430mn
potential Idea/Vodafone customers); and 3) broad-based offerings (13 business lines) SHARE HOLDING PATTERN (%)
across customers’ lifecycle. Moreover, the company has, over the past couple of years, Current Q3FY18 Q2FY18
taken a few strategic steps, which we believe entail multiplier effect: a) rebranding Promoters * 72.8 72.8 72.8
(unified branding under Aditya Birla Capital); b) platform integration (single data base, MF's, FI's & BK’s 7.0 7.1 7.4
CRM, IT platform, unique customer id); c) multi-channel distribution franchise; and FII's 5.3 5.8 7.9
d) robust risk management practices (three-tiered risk framework). Others 14.9 14.3 11.9
* Promoters pledged shares : NIL
Promising blend of businesses; scalable and sustainable model (% of share in issue)
The company has promising blend of businesses which are at different stages of lifecycle:
RELATIVE PERFORMANCE (%)
a) NBFC, with a diversified low-risk portfolio, will help sustain growth momentum; b) HFC
Stock over
is now at an inflection point; and c) non-credit businesses (AMC, life insurance) are Sensex Stock
Sensex
envisaged to benefit from financialisation of savings. Moreover, a few businesses (health
1 month 0.4 (9.4) (9.9)
insurance) are closer to gestation. Overall, we estimate ABCL to post 30% EPS CAGR
3 months 3.7 (10.1) (13.8)
(consolidated) over FY18-20 with RoE rising to 17% by FY20 from 13% in FY18.
12 months 13.4 NA NA
Outlook and valuations: Execution critical; initiate with ‘BUY’

We believe, established businesses will drive valuations, transformational businesses
provide added kicker and incubating businesses offer option value. Given the NOFHC
Kunal
NileshShah
Parikh
structure with no medium-term plans to list step-down entities, we have not assigned Kunal Shah
+91
+91 22
22 4040
4063 7579
5470
+91 22 4040 7579
holdco discount; this is likely to cap their standalone valuations as well. We initiate kunal.shah@edelweissfin.com
nilesh.parikh@edelweissfin.com
kunal.shah@edelweissfin.com
coverage with ‘BUY/SO’ and SOTP-based target price of INR199 (>40% upside), while risks Click on image to view video
Kunal Shah
lie in execution, rising interest rate and regulations. Click on image to view video
+91 22 4040 7579
SOTP (FY20E) Prakhar Agarwal
kunal.shah@edelweissfin.com
Prakhar Agarwal
+91 22 6620 3076
Business Method Value (INR mn) Value per share +91 22 6620 3076
prakhar.agarwal@edelweissfin.com
ABFL P/BV 2,47,600 112 Prakhar Agarwal
+91 22 6620 3076
ABHFL P/BV 34,360 16 Abhishek Agrawal
Abhishek Agrawal
BSLI AV 51,267 23 +91 22 4040 7402
+91 22 4040 7402
abhishek.agrawal@edelweissfin.com
ABAMC (%) of AUM 1,01,383 46 abhishek.agrawal@edelweissfin.com
Others 2,636 1
Net value 199 June
July 13,
June 13,2018
10, 2017
2018
1 Edelweiss Securities Limited

BFSI
Fig. 1: Unique business model positions ABCL to sustain growth momentum and improve return ratios
Established Transformational Incubating

businesses businesses businesses
NBFC – Well Life Insurance-

diversified franchise, Improving;
with low risk profile Health
sustainability key Insurance/ ARC -
Nascent, but good
AMC - A self optional value
sustaining model; focus HFC –High growth
on value accretive AUM story
Scalable and sustainable
Table 1: Shares similarities with other success stories like Bajaj & HDFC; focused execution could take ABCL to similar level
Lending (AUM) AMC (AUM) Life Insurance Health Insurance General Insurance
Aditya Birla
◑ ◕ ◐ ◐ ○
HDFC
● ● ● ○ ◕
Bajaj
● ○ ◐ ○ ●
M&M
◐ ○ ○ ○ ○
L&T
◕ ◔ ○ ○ ○
Reliance (ADAG)
◔ ◕ ◔ ○ ◔
Table 2: Diversified portfolio, customer leverage & distribution will help ABCL sustain >30% AUM CAGR in lending businesses
Consumer SME MCG LCG CV Others HL LAP CF/LRD Others
ABFL ✔ ✔ ✔ ✔ ✔ ABHFL 56 32 12
BAF ✔ ✔ HDFC 61 11 21 7
MMFS ✔ ✔ ✔ ✔ LICHF 83 13 4
LTFH ✔ ✔ ✔ ✔ ✔ IHFL 60 20 21
SHTF ✔ Repco 81 19
SCUF ✔ ✔ ✔
Source: Company, Edelweiss research

Aditya Birla Capital
Chart 1: Ideally placed to capture benefit of financialisation of savings and democratisation of credit
12.7
12.4
12.3
6.4
3.2
2.3
2.9 1.8
1.5
0.9 1.5 1.2 1.1
0.3
0
FY15 FY18E FY25E FY15 FY18E FY25E FY15 FY18E FY25E FY15 FY18E FY25E FY15 FY18E FY25E
AMC Health HFC Life Insurance NBFC
Insurance
*Note: Bubble size indicates the market opportunity and the numbers indicate market share
Table 3: Lending businesses and AMC estimated to drive strong >30% EPS CAGR, which in turn, will lead to >17% RoE
FY18 FY20E EPS CAGR (%) 1.5 20.0
PAT (INR mn) Prop (%) (INR mn) Prop (%) (FY18-20E)
Standalone 615 6.1 710 4.2 7.5 1.2 16.0
NBFC 7,308 72.8 12,391 72.9 30.2
HFC 326 3.2 1,284 7.6 98.5 0.9 12.0
AMC 3,303 32.9 5,569 32.8 29.8
(%)
(%)
Life insurance 1,656 16.5 1,508 8.9 (4.6) 0.6 8.0
Broking &money 101 1.0 397 2.3 98.5
Health insurance (1,892) (18.9) (2,195) (12.9) NA 0.3 4.0
Others/ Elimi. (1,378) (13.7) (2,664) (15.7) NA
Total 10,038 100.0 16,999 100.0 30.1
0.0 0.0
FY17 FY18 FY19E FY20E
RoA (%) RoE (%)
Table 4: Valuing each business separately, we arrive at a fair value of INR199 (>40% upside)
AUM/earnings/ Per share
FY20E (INR mn) Valuation method Multiple (x times) Business valuation Stake Value
book/AV (INR)
ABFL Book Value 99,438 2.5 2,47,600 100% 2,47,600 112
ABHFL Book Value 17,531 2.0 34,360 100% 34,360 16
Birla Sun Life Insurance Appraisal Value 54,031 1.9 1,00,523 51% 51,267 23
Birla Sun Life AMC Total AUM (%) 39,75,806 5.0 1,98,790 51% 1,01,383 46
Aditya Birla Money Mcap (Listed) 3,514 75% 2,636 1
Overall Value 199
Source: Edelweiss research

BFSI
Executive Summary
Ideally placed to cash in on emerging opportunities in financial services
ABCL, being one of the most diversified financial conglomerates, is uniquely positioned to
capture emerging opportunities in the financial services space. We envisage four defining
trends to drive the financial services space in India: a) financialisation of savings;
b) democratisation of credit; c) privatisation, but by stealth; and d) digital revolution. In this
backdrop, ABCL is ideally placed given: 1) strong parentage (flow of capital, funding cost
benefit); 2) balanced & lower risk lending portfolio (akin to banks); 3) broad-based offerings
(13 business lines) across customers’ lifecycle; and 4) synergy potential (10mn customers
across group; further >430mn potential Idea/Vodafone customers).
Promising blend of businesses; scalable and sustainable business model

The company’s diversified business model shares similarities with other successful financial
entities like Bajaj and HDFC. This bolsters our confidence in valuation re-rating, contingent
on successful execution of its business strategies. Moreover, it enjoys market leadership in
key businesses—amongst the top 5 diversified NBFCs, third-largest AMC, amongst the top 5
general insurance brokers and leading private life insurer. Also, it has a promising blend of
businesses which are at different stages of lifecycle—established (NBFC, AMC),
transformational (HFC, life insurance) and incubating (health insurance). Initiatives aimed at
leveraging its ecosystem, collaborating, cross-selling and integrating are expected to have
multiplier effect, rendering ABCL a sustainable and scalable model.
Strategic initiatives and multiple growth levers burnish prospects

ABCL’s NBFC arm is one of the fastest-growing (>38% CAGR over FY14-18) with a well-
balanced portfolio, akin to banks. We believe, retail/SME under penetration, opening up of
the corporate credit space (ebbing competition from PSU banks), diversified distribution
network and strong funding profile will help ABFL sustain 25-27% AUM CAGR. Over the past
two years, ABCL has been investing in the housing finance business, which is now at an
inflection point—set to benefit from structural growth levers. Moreover, we estimate its
non-credit businesses (AMC, life insurance) to clock >20% EPS CAGR reaping benefits of
financialisation of savings. Also, a few businesses are closer to gestation (health insurance).
Though these businesses are likely to continue to report losses, the quantum is expected to
dip substantially, providing structural delta to earnings. Overall, we estimate ABCL to post
30% EPS CAGR (consolidated) over FY18-20 with RoE improving to 17% by FY20 (FY18: 13%).
Outlook and valuations: Execution critical; initiate with ‘BUY’

We believe, established businesses (NBFC, AMC) will be key value drivers (>75% of SOTP in
FY20), transformational businesses (life insurance, HFC) provide added kicker and incubating
businesses (ARC, health Insurance) offer option value. As the listed company at the top is an
NOFHC, with major value-driving businesses being unlisted and no medium-term plans to
list/hive-off any of its key businesses, we have not applied any holdco discount. Valuing
each business separately, we arrive at SOTP-based TP of INR199 (>40% upside). ABCL’s
business model shares similarities with successful financial entities like Bajaj and HDFC,
which indicates potential valuation re-rating. However, successful execution of strategic
initiatives holds key. Besides this, higher interest rates, regulatory framework (in Life
insurance and AMC) and rising competition may also pose risk to our analysis. We initiate
coverage with ‘BUY/SO’.

Investment Rationale
ABCL, one of the most diversified financial conglomerates, is uniquely positioned to capture
opportunities emerging from financialisation of savings and democratisation of credit given:
1) its spread across a gamut of financial services businesses; and 2) market leadership—
amongst top 5 diversified NBFCs (AUM of INR510bn plus, including HFC), third-largest AMC
(AUM of INR2.7tn), amongst top 5 general insurance brokers and leading private life insurer.
Unique business positioning to sustain growth momentum

ABCL is a unique business proposition given: 1) strong parentage advantage, which ensures
flow of capital & funding cost benefit; and 2) synergy potential (the group has huge base of
10mn customers across businesses; further >430mn potential Idea/Vodafone customers); 3)
broad-based offerings—13 distinct lines of business to serve customers across their lifecycle
& business value chain. A well-balanced lending portfolio with lower risk (akin to banks)
places it ideally to leverage opening up of the credit space (with ebbing competition from
PSU banks). This business model shares similarities with other successful financial entities
like Bajaj & HDFC, indicating potential re-rating on successful execution of its business
strategies. Also, it has a promising blend of established (NBFC, AMC), transformational (HFC,
life insurance) and incubating (health insurance, ARC) businesses, which renders it a
sustainable and scalable growth model.
Fig. 2: Unique business model positions ABCL to sustain growth momentum and improve return ratios
Scalable
Transforma
Establised Incubating and
tional
businesses businesses sustainable
businesses
model
NBFC Life Insurance Health Insurance

Asset Management Housing Finance ARC
Table 5: Shares similarities with other successful business groups

Lending (AUM) AMC (AUM) Life Insurance Health Insurance General Insurance
Aditya Birla
◑ ◕ ◐ ◐ ○
HDFC
● ● ● ○ ◕
Bajaj
● ○ ◐ ○ ●
M&M
◐ ○ ○ ○ ○
L&T
◕ ◔ ○ ○ ○
Reliance (ADAG)
◔ ◕ ◔ ○ ◔

BFSI
Thoughtful evolution of business model

ABCL’s journey, from being primarily a consortium of a few strong businesses (life insurance,
NBFC, AMC, among others) to one of the most diversified financial conglomerates—13 lines
of business—has been well strategised. At the core, the vision was to create a financial
conglomerate catering to the entire customer lifecycle across various segments—corporate,
retail, mass affluent and mass retail. As a result, its business model offers holistic solutions
to customers from ‘cradle to grave’—be it credit (NBFC, housing), savings (AMC, broking,
wealth management) and protection (life insurance).
Fig. 3: Comprehensive product portfolio and 13 business lines help ABCL tap customers through their life cycle
Protecting Investing Financing Advising
Life insurance Mutual funds Home loans Aggregating
Health insurance Wealth management Personal loans Financial planning
Solutions
Motor insurance Private equity SME loans Tools & calculators
Stocks, Commodity Corporate loans
and Currency trading
Source: Company
Multiple levers to sustain best-in-class growth & improved return ratios

We believe, ABCL has created a diversified credit business which will aid sustained growth.
Over the past two years, the company has been investing in the housing finance business,
which is now at an inflection point—set to benefit from structural growth levers. On the
other hand, non-credit businesses (asset management, life insurance, etc) are estimated to
clock >20% earnings CAGR benefiting from financialisation of household savings.
Moreover, a few businesses are closer to gestation (My universe and health insurance).
Though they will continue to report losses, the quantum is likely to dip substantially,
providing structural delta to earnings. Overall, we estimate ABCL to post 30% EPS CAGR
A promising blend of established (consolidated) over FY18-20 with RoE improving to 17% by FY20 (13% in FY18).
(NBFC, AMC), transformational
(HFC, life insurance) & incubating 1) Credit businesses: Well-balanced bank-like portfolio
(health insurance) businesses Aditya Birla Finance (ABFL) is one of the fastest-growing NBFCs (>38% CAGR over FY14-18)
renders it a sustainable and with a well-balanced portfolio, akin to banks—corporate 50%, SME 27%, retail/HNI at 20%
scalable growth model and others at 3%. Going forward as well, we believe, retail/SME under penetration, opening
up of the corporate credit space (with lower competition from PSU banks), diversified
distribution network, and strong funding profile will help ABCL sustain 25-27% AUM CAGR.
This, along with sustained margin (move towards SME/retail segment to support yields), will
lead to similar 25-27% NII CAGR. Moreover, given its low risk profile and robust risk
management practices, we expect asset quality to remain benign—GNPLs at <1%, credit
cost at 50-60bps. Hence, we estimate ABFL’s RoA/RoE to improve to 2.0%/14% (post
capital) by FY20 (2.0%/13.7% in FY18).
Further, the other leg of credit business viz., Aditya Birla Housing Finance (ABHFL), is slated
to benefit from structural growth levers (government and regulatory thrust on affordable
housing), strong distribution franchise (tie ups with developers & builders) and strong
knowhow in the self-employed segment. We estimate the company to post 58-60% AUM
CAGR (looks optically higher on a lower base) over FY18-20, which will drive 70% NII
CAGR. This, along with higher operating leverage (cost reduction and direct channel

sourcing), will help ABHFL post >170% PBT CAGR (base effect), leading to RoA/RoE of 0.8%
/9% (post capital) by FY20E.
Chart 2: Strong operational performance along with sustained asset quality will help ABFL touch 2% RoA mark
903 56.0 2.5 18.0
764 49.0 2.3 16.4

695
624 42.0 2.0 14.8

(INR bn)
548
(%)
(%)
(%)
485 432 35.0 1.8 13.2
347
345 28.0 1.5 11.6
258
206 21.0 1.3 10.0

FY16 FY17 FY18 FY19E FY20E FY16 FY17 FY18E FY19E FY20E
AUM growth (RHS) RoA RoE (RHS)
2) AMC business: Momentum to sustain

One of the key beneficiaries of financialisation of household savings in India will be the asset
management industry. AMC business in India is highly concentrated with top-5/10 players
controlling >50/80% of AUM. With Aditya Birla AMC being among the top players (third-
largest mutual fund with >INR2.6tn AUM, 10.8% market share), we expect it to leverage this
opportunity. The company is likely to benefit from rising penetration, consistent fund
performance and ability to leverage its strong retail presence. Given anticipated strong AUM
growth (driven by equity segment), we expect profitability to improve over FY18-20. We
believe, the business model is self sustaining and will generate RoE of >30% (capital light
model) over FY20, with no capital commitments from the holding company.
Chart 3: Equity proportion is expected to rise, leading to improved profitability going ahead…
40.0
36 8.5
34
33.8 32
6.8
5.6
27.6
(NR bn)
24 5.1 4.3
23
(%)
19 3.3
21.4 3.4
2.0 2.2
15.2 12 1.7
9.0 0.0
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY16 FY17 FY18 FY19E FY20E
Equity proportion PAT

BFSI
3) Life insurance business: On improving trajectory

Aditya Birla Sun Life Insurance (BSLI) was among the most affected by the regulatory
upheavals of FY10. Absence of a prominent bancassurance partner (further dented by
Citibank’s exit) and higher ULIP & NAV guaranteed products were primarily responsible for
below par performance. However, over the past few years, BSLI’s business metrics—growth,
persistency, opex ratios—have been stabilising. The company has also tied up with HDFC
Bank as a bancassurance partner and ramp up of this franchise will hold key for the
company’s growth. Having said that, it still operates under significant profitability pressure
(sub-5% post cost overrun margin) and improvement in the same will be a key monitorable.
We estimate the company to deliver core RoEVs of 10-12%.
Table 6: Core RoEV potential of 12%

(INR mn) FY17 FY18 FY19E FY20E Comments
Opening Embedded Value (A) 32,750 38,100 42,819 47,964
Value of New business (540) 515 1,141 1,941 VNB takes into account post cost NBMs
Uniwind of discount 2,948 3,048 3,426 3,837 Unwind of discount at 8%
Others 2,943 1,156 578 289
Closing Embedded Value (B) 38,100 42,819 47,964 54,031
Core RoEV (%) 7.4 9.4 10.7 12.0 Core RoEV potential of >12%
Table 7: Appraisal value pegged at ~INR100bn, translating into P/EV of 1.9x

(INR mn) FY17 FY18 FY19E FY20E FY21-25E FY26-29E Terminal Comments
APE 10,789 11,973 13,690 15,651 1,15,270 1,55,729 6,52,179
-growth (%) 29.7 11.0 14.3 14.3 13.2 12.0 4.0 Lack of bancassurance partner lead to
lower than bank promoted companies
growth, ramp-up of HDFC bank key
NBAP Margin (%) (5.0) 4.3 8.3 12.4 12.5 13.3 12.0 Cost over-runs will have bearing on
NBMs initially
NBV (INR) 2,810 3,878 1,141 1,941 14,743 21,273 78,261
Structural Value (PV of NBV) (A) 46,492
Embedded Value (B) 54,031
Appraisal Value (A + B) 1,00,523
Implied P/EV (x) 1.9 Implied P/EV at 1.9x for core RoEVs of
11-13%
Core RoEV (%) 12.0
4) Investment in nascent businesses to reap benefits in the long term

ABCL has been investing in a few nascent businesses—health insurance, My universe,
among others. We believe, these investments position the company to be a strong play on
opportunities arising from jump in financial savings. We expect these businesses to continue
to report losses during the incubation period (over the next three years). However, the
losses will pare as the company continues to improve on leverage.

Strategic initiatives to have multiplier effect

To optimally leverage this ecosystem, ABCL has, over the past couple of years, taken a few
strategic steps such as: a) rebranding the entire ecosystem (unified branding under Aditya
Birla Capital) leading to strong customer connect; b) integrating platforms across segments
(single database, CRM, IT platform, unique customer id) to render scalability; c) building
multi-channel distribution franchise (over 500 multi-channel distributors);
d) institutionalising robust risk management practices (three-tiered risk framework); and
e) plugging strategic gaps across segments. With core ingredients in place, ABCL is in a sweet
spot to benefit from the three primary trends unfolding in the financial services space—
financialisation of savings, democratisation of credit and digitisation.
Fig. 4: Building blocks of strategic plan

Re-branded entire segments as Aditya Birla Capital Leverage on strong parentage ,which
Re-branding
impart it with strong customer connect
Aggressive campaign launched to improve group identity
Integrating platform Single database, CRM, IT platform, unique customer id Build on scale
Establish presence financial services (13 lines of business)

Diversify product Cater to varied needs of customers across
Presence across customer segments – corporate, retail, mass
offering their lifetime
affluent, and SME
Strong distribution Building multichannel distribution franchise (over 500 Better channel management
ecosystem multichannel distributors)
3 Tier framework
Risk management Build on sound systems being a role model
Central risk aggregation system
A strong management team, with members having over 23 Achieve sustainable and profitable scale
Filling strategic gaps years of experience in financial services segment Being top quartile in every line of business
Unified brand and experience for a better connect

One of the distinct advantages for ABCL is its strong parentage (Aditya Birla Group). To
leverage on this brand and the group’s ability to offer holistic solutions to customer needs,
the company has rebranded all businesses under one brand Aditya Birla Capital. To this
effect, aggressive marketing campaigns have been launched, email ids are being changed,
Integration across businesses branches are being revamped with a common kiosk, among others. This entails better
provides the Group with an inherent connect of various stakeholders (customers, employees, among others) with the group
advantage to build on collaboration ecosystem.
between segments, thereby gaining
strong scalability potential
Integration and collaboration to build scale
Not only has the company unified its database, CRM, but also created a unified platform
with one login id, one website, one phone number which enables customers to conveniently
transact and get services for all their requirements. This integration across businesses
provides the group with an inherent advantage of using analytics (bundling of products,
utilisation of common distributors, among others) to build on collaboration between
segments, thereby gaining strong scalability potential.

BFSI
Multi-channel distribution ecosystem

ABCL has invested in the past few years to build a strong multi-channel distribution
franchise with over 1,600 points of presence, 260 plus national advisors, 54K IFAs, among
others. Moreover, the company can potentially leverage on the group’s eco system to
further strengthen its distribution. For example, it can utilise group company Ultratech’s
supplier/distributor network. Also, an organisation structure that incentivises cross-selling
strengthens to the underlying business model.
Fig. 5: Multi-channel presence and strong distribution render it a scalable model
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Source: Company
Robust risk management framework

One of the lynchpins of building a sound business model rests with the risk management
practices adopted by a company. With this as a touchstone, ABCL has established a three-
tier risk management framework. It has built on central risk aggregation system and has
robust internal rating management (any exposure over INR50mn has internal rating and the
overall rating profile is A+). The company follows a multi-pronged credit appraisal strategy
as it undertakes various checks through CIBIL score, RBI defaulters and SEBI defaulters. It is
also planning on improving its risk management processes by deploying alternative credit
models via social scoring, transaction data and an early warning mechanism.

Fig. 6: Three-tier risk management framework reflects in benign asset quality
3 Tier Framework
Level Level Level

1 2 3
Oversight by Risk Audit & governance

function oversight committees
Source: Company
Strong leadership with strong JV partners across key businesses

ABCL has a strong management team across businesses with average experience of 20 plus
years in financial services and more than 10 years of stints with the Aditya Birla Group. This
is further bolstered by strong JV partners across critical businesses viz., Sunlife in Aditya Birla
Sunlife Insurance & Birla Sunlife Asset Management and MMI Holdings in the health
insurance business.
Financial conglomerate poised to leverage on financialisation of savings

A diverse product suite offering solutions across customer lifecycle, wide distribution reach,
robust risk management practices, integrated technology platform, efficient capital
allocation and cross-sell incentivisation place ABCL in a sweet spot to capture emerging
opportunities in the fastest-growing financial services space.
Chart 4: Household assets to tilt in favour of equities, MF and insurance….
Cash FY17 LI Fund Cash FY25E

MF AUM 5% MF AUM LI Fund
Gold 2% Gold 0%
1% Bank 5% 7%
9% 6%
deposits
11% Small
savings Bank
0% deposits
Equity 12% Small
3% savings
0%
Equity
5%
Real Estate
Real Estate 65%
69%

BFSI
Fig. 7: …ABCL well poised to cash in on opportunities

51% 51% 100% 100% 50.002% 100% 75% 93.7% 51%

Aditya Birla Aditya Birla Aditya Birla Aditya Birla Aditya Birla
Birla Sun Life Aditya Birla Aditya Aditya Birla
Housing Insurance Health
Insurance Sun Life AMC Birla Finance PE Advisors Money MyUniverse
Finance Brokers Insurance
51% 100% 100%

Aditya Birla
Aditya Birla Aditya
Financial
Wellness Birla ARC
Services
Source: Company
Table 8: Ideally placed to capture benefits of financialisation of savings and democratisation of credit
FY15 FY18E FY25E
(INR bn)
Industry ABCL Market share (%) Industry ABCL Market share (%) Industry ABCL Market share (%)
NBFC 15,379 176 1.1 23,994 442 1.8 72,010 2,294 3.2
HFC 5,623 14 0.3 8,989 79 0.9 26,977 628 2.3
Life insrance 3,228 48 1.5 5,062 59 1.2 13,747 199 1.5
Health insrance 29 NA NA 83 2 2.9 396 25 6.4
AMC 10,828 1,335 12.3 22,157 2,740 12.4 78,604 9,951 12.7
Chart 5: Diversified revenue pool to help with stability and cross-sell opportunities
Revenue (FY18) PBT (FY18)
New (HFC Others Life

New (HFC
+ HI) 5% Others Insurance
+ HI)
6% -11% -4% 11%
AMC
9%
Life
Insurance AMC
47% 32%
NBFC NBFC
33% 72%
Source: Company

Aditya Birla Finance: A strong diversified franchise
Aditya Birla Finance (ABFL) is a diversified financial lender (corporate 50%, SME 27%,
retail/HNI at 20% and other at 3%) and is one of fastest growing NBFCs (>38% CAGR
over FY14-18). We believe, a diversified loan mix, strong funding benefit, robust
customer leverage and extensive distribution will help the company sustain 25-27%
AUM CAGR. This, along with sustained margin (move towards SME/retail segment to
support yields), will help similar 25-27% NII CAGR. Moreover, given its strong risk
management practices, we expect asset quality to remain benign (GNPLs at <1%, credit
cost at 50-60bps). We estimate RoA/RoE to improve to 2.0%/14% (post capital) by FY20
(2.0%/13.7% in FY18).
Diversified lender with incremental focus on retail/SME

ABFL is a well diversified player with presence across retail (11%), SME (27%), mid-corporate
(17%) and large corporate (33%). This, in conjunction with a balanced loan mix, we believe,
will throw up multiple growth opportunities in the coming years.
Given the company’s strong distribution franchise, presence across customer segments,
group synergies and robust technology platform, we estimate ABFL to clock >25-27% AUM
CAGR over FY18-20 in retail and SME segments (key focus area). Moreover, owing to its
corporate lending experience and strong parentage (leading to best-in-class funding cost),
ABFL is also ideally positioned to leverage corporate lending opportunities arising from
structural challenges with PSU banks. Thus, we estimate ABFL to post >25% loan CAGR over
FY18-20.
Table 9: Strong product diversification akin to banks…

Segments Products Proportion (%) Key features and management strategy
Term loan 11.0 Sector agnostic with presence across industries
Structured finance 8.0 Focus on top corporates (targets top 150 corporates)
Large corporate Project loan 14.0 Strength of customised solutions and innovative products (structured finance)
Focus on last mile and operational project finance (95% of project finance is operational)
Term loan 9.0 Companies with turn-over of INR2.5bn- INR10.0bn

Structured finance 1.0 Strength of customised solutions and innovative products
Mid-corporate
Project loan 1.0 Key offerings are term loans, WC loans , acquisition finance , balance sheet finance
Construction finance 6.0
Term loan 9.0 Key offerings are term loans, LAP, LRD, vendor financing and channel financing
LAP 6.0 Key strengthen: Value chain of Aditya Birla ecosystem can be leveraged
SME
LRD 7.0 Strategy: Backward and forward integration in mid and large portfolio
Supply chain & broker 5.0 Key focus segment aims to take proportion to 30% from 27% in FY18
Digital 5.0 Key offerings are LAP, PL, LAS, IPO financing, and ESOP financing
Strategy: To add new product lines (consumer durables etc), leverage technology and
Retail LAP 4.0
extensive group customer base to cross-sell and up-sell products
LAS 2.0 Digitalise back end processes so as to improve customer experience and reduce TAT
Promoters & HNIs 9.0 Key offerings: IPO financing, LAP , LAS
Others 3.0 Key offerings: Incl. Investment / DCM

BFSI
Chart 6: …with robust infrastructure (across geographies)… Chart 7: ….and risk mitigants (focus on direct sourcing)…
Geographical mix Sourcing mix
South Channel
18% Partners
22%
North
20% West
58%
Direct
East 78%
4%
Source: Company
Chart 8: …will help it sustain strong AUM growth momentum (25-27% CAGR)
900 56.0
760 695 49.0
620 42.0
(INR bn)
548
(%)
480 432 35.0
347
340 28.0
258
200 21.0
FY16 FY17 FY18 FY19E FY20E
AUM growth (RHS)
Move towards higher yields along with funding cost to boost NIM
One of ABFL’s key strengths is its strong parentage, which helps diversify liability profile and
effectively lower funding cost (one of the lowest among NBFCs). This, in turn, helps the
company move towards the quality curve, reflected in its lower risk-adjusted margin.
Cumulatively, the company has benefitted from stable spreads and margin through the
interest rate cycle. Henceforth, we expect two trends to play out: a) lending rates will
benefit from move towards higher yielding SME & retail segment; and b) the turning
interest rate cycle will put some pressure on borrowing cost, translating into higher
borrowing cost. Thus, cumulatively, we estimate spreads to be broadly stable, translating
into NII CAGR of ~25% over FY18-20.

Chart 9: Diversified funding mix and strong parentage help ABFL run lower funding cost (one of the lowest among peers)…
Borrowing mix 12.0
Sub Debt
5% 10.6
NCDs 9.2 8.9

30% Banks 8.5 8.5
(%)
40% 7.8
7.8 7.5 7.4
6.4
CP's 5.0
25% SCUF LTFH CapF MMFS BAF ABFL
Chart 10: ..also percolates into move towards quality curve reflected in lower risk adjusted margin
26.0 17.0
13.9
22.6 14.0
21.0
( Yield ion advances %)
19.2 18.3 11.0 10.4

9.9
( NIMs %)
17.6 9.7
16.0
15.8 8.0
12.2 5.3
12.4 11.1 5.0 4.1
9.0 2.0
SCUF LTFH CapF MMFS BAF ABFL SCUF LTFH CapF MMFS BAF ABFL
Chart 11: Lending rates to benefit (mix change), borrowing cost to rise keeping spreads steady, leading to ~25% NII CAGR
13.0 5.0 33.0 59.0
10.4 4.0 28.0 51.2

25.1
7.8 3.0 23.0 43.4

(INR bn)
19.9
(%)
(%)
(%)
5.2 2.0 18.0 16.0 35.6
2.6 1.0 13.0 11.0 27.8
0.0 0.0 8.0 20.0

FY18E FY19E FY20E FY17 FY18E FY19E FY20E
NIMs (RHS) Yields Cost NII growth(RHS)

BFSI
Operating leverage to play through

One of the key proponents of improvement in ABFL’s return ratio is operating leverage
benefit. The company has already invested in stepping-up its distribution franchise
(branches, agents, etc) and building a technology platform. With management focus on
technology and cross sell (technological integration will help leverage group customers at
minimal costs), we believe there should be definite improvement in cost ratios, which will
percolate to better return ratios.
Chart 12: Improvement in cost ratios will boost operating performance with PPoP growth (~28% YoY)
38.0 28.0 55.0
34.0 23.4 44.0

31.9 20.6
31.0 30.5
30.0 28.5 28.9 18.8 33.0
27.1 16.0
(%)
(%)
(%)
26.0 14.2 12.6 22.0
23.6
9.3
22.0 9.6 11.0
7.1
18.0 5.0 0.0

FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY16 FY17 FY18E FY19E FY20E
Cost Income Ratio (%) PPoP growth (RHS)
Best-in-class asset quality; trend likely to sustain

ABFL has demonstrated a strong track record of benign asset quality across cycles (GNPLs of
0.5-1.3% over the past five years), a testimony to its strong risk management practices. A
diversified portfolio, effective early warning systems, strong risk selection (average credit
rating for corporate loans at A+), customised product offerings and cash flow-based lending
are key factors driving its strong asset quality.
Given the management’s strong inclination towards low-risk assets, we expect the trend to
sustain and we estimate credit cost at sub-60bps over FY18-20 (average credit cost of 35-
40bps over the past five years).

Chart 13: Strong track record of asset quality—Trend likely to sustain given strong risk selection and management risk controls
2.0 80.0 GNPLs (FY18)
13.0
1.6 68.0 10.3

1.3 10.4
1.2 56.0
0.9 7.8
(%)
0.9 6.8
(%)
0.9
0.8
(%)
0.8 0.6 0.7 44.0 5.2
0.6 0.6 5.2
0.5
0.4
0.4 0.3 32.0
0.2 0.2
2.6 1.6 1.7
0.9
0.0 20.0
FY14 FY15 FY16 FY17 FY18 FY19EFY20E 0.0
GNPL NNPL PCR (RHS) SCUF LTFH CapF MMFS BAF ABFL
RoA to touch 2%, leverage to keep RoE in 13-14% range

We estimate ABFL to post >26% PAT CAGR over FY18-20 leading to RoA of 2%. Given the
strong growth momentum, we have assumed capital infusion in the company of INR14bn
(INR7bn in FY19 and INR7bn in FY20) leading to RoE of 13-14%.
Chart 14: Strong earnings momentum will help ABFL touch 2% RoA mark, helping it narrow the gap with peers
2.5 18.0 5.0
2.3 16.4 4.0 3.6
2.0 14.8 2.8

3.0
(%)
(%)
(%)
2.2 2.1
1.8 13.2 2.0
2.0
1.5
1.5 11.6
1.0
1.3 10.0
FY16 FY17 FY18E FY19E FY20E 0.0
RoA RoE (RHS) SCUF LTFH CapF MMFS BAF ABFL

BFSI
Financial Statement
Income statement (INR mn) Balance sheet (INR mn)

Year to March FY17 FY18E FY19E FY20E Year ended 31st March FY17 FY18E FY19E FY20E
Interest income 31,814 39,603 49,596 62,876 EQUITY AND LIABILITIES
Interest Expense 20,771 23,590 29,651 37,800 Shareholder funds
Net interest income 11,044 16,013 19,945 25,076 Share Capital
Fee income 2,135 2,162 2,738 3,464 Equity 6,274 6,451 6,630 6,775
other income 317 277 364 474 Preference 100 - - -
Net revenue 13,496 18,452 23,046 29,014 Reserves and Surplus 43,539 56,759 73,416 92,663
Operating expense 4,187 5,879 7,026 8,391 49,913 63,210 80,047 99,438
- Employee exp 2,499 3,937 4,835 5,925 Non-current Liabilities
- Dep. /amortisation 147 166 188 212 Long term borrowings 159,466 197,389 249,580 318,800
- Other opex 1,542 1,776 2,003 2,254 Other long term liabilities 1,597 1,676 1,760 1,848
Preprovision profit 9,308 12,574 16,021 20,623 Long term provisions 2,044 2,269 2,946 4,027
Provisions 989 1,484 1,969 2,921 163,107 201,335 254,286 324,675
PBT 8,319 11,090 14,052 17,702 Current Liabilities
Short term borrowings 99,125 122,698 155,140 198,168
Taxes 2,467 3,327 4,216 5,311 Trade Payables
PAT 5,853 7,763 9,836 12,391 Micro & small enterprises 0 0 0 0
EPS 10.1 12.0 14.8 18.3 Others 1,064 1,276 1,429 1,601
Other current liabilities 40,262 49,522 60,912 73,095
Growth ratios (%) Short term provisions 728 815 913 1,022
Year to March FY17 FY18E FY19E FY20E 141,178 174,312 218,395 273,886
NII growth 38.0 45.0 24.6 25.7 Total 354,199 438,857 552,728 697,998
Net revenues growth 43.1 36.7 24.9 25.9
Opex growth 81.7 40.4 19.5 19.4 ASSETS
PPP growth 30.6 35.1 27.4 28.7 Non-current Assets
Provisions growth 14.8 50.0 32.7 48.4 Fixed Assets
PAT growth 43.2 32.6 26.7 26.0 PP&E 139 163 190 223
Intangible assets 361 404 453 507
Operating ratios (%) Intangible assets un. dev. 66 73 80 88
Year to March FY17 FY18E FY19E FY20E Non-Current investments 659 751 879 1,028
Yield on advances 10.9 10.6 10.5 10.5 Deferred tax assets (Net) 768 380 (112) (732)
Cost of funds 7.8 6.9 7.0 7.1 Loans and advances 245,257 305,605 387,187 491,365
Spread 3.1 3.7 3.6 3.5 247,250 307,375 388,676 492,479
Net interest margins 3.6 4.1 4.0 4.0 Current Assets
Cost-income 31.0 31.9 30.5 28.9 Current investments 7,942 9,054 10,593 12,394
Tax rate 29.7 30.0 30.0 30.0 Stock of securities 5,828 6,585 7,573 8,709
Trade receivables 119 133 149 167
RoE decomposition (%) Cash and bank balances 1,357 1,750 1,955 2,480
Year to March FY17 FY18E FY19E FY20E Loans and advances 87,656 109,225 138,383 175,617
Net interest income/Assets 3.6 4.1 4.0 4.0 Other current assets 4,047 4,735 5,398 6,154
Other Income/Assets 0.8 0.6 0.6 0.6 106,949 131,482 164,051 205,520
Net revenues/Assets 4.4 4.7 4.7 4.6 Total 354,199 438,857 552,728 697,998
Operating expense/Assets 1.4 1.5 1.4 1.3
Provisions/Assets 0.3 0.4 0.4 0.5 Balance sheet ratio
Taxes/Assets 0.8 0.8 0.9 0.8 Year ended 31st March FY17 FY18E FY19E FY20E
Total costs/Assets 2.5 2.7 2.7 2.7 Earning assets 352,865 437,837 552,117 697,912
ROA 1.9 2.0 2.0 2.0 Gross NPA ratio 0.5 0.9 0.9 0.8
Equity/Assets 14.1 14.3 14.5 14.4 Net NPA ratio 0.2 0.7 0.6 0.4
ROAE 13.5 13.7 13.7 13.8 Provision coverage 55.3 29.3 35.0 50.0

Aditya Birla Housing: Sustainable growth story
Aditya Birla Housing Finance (ABHFL) is slated to benefit from structural growth levers
(government and regulatory thrust on affordable housing), strong distribution franchise
(tie-ups with developers and builders) and strong knowhow in the self-employed
segment. We expect the company to post >58% AUM CAGR (looks optically higher on
lower base) over FY18-20E, which will drive ~70% NII CAGR. This, along with higher
operating leverage (cost reduction and direct channel sourcing), will help it clock >170%
PBT CAGR (base effect) leading to RoA/RoE of 0.8% /9% (post capital) by FY20E.
Optimal product strategy: Yield generators and quality stabilisers

ABHFL’s unique business model is characterised by optimal product strategy—balance
between yield generators (LAP and developer segment forming 37%) and quality stabilisers
(home loan segment forming 63% of portfolio). Leveraging its knowhow in the self-
employed segment, strong parentage (efficient group synergies of Aditya Birla Group) and
comprehensive product suite, the company aims to leverage on the Affordable Housing
segment and further expand its housing finance business by deepening its geographical
reach—enter tier II/III cities following the hub-and-spoke model.
On the other hand, the company has high share of non-home loan segments viz., LAP (26%)
and developer finance (11%; management focus is on the B2B2C business model).
Management aims to sustain this focus to leverage its strong know how and deliver better
RoE.
Table 10: An optimal mix of yield generators and quality stabilisers …

Segments Proportion (%) Key features and management strategy
Key focus: Self employeed segment in tier-2/3 locations
Home loan (incl.
63.0 Strategy: To leverage on affordable housing segment
affordable housing)
Opportunities: To leverage on group's brand, distribution and customer synergies
Key focus: Self employeed segment in tier-2/3 locations
LAP 26.0 Strength: 1) customer‐centric model; 2) faster turnaround time ; 3) clear market segmentation; 4)
strong relationships; and 5) established brand
Key focus: Restricted to CAT A developers
Construction finance 11.0
Strategy: Relationship based model , focus on top 10 location and on CAT A developers

BFSI
Chart 15: …will help it sustain strong AUM growth (> 58% CAGR), albeit on a low base
250 115.0
205
200 92.0
150 134 69.0
(%)
(%)
100 81 46.0
50 41 23.0
14 20
0 0.0
FY15 FY16 FY17 FY18 FY19E FY20E
AUM (INR mn) AUM Growth
Improvement in funding cost to drive NIMs

With relatively higher share of non-housing loans (37% as on FY18), ABHFL is able to earn
healthy yields. We expect the relatively higher yields to sustain given the high share of non-
housing loans (40% by FY20), wherein it has some pricing power. Having said that, NIMs are
relatively soft (vis-à-vis peers) given relatively higher funding cost.
Though we expect some improvement in funding cost as operations stabilise, in the short
term, this will be partially offset by a turning interest rate cycle. Thus, we estimate NIM in
the 2.8-2.9% range, leading to NII CAGR of ~70% over FY18-20.
Chart 16: Share of non-housing loans will continue to be higher, leading to higher yields…
100.0 6 14.0
12 11 15 18
80.0 34 12.6
26
32 25 22
11.2
60.0 11.2 10.9
(%)
(%)
9.9 9.7 9.9

40.0 9.6
9.8
60 63 60 60
56
20.0
8.4
0.0
FY16 FY17 FY18 FY19E FY20E 7.0
FY15 FY16 FY17 FY18E FY19E FY20E
HL LAP CF
Yields

Chart 14: …however rising CoF will keep NIMs steady

14.0 4.0
12.2 3.6
10.9
10.4 9.9 9.7 9.9 3.2
9.6
(%)
(%)
8.6 2.8
7.5 7.4 7.5 7.6
6.8 6.3 2.4
5.0 2.0
FY16 FY17 FY18E FY19E FY20E
Yields Cost of funds NIMs (RHS)
In expansion mode; operating leverage to be back-ended

The company has demonstrated sound execution skills by turning positive in seven full
quarters of commencing operations. It has already made good investments in stepping-up
its distribution franchise (presence across 51 branches in 16 states, 35 locations and has
2,700 plus channel partners) and building technology platform. It is planning to further
expand into tier-II/III locations (hub-and-spoke model, started pilot in 21 locations).
Moreover, 45% of the sourcing is via direct channels and 55% through channel partners.
Management expects the proportion of sales through the direct channel to rise (leverage on
technology and social platform, develop its e-home loan portal, among others).
Chart 15: In expansion mode—Expanding geographical presence (84 branches by FY19) with higher direct sourcing…
100.0
Geograhical mix (%)
South 80.0
19% 56 55
North
67
29% 60.0
(%)
40.0
East
14% 20.0 44 45
33
0.0
FY16 FY17 FY18
West
Direct Channel partners
38%

BFSI
Though we do expect ABHFL to leverage its strong group distribution and the technology
platform to some extent, the expansion is likely to keep its cost ratio elevated in the near
term. And, the operating leverage benefit is likely to play out as scale builds up, which will
be back-ended. Hence, we estimate opex/assets to be at 1.8% in FY20 (2.5% in FY18) and
cost/income at 56% in FY20 (76% in FY18).
Chart 16 : … will entail operating leverage benefit, but improvement will be somewhat back-ended
180 7.0 100.0
5.8
151 149 5.6 80.0
56 55
67
123 3.4 4.2 60.0
(%)
(%)
(%)
102 2.5 40.0

94 2.1 2.8
1.8
76 44 45
66 1.4 20.0
65 33
56
0.0
37 0.0
FY16 FY17 FY18
FY15 FY16 FY17 FY18 FY19E FY20E
Direct Channel partners
Cost/Income Opex/Assets (RHS)
Source: Company
Asset quality critical to sustain improvement in profitability

ABHFL has maintained strong asset quality—GNPLs at 0.3-0.5%—reflecting its strong risk
management practices. But, given its operation in self-employed and non-housing
segments, it is imperative for company to maintain good underwriting skills. Looking at
construction finance, lower ticket size and focus on CAT A developers, assuage concerns.
Given its area of operation, we expect some volatility in asset quality & thus factor in some
rise in GNPLs. However, this may not fructify in near term as the book is yet to season out.
Chart 17 : Despite operating in tough segments, strong risk selection reflects in sustained and best-in-class asset quality
1.0 30.0 5.0
0.8 24.0 3.7

4.0
0.6
0.6 0.5 0.6 18.0
3.0
(%)
(%)
0.4 0.4 0.4

(%)
0.4 0.3 12.0

0.3 2.0
0.2 0.1 1.2
0.2 6.0 0.9 1.0
1.0 0.8
0.3
0.0 0.0
FY16 FY17 FY18 FY19E FY20E 0.0
GNPLs NNPLs Coverage (RHS) HDFC LICHF DHFL Repco IHFL ABHF

Scale benefit to reflect in better profitability

Given the strong loan momentum and sustained / improved margin, we estimate ~70% NII
CAGR. Having said that, the scale benefit will drive operating leverage benefit. Hence, we
estimate PBT growth to be >170% (albeit, on a much lower base), translating into RoA of
0.8% by FY20. Given the robust growth momentum, we have assumed capital infusion in the
company of INR8bn (INR4bn in FY19 and INR4bn in FY20) leading to RoE of 8-9% (post
capital raising).
Chart 18: Scale benefit to play out gradually; expect it to be mid-teen RoE business in steady state
1,834 2.0 14.0
1,888
1.4 9.8
1,473
0.8
0.8 0.5 0.5 5.6
1,058
(INR mn)
(%)
828
(%)
0.2 1.4
644
249
(0.4) (2.8)
229
(0.5)
(1.0) (7.0)
(186) (155) FY17 FY18E FY19E FY20E
FY17 FY18 FY19E FY20E
PBT RoA RoE

BFSI
Financial Statement
Income Statement (INR mn) Balance Sheet (INR mn)
Year ended March FY17 FY18E FY19E FY20E Year ended 31st March FY17 FY18E FY19E FY20E
Interest income 2,977 5,865 10,477 16,722 EQUITY AND LIABILITIES
Interest Expense 2,112 4,136 7,373 11,734 Shareholder funds
Net interest income 865 1,730 3,105 4,987 Share Capital 3,331 4,160 4,702 5,086
Fee income 170 284 361 524 Reserves and Surplus 344 3,507 7,544 12,444
other income - - - - 3,675 7,667 12,247 17,531
Net revenue 1,035 2,014 3,466 5,511 Non-current Liabilities
Operating expense 1,055 1,530 2,245 3,098 Long term borrowings 24,160 47,956 80,212 1,23,485
- Employee exp 512 736 1,025 1,341 Other long term liabilities 56 63 70 79
- Dep. /amortisation 30 38 42 45 Long term provisions 230 465 858 1,437
- Other opex 513 756 1,178 1,712 24,446 48,484 81,140 1,25,001
Preprovision profit (20) 484 1,221 2,413 Current Liabilities
Provisions 135 235 393 579 Short term borrowings 11,709 23,241 38,873 59,845
PBT (155) 249 828 1,834 Trade Payables
Taxes - (83) 248 550 Micro & small enterprises 0 0 0 0
PAT (155) 332 580 1,284 Others 197 221 248 277
Other current liabilities 1,779 2,099 2,351 2,633
Growth ratios (%) Short term provisions 41 45 51 57
Year to March FY17 FY18E FY19E FY20E 13,726 25,607 41,523 62,812
NII growth 190.6 100.0 79.5 60.6 Total 41,847 81,757 1,34,910 2,05,343
Net revenues growth 147.5 94.6 72.1 59.0
Opex growth 69.8 45.1 46.7 38.0 ASSETS
PPP growth NA NA 152.3 97.6 Non-current Assets
Provisions growth 36.2 73.7 67.4 47.1 Fixed Assets
PAT growth NA NA 74.6 121.5 PP&E 82 102 122 142
Intangible assets 13 18 23 28
Operating ratios (%) Intangible assets un. dev. 3 3 4 4
Year to March FY17 FY18E FY19E FY20E Loans and advances 39,394 77,209 1,27,584 1,94,349
Yield on advances 9.7 9.5 9.7 9.9 39,492 77,332 1,27,732 1,94,523
Cost of funds 7.5 7.4 7.5 7.6 Current Assets
Spread 2.2 2.2 2.2 2.3 Cash and bank balances 5 10 18 29
Net interest margins 2.8 2.8 2.9 2.9 Loans and advances 2,123 4,161 6,875 10,473
Cost-income 101.9 76.0 64.8 56.2 Other current assets 226 254 284 318
Tax rate 0.0 (33.3) 30.0 30.0 2,355 4,425 7,178 10,820
Total 41,847 81,757 1,34,910 2,05,343
RoE decomposition (%)
Year to March FY17 FY18E FY19E FY20E Balance sheet ratio (%)
Net interest income/Assets 2.8 2.8 2.9 2.9 Year ended 31st March FY17 FY18E FY19E FY20E
Other Income/Assets 0.6 0.5 0.3 0.3 Earning assets 41,749 81,634 1,34,761 2,05,169
Net revenues/Assets 3.4 3.3 3.2 3.2 Gross NPA ratio 0.3 0.5 0.6 0.6
Operating expense/Assets 3.4 2.5 2.1 1.8 Net NPA ratio 0.3 0.4 0.4 0.4
Provisions/Assets 0.4 0.4 0.4 0.3 Provision coverage 17.4 18.9 23.0 28.0
Taxes/Assets 0.0 (0.1) 0.2 0.3
Total costs/Assets 3.9 2.7 2.7 2.5
ROA (0.5) 0.5 0.5 0.8
Equity/Assets 9.3 9.2 9.2 8.8
ROAE (5.4) 5.9 5.8 8.6

Aditya Birla AMC: A self-sustaining model
Aditya Birla AMC (ABAMC) is India’s fourth-largest mutual fund with >INR2.6tn AUM,
translating into 10.8% market share (from 9.4% in FY13). We envisage the company to
benefit from rising penetration, consistent fund performance and an ability to leverage
its strong retail presence. Given strong AUM growth ahead (largely driven by equity
segment) we expect better profitability growth over FY18-20. We believe, the business
model is self sustaining and estimate it to generate RoE of >30% over FY20 with no
capital commitments from the holding company.
Huge industry potential: Structural bet to continue

The mutual fund industry has clocked healthy growth in the previous decade with average
AUM rising from INR3.5tn in FY07 to >INR23tn in April 2018. The industry’s QAAUM has
jumped from >INR10tn in FY15 to >INR20tn, 18% CAGR over the past 10 years. The industry’s
potential can be gauged by various factors such as: (1) improving long-term GDP growth; (2)
favourable demographics; (3) rising savings pie—household savings at decadal low; (4)
higher financial inclusion; (5) lower penetration; and (6) low AUM to GDP.
Fig. 8: Structural drivers in place for sustained growth momentum
Increased Increased tax

Lower Expansion in new digitalisation and savings option Deepening of the
Increase in SIPs
penetration geographies rising financial provided by ELSS bond market
inclusion and NPS
Mutual fund penetration much lower: The penetration level of mutual funds in India
remains low with total AUM-to-GDP ratio of ~12% against global average of >50%, and
upwards of 100% in US and Australia. Despite the increase, the share of mutual fund savings
continues to remain minuscule. This, there is considerable scope for expansion in the share
of mutual fund savings.

BFSI
Chart 19: Domestic mutual fund industry penetration lower than global peers
125
104
102
78
(%)
56 54 55
55 46
36
31
11 12
8
US Brazil UK S. Africa Japan China India World
Expansion in new geographies: AUM from B15 cities has been growing at a higher pace
compared to T15, albeit on a smaller base. Regulatory changes by SEBI permitting higher
expense ratios along with positive sentiments in equity markets provided the required fillip for
growth in AUM of B15 cities. While fund houses have been able to tap savings of B15 cities,
there is considerable scope for further growth.
Chart 20: Expansion in newer geographies (B15) will help improve growth momentum
100.0
15.5 15.7 16.1 16.6 17.8
80.0
60.0
(%)
40.0 84.5 84.3 83.9 83.4 82.2
20.0
0.0
FY14 FY15 FY16 FY17 Q1FY18
T15 MAAUM B15 MAAUM
Source: AMFI, Company, Edelweiss research
Increased digitalisation and rising financial inclusion: The mutual fund industry has seen
increased digitalisation, which is expected to further boost AUM. Digitalisation has enhanced
distribution reach across the country. Mobile phones and online applications are used for
transactions as well as tracking portfolios. Mutual fund houses can look at targeting the
customer base which has now been ‘financially included’ by offering products suitable to their
needs.

Increase in SIPs: There has been an increase in investors’ preference for SIPs. Mutual fund
houses have been holding various awareness drives to promote investments through SIPs.
Increase in SIPs has lent some stability to retail investments, resulting in sustainable growth for
the mutual fund industry.
Chart 21: SIPs have grown significantly, implying sustainable growth investments
86.0
73.6
61.2
(INR bn) 48.8
36.4
24.0
Apr-16
Apr-17
Apr-18
Sep-16
Feb-17
Feb-18
Sep-17
Jun-16
Mar-17
Jun-17
Mar-18
Dec-16
Dec-17
Jul-16
Jul-17
Aug-16
Oct-16
Aug-17
Oct-17
Nov-17
Nov-16
May-16
May-17
Jan-17
Jan-18
SIP Monthly
Source: AMFI
Ably poised to leverage on retail strength

Aditya Birla AMC is the third-largest asset manager in India with >INR2.6tn in AUM as of
FY18 and a market share of 10.8%. We expect the company to deliver 20% AUM CAGR over
FY18-20 (30% over FY14-17) leveraging its strong distribution franchise and consistent fund
performance. The equity proportion has jumped sharply from 12% in FY14 to 35% in FY18, a
trend we expect to sustain (management expects this to rise to 40% by FY20) as the
company leverages its position in B15 (below top-15 cities) and scales up its retail funds.
Moreover, consistent and superior fund performances will drive higher urban inflows.
Strong distribution and brand connect

The company’s distribution is diversified across channels and geographies. Apart from
owned 150 branches (82 in 2013), 226 investor service centers and 78 market
representatives, the company has roped in IFAs (57k plus empanelled), NDs and banks as
distribution partners. Direct channels contribute 43% to its AAUM. Aditya Birla AMC has
also seen a significant rise in the contribution from cities beyond the top 15 (B-15) as well.
Its AUM market share from B15 cities has risen from 7.6% as of H1FY15 to 9.4% as of FY18.
The share of B15 AUM in its total AUM has also risen from sub-10% in FY14 to >14% in
FY18.

BFSI
Chart 22 : Robust growth momentum bolstered by extensive distribution, brand connect and focus on B15
Bank 3,000 15.0

15.5
17% 12.8
2,400 11.4 401
12.4
9.8 10.2
270
1,800
(INR bn)
Direct 9.3
173
(%)
42% 136
1,200 6.2
IFA 94
19%
600 3.1
National
Distributors 0 0.0
18% FY14 FY15 FY16 FY17 FY18
Others B15 Cities AUM
Contribution of B15 (RHS)
Moreover, being one of the oldest mutual funds and with presence in multiple businesses
at a group level provides a strong brand connect—a key differentiator from other mutual
fund houses. It features in the top 5 funds in terms of AAUM overall as well as across debt
and equity. This is clearly reflected in the market share of the company at 13.7% in FY18
(8.3% in FY14).
Chart 23 : Strong distribution, brand connect & B15 focus aiding market share gain; impressively, folios witnessing good growth
13.0 7.0 11.0
6.0
11.4 6.0 10.0
5.3
5.0 4.8 9.0
9.8
4.3
(mn)
(%)
(%)
4.0
8.2 4.0 3.6 8.0
3.3
3.1
2.9
6.6 3.0 2.7 2.8 7.0
5.0 2.0 6.0

Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
No. of folios B15 market share (RHS)

Total AAUM Equity AAUM B15 market share
Source: Company
Rise in equity proportion to drive 30% earnings growth

Healthy growth in AUM and rise in share of equity AUM should drive >20% CAGR in the
company’s top line over FY18-20. Furthermore, compared to peers, the revenue mix was
lower (largely on lower equity proportion), but cost proportion was similar (upfronting of
expenses), which led to below-average profitability. With rise in equity proportion and
ageing of AUM, we expect profitability to improve. We estimate 30% earnings CAGR over
FY18-20 with steady revenue/AUM of >50bps and PAT/AAUM of 15bps.

Chart 24 : Expect equity proportion to rise, leading to improved profitability traction henceforth …
40.0 56.0
36
34
33.8 32 49.6 46.5 45.5
27.6 43.2
24
(%)
23
(%)
21.4 19 36.8 34.0

31.7
30.5
15.2 30.4
12
9.0 24.0
FY14 FY15 FY16 FY17 FY18 FY19E FY20E ICICI Pru HDFC Reliance SBI Birla AMC
Equity proportion Equity AUM (9mFY18)
Chart 25 : ..this, in turn, will improve profitability helping bridge the gap with peers
8.5 1.0
6.8 0.8
5.6 0.66
0.6 0.57
5.1 4.3 0.50
(NR bn)
0.48
(%)
0.41
3.3
3.4 0.4
2.0 2.2 0.23 0.20
1.7 0.2 0.14 0.11
0.11
0.0 0.0
FY16 FY17 FY18 FY19E FY20E HDFC Birla AMC ICICI Pru SBI Reliance
PAT Revenue (FY17) PAT (FY17)
*Note: Aditya Birla AMC upfront brokerage commission in the year incurred, compared to other
AMCs amortising such cost over estimated life

BFSI
Financial Statements
Income statement (INR mn) Balance sheet (INR mn)

Year to March FY17 FY18E FY19E FY20E Year ended 31st March FY17 FY18E FY19E FY20E
Revenue from operations 9,685 12,401 15,545 19,214 Share Capital 180 180 180 180
Other Income 460 494 512 531 Reserve and Surplus 9,236 11,406 14,262 17,954
Total Revenue 10,145 12,895 16,057 19,745 9,416 11,586 14,442 18,134
Non current liability
Expenses 6,774 7,973 9,580 11,371 other long term liabilities 14 17 20 24
Employee 1,977 2,280 2,624 3,013 Long term provisions 515 551 590 631
Other opex 1,238 1,444 1,689 1,976 529 568 610 655
Brokerage & Marketting 3,481 4,165 5,171 6,272 Current liability
Dep & Amortisation 78 84 96 109 Trades payable 464 556 612 673
Other current liabilities 933 1,268 1,453 1,673
PBT 3,371 4,923 6,477 8,374 Short term provisions 657 722 794 874
Taxes 1,139 1,649 2,170 2,805 2,054 2,547 2,860 3,220
PAT 2,232 3,274 4,307 5,569 Total 11,998 14,700 17,911 22,009
Operating ratios (%) Fixed assets 185 235 315 415

Year ended 31st March FY17 FY18E FY19E FY20E Non current investments 2,335 2,940 3,644 4,561
AUM (INR bn) 2,107 2,677 3,263 3,942 Deferred tax assets 265 275 286 298
-growth 38.3 27.0 21.9 20.8 Long term loan and advances 716 788 866 953
-Equity porportion 23.7 32.3 33.8 35.6 3,316 4,003 4,797 5,811
Revenue/AAUM 0.56 0.54 0.54 0.55
PAT/AAUM 0.12 0.14 0.15 0.15 Current Assets 8,498 10,462 12,800 15,782
Total 11,998 14,700 17,911 22,009

Birla SunLife Insurance: Improving; sustainability key

Birla Sun Life Insurance (BSLI) was among the most affected by the regulatory
upheavals of FY10 (private market share declined from ~8% in FY10 to 3% in FY16).
Absence of a prominent bancassurance partner (further spooked by Citibank’s exit),
higher ULIP and NAV guaranteed products were primarily responsible for below‐par
performance. However, over the past couple of years, BSLI’s business metrics (viz.,
growth, persistency, opex ratios) have been stabilising. The company has also
appointed HDFC Bank as bancassurance partner and ramp-up of this franchise will hold
key for the company’s growth metrics. We are building APE CAGR of 14-16% over FY18-
20 (factoring some benefit from the HDFC Bank tie up) and value BSLI at INR100bn.
Absence of dominant bancassurance partner rankled; HDFC Bank key

BSLI, being a non-bank promoted entity, till a year ago did not have a prominent
bancassurance partner (further pulled back by Citibank’s exit). The company’s agent
productivity has also been challenging, which adversely impacted growth (albeit,
unwavering focus has delivered positive results over the past couple of years). However, its
recent tie up with HDFC Bank (through selected channels currently), DBS Bank and LVB via
open architecture framework augurs well.
FY18 growth was impressive—individual APE up at ~15%—ably supported by flows post

demonetisation and shift towards financial savings. We envisage the life insurance space to
be structural beneficiary of rise in financial savings and BSLI, now with a strong
bancassurance partner, should benefit from this opportunity.
Though the HDFC Bank tie up does entail good potential benefits, we expect synergies to
take time to kick in (currently restricted to selected channels through HDFC Bank, system
integrations etc). Hence, we expect growth metrics to normalise (post strong growth
clocked post demonetisation as the base normalises).
Chart 26: Post consolidation, growth has returned; sustainability holds key; improved traction through HDFC Bank is key
100
14 12 16 12
22 16 18 19 16
37.5 8
80 10 19
17 18 20 19
18
( Distribution %)
17
22.6
60
7.7
(%)
40 80 74
67 64 63 65 67 69
(7.2) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 61
20
(22.1)
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
(37.0)
GWP APE
Agents Banks Others
Source: Company
Note: FY18 APE growth has optically softened due to re-classification of some group business into single premium only

BFSI
Chart 27: Product mix—Focus on traditional business with term proportion rising
100.0 3 2 5
21 17
29
80.0 39 32
53
60.0 41 43
31
(%)
24
2 29
40.0
20.0 45 40 39
38 37
30
0.0
FY13 FY14 FY15 FY16 FY17 FY18
ULIPs Par Non-Par Term
Source: Company
Sustained improvement in critical business parameters vital

Post regulatory changes in FY10, BSLI shifted focus to traditional products (contribution
increased from <1% in FY10 to >60% in FY18) with emphasis largely on non-par products
(>30% in FY18). While the non-par tilt supported NBM, it was adversely impacted by: a) new
batch of low-cost ULIPs post FY10 regulations; b) higher cost overruns; and c)
discontinuation of higher NAV guaranteed products (~20-25% in FY13). Going ahead,
improvement in critical business parameters such as persistency (13th month at ~75%), cost
ratios (>15% for FY18) and profitability (lower on investment in agency channel) holds key.
Table 11: Persistency, though improving, continues to be blow peers—A critical metric for sustained improvement
Persistency Ratios (%) FY14 FY15 FY16 FY17 FY18 Persistency (13th month)
102.0
13th Month 60.1 60.0 64.7 71.5 75.3
25th Month 60.7 52.4 56.5 60.2 64.4
92.0
37th Month 64.2 56.8 49.6 52.2 55.5
49th Month 53.3 36.9 52.1 47.3 49.5 82.0
61st Month 43.5 36.7 35.5 47.1 42.3
(%)
72.0
62.0
52.0
BSLI BALIC Max Life SBI Life ICICI HDFC
Life Life
FY18
Source: Company

Chart 28: Opex ratio, though improving, continues to be higher than peers, indicating further scope for improvement
29.0 Opex ratio
26.3 21.0
25.2 24.1 18.0

22.2
21.2 20.6 21.1
21.4 15.0
(%)
(%)
17.6 16.3 12.0

15.6 15.7
9.0
13.8
6.0
10.0 SBI Life ICICI Life HDFC BSLI Max Life BALIC
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Life
Opex ratio Q3FY18
Source: Company
Gradual recovery to play through

BLSI has one of the lowest NBMs in the industry (negative post cost overruns). Management
aims to correct this by focusing on cost efficiencies and enhancing proportion of non-par
protection businesses. Its target is to breakeven over the next two years. However, even
factoring this, NBMs is likely to be relatively weak and RoEV will continue to remain below
peers.
We estimate APE CAGR of 14-16% over FY18-20 and exit NBM of 12-13% (post cost over-
runs in FY20), leading to EV of INR54bn. We arrive at SV of INR46.5bn, leading to AV of
INR100bn (implied P/EV of 1.9x FY20E).
Table 12: Movement of embedded value—Core RoEV potential of 12%

(INR mn) FY17 FY18 FY19E FY20E Comments
Opening Embedded Value (A) 32,750 38,100 42,819 47,964
Value of New business (540) 515 1,141 1,941 VNB takes into account post cost NBMs
Uniwind of discount 2,948 3,048 3,426 3,837 Unwind of discount at 8%
Others 2,943 1,156 578 289
Closing Embedded Value (B) 38,100 42,819 47,964 54,031
Core RoEV (%) 7.4 9.4 10.7 12.0 Core RoEV potential of >12%

BFSI
Table 13: Appraisal value pegged at INR100bn, translating into P/EV of 1.9x
(INR mn) FY17 FY18 FY19E FY20E FY21-25E FY26-29E Terminal Comments
APE 10,789 11,973 13,690 15,651 1,15,270 1,55,729 6,52,179
-growth (%) 29.7 11.0 14.3 14.3 13.2 12.0 4.0 Lack of bancassurance partner lead to
lower than bank promoted companies
growth, ramp-up of HDFC bank key
NBAP Margin (%) (5.0) 4.3 8.3 12.4 12.5 13.3 12.0 Cost over-runs will have bearing on
NBMs initially
NBV (INR) 2,810 3,878 1,141 1,941 14,743 21,273 78,261
Structural Value (PV of NBV) (A) 46,492
Embedded Value (B) 54,031
Appraisal Value (A + B) 1,00,523
Implied P/EV (x) 1.9 Implied P/EV at 1.9x for core RoEVs of
11-13%
Core RoEV (%) 12.0

Financial Statements
Policyholders' account (INR mn) Balance sheet (INR mn)

Year to March FY17 FY18E FY19E FY20E Year to March FY17 FY18E FY19E FY20E
First year premium 24,648 24,162 27,500 31,238 Liabilities
Renewal premium 31,897 33,694 38,458 44,518 Net worth 21,695 22,110 21,823 23,331
Single premium 694 1,175 1,433 1,783 Policyholders' funds: 3,27,350 3,52,101 4,50,171 5,14,427
NBP 25,343 25,336 28,933 33,021 -Prov. for linked liab. 2,20,893 2,09,001 2,70,969 2,93,553
APE 24,718 24,279 27,644 31,417 Funds for future approp. 6,448 5,448 5,396 5,396
GWP 57,240 59,030 67,391 77,539 Total 3,55,493 3,79,659 4,77,390 5,43,153
NWP 55,335 57,215 65,650 75,798 Assets
Income from invst. 43,376 30,104 45,323 46,159 Investments
Other Income 1,962 1,474 1,503 1,537 -Shareholders' 16,039 18,549 20,242 21,750
Total income 100,673 88,792 112,476 123,494 -Policyholders' 80,312 1,02,839 1,35,011 1,68,843
Commissions 2,551 2,688 3,284 3,750 -Linked assets 2,48,877 2,47,279 2,70,969 2,93,553
Operating expenses 8,691 9,295 10,896 12,277 Fixed assets & Loans 1,347 1,483 1,483 1,483
Provision for tax - FBT Net current assets 5,523 7,781 8,170 8,579
Exp. (incl commissions) 11,242 11,983 14,179 16,027 Others 253 251 41,514 48,946
Benefits paid (net) 46,523 50,553 47,065 47,928 De. bal. in sh.hold. a/c 3,648 1,980 0 0
Interim Bonus Paid 13.448 23.143 0 0 Total 3,55,493 3,79,659 4,77,390 5,43,153
Change in liab. (net) 39,609 23,501 48,338 56,825
Surplus 3,287 2,732 2,894 2,715 Combined Ratios (%)
Approporations Year to March FY17 FY18E FY19E FY20E
Tr. to Shareholders' a/c 3,350 2,749 2,894 2,715 AUM (INR mn) 3,45,228 3,68,667 4,26,222 4,84,145
Bal. being FFA-sh. holders' (63) (16) - - RONW 11.3 14.8 15.2 12.7
Invst. yield on sh/folder 9.0 8.5 8.4 8.5
Key Ratios (%) Ben. paid/Lagged AUM 15.1 14.6 12.8 11.2
Year to March FY17 FY18E FY19E FY20E
APE growth 13.5 (1.8) 13.9 13.6 Valuation
-FYP growth 13.4 (2.0) 13.8 13.6 Year to March FY17 FY18E FY19E FY20E
-Single growth 48.1 69.2 22.0 24.4 Price /EV (x) NA NA NA 1.9
GWP growth 2.6 3.1 14.2 15.1 ROEV (%) 16.3 12.4 12.0 12.6
-Renewal growth (5.1) 5.6 14.1 15.8 Price /Book (x) NA NA NA 4.5
Conservation 57.7 59.6 66.5 67.5 Price / AUM (%) NA NA NA 0.2
Commission ratio 4.5 4.6 4.9 4.8 ROA (%) 0.4 0.5 0.4 0.3
Opex ratio 15.2 15.7 16.2 15.8 ROE (%) 5.7 7.6 7.7 6.7
Contri. of EV to Val. (%) NA NA NA 53.7
Shareholders' account
Tr. frm policyholders a/c 3,350 2,748 2,894 2,715
Income from invst. 1,491 1,617 1,629 1,785
Contrib. to pol.hol. fund 1,630 1,124 1,139 1,165
PBT 1,228 1,668 1,693 1,508
Provision for taxation - - - -
PAT 1,228 1,668 1,693 1,508

BFSI
Other businesses: Nascent, but good optional value

Aditya Birla Insurance broker: Aditya Birla Insurance Brokers (ABIBL) is one of
India’s leading composite general insurance brokers. The company specializes in providing
general insurance broking and risk management solutions to companies and individuals. It
also offers reinsurance solutions to insurance companies and has established strong
relations with domestic as well as global insurers and reinsurers.
The premium placement for the company jumped 59% in FY17 versus industry’s 32%. The
trend sustained in FY18 with premium placement rising 25% YoY, while general insurance
industry’s premium grew 18%. Consequently, its market share in industry’s premium
placement grew to 2.15% (0.93% in FY13). In revenue terms, the company is expected to
report >20% growth, which along with operating leverage benefit will translate into better
profit growth. Going forward, we are building in PAT CAGR of 29-30% over FY18-20E.
Aditya Birla Health Insurance: It is a 51:49 JV of Aditya Birla Capital and MMI
Holdings—a diversified financial services leader from South Africa. The company is working
with three-pronged strategy:
These are nascent businesses and
loss making (losses likely to o Strong distribution franchise: The company has created significant scale across all
reduce over the next couple of channels in a year of launch reflected in: a) fast-growing agency channel—15,700
years). Having said that, they agents across 59 branches in 36 cities; b) five banca tie ups—HDFC, DCB, RBL, Deutsche
operate in areas that are highly & AU Small Finance Bank; and c) tied up with 4,200 plus hospitals across 540 cities.
scalable, entailing huge upside
o Building of digital ecosystem: The company aims to augment physical with digital to
potential.
engage with customers and integrate the entire ecosystem. In this bid, it has launched a
seller portal and a customer app ‘Activ Health’, among others. Vindicating this,
currently 70% of retail business is issued via the digital mode (FY18) with digital/online
channel contributing 12% to the retail business.
o Strong product suite: Include Unique product opening doors of distributors and
working with philosophy of Move from “Buy & Forget” to “Buy & Engage” with
philosophy of ‘Health First’.
The company reported underwriting loss of INR877mn in FY17 and INR2bn in FY18. While
we do perceive structural potential of health insurance given: a) lower penetration; and b)
rising medical cost, this is a relatively longer gestation business. We expect this business to
continue to report underlying losses (cumulative loss of INR4-5bn over FY19-20E).
Aditya Birla MyUniverse: It is a leading online money management platform. It

provides services related to aggregation (bank accounts, credit cards, mutual funds etc),
advisory (goal-based budgeting etc) and transaction execution (bill payments etc). Currently,
it has over 4mn registered users with 1.3mn user aggregated accounts and >INR200bn
under aggregation.
Given the longer gestation period, the company reported a loss of INR577mn in FY17 and
INR318mn loss in 9mFY18. We believe, this business will act more as a customer acquisition
and customer experience enhancing business and will continue to post losses in the near
term (till scale builds up). We estimate cumulative losses of INR500-600mn over FY19-20.

Aditya Birla Money: Aditya Birla Money is the listed investing and broking business
arm of ABCL. It offers portfolio management services, investments in debt instruments and
mutual funds through it digital platform. While as a depository participant, ABM has equity
assets under custody worth INR250bn catering to over 0.3mn investors, in addition to the hi-
tech platform, its pan-India distribution network of 40 plus branches & 700 plus franchisee
offices is a key driver.
Table 14: Income statement (INR mn)

Revenue from operations 1,246 1,532 1,839 2,115
Other revenue 85 86 88 90
Total revenue 1,331 1,618 1,927 2,204
Employee benefits expenses 500 625 719 826
Finance cost 54 57 59 61
Dep. and ammor expense 32 33 34 35
Business partner's payout 331 430 481 529
Other expenses 334 341 347 354
Total expenses 1,250 1,485 1,640 1,805
Profit before tax 81 133 287 399
Tax expenses 8 7.5 3.5 2.5
Current tax 10
MAT credit (2)
Tax refund -
Profit for the year 73 126 283 397
EPS 1.3

BFSI
Valuations
We believe, ABCL is in a sweet spot to capture the financialisation story. The diverse product
suite provide across value chain, strong distribution profile, robust risk management
practices, integrated technology platform, its capital allocation and an organisational
structure that incentivises cross-selling strengthens the underlying business model.
Moreover, the company is exposed to the fastest-growing segments of financial services and
these businesses have structural tailwinds in sight.
We believe, established businesses (NBFC, AMC) will be key value drivers (>75% of SOTP in
FY20), transformational businesses (life insurance, HFC) provide added kicker and incubating
businesses (ARC, health Insurance) offer option value. On consolidated basis, we expect the
company to post 30% plus earnings CAGR largely supported by strong traction in lending
business and asset management business. Using the sum-of-the-parts (SOTP) methodology,
we arrive at a target price of INR199 (>40% upside) and initiate coverage with ’BUY/SO’.
Aditya Birla Finance: ABFL is a diversified financial lender (corporate 50%, SME 27%,
retail/HNI 20% and others at 3%) and one of fastest-growing NBFCs (>38% CAGR over FY14-
FY18). We believe, a diversified loan mix, strong funding benefit, robust customer leverage
and strong distribution will help the company sustain 25-27% AUM CAGR, translating into
26% earnings growth, rendering RoA/RoE potential of 2.0%/14% (post capital) by FY20.
Peers’ average trading multiples range between 1.7x and 5.1x FY20E P/ABV for RoE in the
12-23% range. Juxtaposing this with ABFL’s ability to sustain higher level of growth
(diversified loan book, new product launches, lower market share) we assign ABFL target
multiple of 2.5x FY20E P/BV, leading to the valuation of INR248bn. With ABCL holding 100%
stake in ABFL, it translates into contribution of INR112/share (57% of SOTP).
Table 15: Peer valuation for NBFCs

-100 CMP MCap AUM (FY18) BV (INR) P/BV (x) EPS (INR) P/E (x) EPS CAGR (%) RoE (%)
(INR) (INR bn) (INR bn) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY18-20E FY19E FY20E
Capital First 569 58 270 289 335 2.0 1.7 43.0 56.0 13.2 10.2 33.9 15.6 17.0
LTFH 164 328 837 62 73 2.7 2.2 13.9 15.2 11.8 10.8 30.5 24.7 22.6
SCUF 2,220 146 275 988 1,165 2.2 1.9 172.1 203.9 12.9 10.9 42.3 18.8 19.0
BAF 2,077 1,201 840 339 408 6.1 5.1 62.2 80.5 33.4 25.8 31.6 19.8 21.4
Chola 1,582 247 429 404 498 3.9 3.2 77.1 97.1 20.5 16.3 24.7 20.0 22.8
Source: Bloomberg, Edelweiss research
Aditya Birla Housing Finance: ABHFL is slated to benefit from structural growth levers
(government and regulatory push on affordable housing), strong distribution franchise (tie
ups with developers and builders) and strong knowhow in the self-employed segment. We
estimate the company to post >58% AUM CAGR (looks optically higher on lower base). This,
along with higher operating leverage (cost reduction and direct channel sourcing), will help
deliver >170% PBT CAGR, leading to RoA/RoE of 0.8% /9% (post capital) by FY20E.
Peers’ average trading multiples ranging from 1.5-3.0x FY20E P/ABV for RoE in the 15-30%
range. To ABHFL we have assigned a target multiple of 2.0x FY20E P/BV, a discount to peers,
given limited track record. This leads to valuation of INR34bn. With ABCL holding 100% stake
in ABHFL, it translates into contribution of INR16/share (~8% of SOTP).

Table 16: Peer valuation for housing finance companies

-100 CMP MCap AUM (FY18) BV (INR) P/BV (x) EPS (INR) P/E (x) EPS CAGR(%) RoE (%)
(INR) (INR bn) (INR bn) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY18-20E FY19E FY20E
HDFC 1,844 3,098 3,594 393 424 2.8 2.5 58.0 67.3 11.9 10.2 15.3 15.3 16.5
LIC Housing 476 240 1,664 289 335 1.6 1.4 43.6 52.1 10.9 9.1 19.9 17.8 18.4
IHFL 1,233 526 1,226 357 423 3.5 2.9 101.0 122.5 12.2 10.1 20.7 30.5 31.4
PNB Housing 1,187 199 623 438 521 2.7 2.3 65.9 85.9 18.0 13.8 31.3 16.2 18.0
Dewan Housing 610 191 1,111 310 344 2.0 1.8 45.9 53.1 13.3 11.5 19.2 16.0 16.7
Can Fin Homes 362 48 157 125 154 2.9 2.3 26.8 33.3 13.5 10.9 21.2 23.6 20.8
Repco Home 591 37 99 249 292 2.4 2.0 40.2 47.0 14.7 12.6 19.4 17.4 17.4
Aditya Birla AMC: ABAMC is third-largest mutual fund with >INR2.6tn AUM, translating into
10.8% market share. We expect it to benefit from rising penetration, consistent fund
performance and an ability to leverage its strong retail presence. Given strong AUM growth
ahead (largely driven by equity segment), we expect better profitability growth over FY18-20.
We believe, the business model is self sustaining and expect it to generate RoE of >30% over
FY20 with no capital commitments from the holding company. We are valuing this business at
percentage of AUM, looking at peer (RNAM, listed recently), which is trading is 6% of FY20E
AUM. Even assuming some discount given lower profitability (lower equity proportion), we
assign 5% of FY20E AUM. This leads to valuation of INR199bn. With ABCL holding 51% stake
in ABHFL, it translates into contribution of INR46/share (23% of SOTP).
Aditya Birla Sunlife: While the tie up with HDFC Bank entails good potential benefits, we
believe synergies will take time to kick in. Hence, we expect growth to normalise (post
strong growth seen after demonetisation as the base normalises) and it is likely to take more
time to catch up with peers. We estimate APE CAGR of 14-16% over FY18-20 and exit NBM
of 12-13% (post cost over runs in FY20), leading to EV of INR54bn. We arrive at SV of
INR46.5bn, leading to AV of INR100bn (implied P/EV of 1.9x FY20E). With ABCL holding 51%
stake in Aditya Birla Sunlife, it translates into contribution of INR23/share (~12% of SOTP).
Aditya Birla Money: Aditya Birla Money is the listed investing and broking business arm of
ABCL. We have used market cap of listed entity and with 75% market share we arrive at
value of INR7.4bn.
Other businesses (health and MyUniverse): These are nascent businesses and loss making
(losses likely to reduce over the next couple of years). Having said that, they operate in areas
that are highly scalable, entailing huge upside potential. In the current scheme of things, the
contribution of these businesses is low and thus we have not assigned any value to them.
Table 17: SOTP (FY20E)

AUM/earnings/ Per share
FY20E (INR mn) Valuation method Multiple (x times) Business valuation Stake Value
book/AV (INR)
ABFL Book Value 99,438 2.5 2,47,600 100% 2,47,600 112
ABHFL Book Value 17,531 2.0 34,360 100% 34,360 16
Birla Sun Life Insurance Appraisal Value 54,031 1.9 1,00,523 51% 51,267 23
Birla Sun Life AMC Total AUM (%) 39,75,806 5.0 1,98,790 51% 1,01,383 46
Aditya Birla Money Mcap (Listed) 3,514 75% 2,636 1
Overall Value 199

BFSI
We have not given holdco discount: As the listed company is an NOFHC (Non-Operative
Financial Holding Company), with major value-driving businesses being unlisted, the only
way to play the financial conglomerate is through holding company. They have no plans in
the medium term to list/hive-off any of its key businesses. Moreover, capital allocation and
leverage benefit will efficiently flow to step-down entities through the holding company
without any conflict of interest. We have, therefore, not applied any holdco discount.
ABCL’s business model shares similarities with successful financial entities like Bajaj and
HDFC, which indicates potential valuation re-rating. However, successful execution of
strategic initiatives holds key.
Chart 29: Similarity with HDFC—Strong execution has helped the company deliver strong performance… (INR bn)
48.0
980
3594
40.0
14.3
14.4
7.0
888 3100
5.0
4.0 6583 5.0
3.0 236
1258
0.0
FY10 FY18 FY10 FY18 FY10 FY18 FY10 FY18 FY10 FY18
Mortgage Bank Life General AMC
Insurance Insurance
*Note: Bubble size indicates company’s portfolio size and numbers outside indicates market share
Chart 30: ….reflected in consistent earnings and commanding premium multiples
109 5.5
99
92 4.9
CAGR
16% 4.7
P/B (x)
75 4.3
(INR)
58 3.7
3.9
41 3.1
30
24 2.5
FY10 FY18

Chart 31: Bajaj Finserv also had similar experience wherein strong execution helped it deliver healthy performance… (INR bn)
25.2 94.9
7.0 7.1
3.5
4.3
114
840.3
1.5
0.6 75.8
40.3
FY10 FY18 FY10 FY18 FY10 FY18
NBFC Life Insurance General Insurance
*Note: Bubble size indicates company’s portfolio size and numbers outside indicates market share
Chart 32: …. reflected in healthy earnings and significant valuation re-rating
199 5.5
5.1
164 4.6
CAGR
P/B (x)
129 3.7
21%
(INR)
172.3
94 2.8
59 1.9 1.9
37.6
24 1.0
FY10 FY18

BFSI
Key Risks
Adverse financial market and economic conditions in India and globally
ABCL is a financial conglomerate and its businesses depend on positive economic conditions
and, in particular, on growing household incomes and a high savings rate. In the event of
any economic downturn, which may be characterized by higher unemployment, lower
household incomes, lower corporate earnings, lower business investment and lower
consumer spending, demand for saving products could be adversely affected.
Successful execution of its strategic initiatives

Few of the businesses are at transformational stage namely HFC, life insurance and few in
incubating stage viz health insurance and ARC, successful scale of which will be incremental
delta to earnings and valuations. Also strategic initiatives embarked upon to entail multiplier
effect will be key to achieve long term sustainability of performance.
Increased competitive intensity

Given the increased formalisation of the economy and favourable government policies like
Housing for All, there will be enhanced competition in ABCL’s areas of operations. However,
strong distribution channels and brand connect will aid momentum on the growth front.
Turning interest rate regime

One of the strong headwinds for the company is its turning interest rate regime, which may
lead to rise in borrowing cost. However, a well-diversified loan book across segments and
pricing power should ensure minimal impact of rising interest rates on ABCL’s margins.
Risk of tightening of fees & commissions

The Bose Committee set up by the Finance Ministry came out with its recommendations in
FY16. One of the recommendations was to completely phase out upfront commissions in
distribution of financial products. If upfront commissions for mutual funds are discontinued,
sales through distributors may be affected. Also, distributors may switch to pushing other
financial products, which may be offering higher commissions to distributors. Currently, the
mutual fund expense ratio is capped at 2.50% for equity schemes and 2.25% for debt
schemes with a few conditions wherein the charges can be increased by 0.50%. If the
recommendation is implemented, there may be adverse impact profitability. However, with
AUM of the industry also increasing, the net impact on profitability may be low.
Introduction of direct tax code

Increase in corporate tax rate from 12.5% currently to 30.0%, as proposed, could impact
Aditya Birla Sunlife’s margin and profitability.
Scale up of recent bancassurance tie ups

One of the key monitorables for the life insurance business is the scalability potential of its
bancassurance channel (recent tie up with HDFC Bank). Any blip in that could potentially
slow the improvement.

Company Description
ABCL has grown into a financial conglomerate with strong presence across businesses which
include life insurance, asset management, private equity, corporate lending, structured
finance, general insurance broking, wealth management, equity, currency and commodity
broking, online personal finance management, housing finance, pension fund management
and health insurance.
Anchored by over 12,000 employees, ABCL has a nationwide reach via over 1,300 points of
presence and more than 142,000 agents / channel partners. The company’s strategic focus
is on expanding scale by surpassing industry’s growth and capturing incremental market
share.
Fig. 9: ABCL—Competitive edge
Strong
Diversified Visionary Strong Aggressive
Distribution
Businesses Leadership team Parentage Growth Strategy
Channel
• NBFC • Focused • Part of the AB • Looking to • 1,600 points of
• Housing customer Group, a USD grow faster presence and
finance segments with 40 bn Indian than industry more than
• Asset a robust risk MNC and capture 142,000 agents
management management • Anchored by incremental / channel
• Life insurance process 120,000 market share partners
• Health • Growth focus employees, • Looking at both
insurance for each belonging to 42 inorganic and
• Broking business nationalities inorganic
• Others • Present in 36 opportunities
countries with
50% revenue
from overseas
Source: Company

BFSI
Fig. 12: Organisation structure

51% 51% 100% 100% 50.002% 100% 75% 93.7% 51%

Aditya Birla Aditya Birla Aditya Birla Aditya Birla Aditya Birla
Birla Sun Life Aditya Birla Aditya Aditya Birla
Housing Insurance Health
Insurance Sun Life AMC Birla Finance PE Advisors Money MyUniverse
Finance Brokers Insurance
51% 100% 100%

Aditya Birla
Aditya Birla Aditya
Financial
Wellness Birla ARC
Services
Source: Company
Fig. 13: ABCL—History of business scale up
— Launched health insurance and incentivised wellness business through subsidiaries

Aditya Birla Health Insurance and Aditya Birla Wellness
2017
— Through its subsidiary Aditya Birla ARC, applied to RBI for the grant of an asset reconstruction
and securitization license
2016 Sun Life Financial (India) Insurance Investment increased its stake in BSLI from 26% to 49%
Granted certificate of registration as a non - deposit taking - systematically important core

2015
investment company (“CIC‐ND‐SI”) by RBI
— Commenced its housing finance business through its subsidiary Aditya Birla Housing Finance
2014 — Acquired mutual fund schemes & portfolio accounts of ING Mutual Fund
— IFC acquired strategic investment in MyUniverse
2012 Launched MyUniverse, an online personal finance management portal
2011 Launched the private equity fund
2009 Aditya Birla Financial Serv. acquires Apollo Sindhoori Capital, a leading brokerage firm in India
Source: Company

Financial Statements (Consolidated)

Income statement (INR mn) Networth (INR mn)
Year to March FY17 FY18E FY19E FY20E Year to March FY17 FY18E FY19E FY20E
Revenue from Operations 58,057 134,278 167,250 207,372 Standalone 46,109 71,441 72,124 72,834
Finance cost 22,991 30,262 37,012 49,484 NBFC 49,913 63,212 80,047 99,438
NII 35,066 104,016 130,238 157,888 HFC 3,675 7,501 12,247 17,531
Other Income 802 2,125 3,077 4,953 AMC 9,416 10,327 14,442 18,134
Net revenue 35,868 106,141 133,315 162,842 Life Insurance 18,047 20,118 21,823 23,331
Opex 25,210 90,604 113,989 137,117 Broking and Money 422 547 831 1,227
Employee cost 7,172 14,994 18,452 22,601 Health Insurance 1,457 894 1,077 1,147
Other cost 18,038 75,610 95,537 114,517 Others/ Eliminiation 48,766 90,081 117,118 129,218
PBT 10,657 15,537 19,326 25,724 Total 80,271 83,958 85,471 104,424
Tax 3,746 5,499 6,690 8,725 Networth (%) proportion FY17 FY18E FY19E FY20E
PAT 6,911 10,038 12,636 16,999 Standalone 57.4 85.1 84.4 69.7
NBFC 62.2 75.3 93.7 95.2
PAT (INR mn) HFC 4.6 8.9 14.3 16.8
Year to March FY17 FY18E FY19E FY20E AMC 11.7 12.3 16.9 17.4
Standalone 42 615 683 710 Life Insurance Specific 22.5 24.0 25.5 22.3
NBFC 5,853 7,308 9,836 12,391 Broking and Money 0.5 0.7 1.0 1.2
HFC (155) 326 580 1,284 Health Insurance 1.8 1.1 1.3 1.1
AMC 2,232 3,303 4,307 5,569 Others/ Eliminiation 60.8 107.3 137.0 123.7
Life Insurance 395 1,656 1,693 1,508 Total 100.0 100.0 100.0 100.0
Broking and Money 73 101 283 397
Health Insurance (867) (1,892) (2,561) (2,195)
Others/ Eliminiation (660) (1,378) (2,186) (2,664) Key ratios
Total 6,913 10,038 12,636 16,999 Year to March FY17 FY18E FY19E FY20E
PAT (%) proportion FY17 FY18E FY19E FY20E EPS (INR) 3.1 4.6 5.7 7.7
Standalone 0.6 6.1 5.4 4.2 -growth (%) 31.9 45.2 25.9 34.5
NBFC 84.7 72.8 77.8 72.9 RoA (%) 1.3 1.2 1.2 1.2
HFC (2.2) 3.2 4.6 7.6 RoE (%) 10.5 13.2 14.4 17.2
AMC 32.3 32.9 34.1 32.8 BV per share (INR) 30.0 39.3 40.4 49.5
Life Insurance Specific 5.7 16.5 13.4 8.9 P/E (x) 44.3 30.5 24.2 18.0
Broking and Money 1.1 1.0 2.2 2.3 P/BV (x) 4.6 3.5 3.4 2.8
Health Insurance (12.5) (18.9) (20.3) (12.9)
Others/ Eliminiation (9.6) (13.7) (17.3) (15.7)
Total 100.0 100.0 100.0 100.0

BFSI
Additional Data
Directors Data
Kumar Mangalam Birla Chairman & Non Executive Director P.H.Ravikumar Independent Director
Sushil Agarwal Non- Executive Director Vijayalakshmi R Iyer Independent Director
Santrupt Misra Non- Executive Director S.C.Bhargava Independent Director
Arun Adhikari Independent Director
Auditors - Deloitte Haskins & Sells LLP

*as per last annual report
Holding - Top 10
Perc. Holding Perc. Holding
PI Opportunities Fund 2.54 Life Insurance Corporation of India 2.43
Standard Life Aberdeen PLC 1.34 Capital Group Cos Inc 0.91
Franklin Templeton Asset Management India 0.47 Aditya Birla Sun Life Asset Mgmt 0.30
Reliance Capital Trustee 0.27 Dimensional Fund Advisors LP 0.24
Blackstone Asia Advisors LLC 0.14 ICICI Prudential Life Insurance 0.11
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year

RATING & INTERPRETATION Aditya Birla Capital
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Allahabad Bank HOLD SU M Axis Bank HOLD SU M

Bajaj Finserv BUY SP L Bank of Baroda BUY SP M
Bharat Financial Inclusion BUY SP M Capital First BUY SO M
DCB Bank HOLD SP M Dewan Housing Finance BUY SO M
Equitas Holdings Ltd. BUY SO M Federal Bank BUY SP L
HDFC HOLD SP L HDFC Bank BUY SO L
ICICI Bank BUY SO L IDFC Bank BUY SP L
Indiabulls Housing Finance BUY SO M IndusInd Bank BUY SP L
Karnataka Bank BUY SP M Kotak Mahindra Bank BUY SO M
L&T FINANCE HOLDINGS LTD BUY SO M LIC Housing Finance BUY SP M
Magma Fincorp BUY SP M Mahindra & Mahindra Financial Services HOLD SP M
Manappuram General Finance BUY SO H Max Financial Services BUY SO L
Multi Commodity Exchange of India HOLD SU M Muthoot Finance BUY SO M
Oriental Bank Of Commerce HOLD SP L Power Finance Corp BUY SO M
Punjab National Bank BUY SP M Reliance Capital BUY SP M
Repco Home Finance BUY SO M Rural Electrification Corporation BUY SO M
Shriram City Union Finance BUY SO M Shriram Transport Finance BUY SO M
South Indian Bank BUY SO M State Bank of India BUY SP L
Union Bank Of India HOLD SP M Yes Bank BUY SO M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING

Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return

BFSI
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f20bf
0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c89e
548e5001b4f8141cf423fd58c07b02,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.06.13 21:21:02 +05'30'
Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bharat Financial Inclusion, Bajaj Finserv, Bank of Baroda, Capital First, DCB Bank, Dewan Housing Finance, Equitas Holdings
Ltd., Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC
Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma
Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance
Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian
Bank, Union Bank Of India, Yes Bank
Recent Research
Date Company Title Price (INR) Recos
13-Jun-18 Insurance Insurance premiums:

Momentum softening, for
now; Sector Update
06-Jun-18 BFSI RBI policy: Tweaked norms’
impact to be limited;
Sector Update
31-May-18 Axis Bank Retail earnings soft; power 543 Hold
recognition underway; Annual
Report Analysis
Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
One year price chart
250
220
190
(INR)
160
130
100
Dec 17
Oct 17
Apr 18
Nov 17
Jan 18
May 18
Sep 17
Feb 18
Mar 18

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INITIATING COVERAGE

Outlook and valuations: Execution critical; initiate with ‘BUY’

1 Edelweiss Securities Limited

Established Transformational Incubating

NBFC – Well Life Insurance-

Scalable and sustainable

2 Edelweiss Securities Limited

Source: Company, Edelweiss research

3 Edelweiss Securities Limited

Promising blend of businesses; scalable and sustainable business model

Strategic initiatives and multiple growth levers burnish prospects

Outlook and valuations: Execution critical; initiate with ‘BUY’

4 Edelweiss Securities Limited

Unique business positioning to sustain growth momentum

NBFC Life Insurance Health Insurance

Table 5: Shares similarities with other successful business groups

5 Edelweiss Securities Limited

Thoughtful evolution of business model

Multiple levers to sustain best-in-class growth & improved return ratios

6 Edelweiss Securities Limited

764 49.0 2.3 16.4

624 42.0 2.0 14.8

206 21.0 1.3 10.0

2) AMC business: Momentum to sustain

Source: Company, Edelweiss research

7 Edelweiss Securities Limited

3) Life insurance business: On improving trajectory

Table 6: Core RoEV potential of 12%

Table 7: Appraisal value pegged at ~INR100bn, translating into P/EV of 1.9x

4) Investment in nascent businesses to reap benefits in the long term

8 Edelweiss Securities Limited

Strategic initiatives to have multiplier effect

Fig. 4: Building blocks of strategic plan

Establish presence financial services (13 lines of business)

Source: Company, Edelweiss research

Unified brand and experience for a better connect

9 Edelweiss Securities Limited

Multi-channel distribution ecosystem

Fig. 5: Multi-channel presence and strong distribution render it a scalable model

Robust risk management framework

10 Edelweiss Securities Limited

Fig. 6: Three-tier risk management framework reflects in benign asset quality

Level Level Level

Oversight by Risk Audit & governance

Strong leadership with strong JV partners across key businesses

Financial conglomerate poised to leverage on financialisation of savings

Chart 4: Household assets to tilt in favour of equities, MF and insurance….

Cash FY17 LI Fund Cash FY25E

11 Edelweiss Securities Limited

Fig. 7: …ABCL well poised to cash in on opportunities

51% 51% 100% 100% 50.002% 100% 75% 93.7% 51%

51% 100% 100%

New (HFC Others Life

12 Edelweiss Securities Limited

Aditya Birla Finance: A strong diversified franchise

Diversified lender with incremental focus on retail/SME

Table 9: Strong product diversification akin to banks…

Term loan 9.0 Companies with turn-over of INR2.5bn- INR10.0bn

13 Edelweiss Securities Limited

760 695 49.0

14 Edelweiss Securities Limited

NCDs 9.2 8.9

19.2 18.3 11.0 10.4