The Market is very excited with New NBFC Aditya Birla Financial Services (New Name – Aditya Birla Capital) coming on the block soon, with PI Opportunities fund (Affiliate of Azim Premji) buying a 2.2% stake valuing the company at post money valuation of 32,000 Crores.
Lets understand the business of Aditya Birla Finance and our Valuation for it.
The business can be divided in 5 major categories
1) Birla Sun Life Insurance – 51% Stake Held
2) Birla Sun Life Asset Management – 51% Stake Held
3) Aditya Birla Finance – 100% Stake
4) Aditya Birla Housing Finance – 100% Stake
5) Other Business – Health Insurance, Online Money Management, Insurance brokerage, etc.
We at Stallion Asset believe an SOTP (Sum of total Parts) Valuation is the right way to value this company. Lets Understand the Business and Valuation of these 5 verticals.
Birla Sun Life Insurance – We at Stallion Asset believe that Insurance Business is set to be disrupted and LIC’s Supply chain moat will be destroyed as people turn toward buying Insurance Policies online. LIC is losing market share and this trend is expected to continue for the foreseeable future. The horse which is leading this trade is HDFC Life and ICICI Prudential Life. Max Life Insurance acquisition deal with HDFC Life happened at 4.3x Embedded value whereas ICICI Prudential trades at 4.10x FY2017 Embedded value. Birla Sun Life Insurance has been an under-performer in the Insurance space and is losing market share, the total premium collected stands at 5700 crores in 2017 v/s 5200 crores in FY2013, whereas Profit before tax has fallen from 540 crores in 2013 to just 120 crores in FY2017. Birla Sun Life has embedded value of 3400 Crores in FY2017, and we value this business at 3x FY2017 Embedded value, a discount of 30% from its peers due to slower growth and small player discount. Aditya Birla Capital has 51% Stake and we value its 51% Stake at 5200 Crores.
Aditya Birla Asset Management – Aditya Birla Asset Management has been consistently gaining market share and has reached to 10.7% of the mutual fund market managing AUM of 2.1 Lakh Crores. This Business has grown at broadly 25% CAGR for last 4 years in AUM, Revenue and Profitability; it did a Pretax profit of 337 crores in FY2017. They have grown market share rapidly in Equity Mutual Fund Segment from 5.5% in 2013 to 8.5% in 2017. We believe this growth of 25% is sustainable for next 5 years and value this business at 20 Times Pretax Profit i.e. 6740 Cr There are other ways some analyst value it i.e. use 3-4% of AUM which would get the valuation of 6000-8,000 Crores. Both these valuation techniques get broadly the same results. The 51% held by Aditya Birla Capital as per our estimates is valued at 3450 Crores.
Aditya Birla Finance – This is the golden crowned NBFC part of the Business which is 100% owned by Aditya Birla capital, the AUM has grown at a Whopping 44% in last 4 years from 8000 Crores to 34700 Crores. 39% of the Loan book is given to large corporates , 27% to SME, 15% in mid-Corporates, the rest is given to Promoters, Retail and Ultra-HNI’s. The loan book is diversified and 79% of the loan book is via direct marketing and only 21% via third party agents. The company has consistently maintained its ROE at 15-16% and Gross NPA was 0.47% for FY2017. The company has mind blowing asset quality. The company has a book value of 5000 Crores and did a Pre-tax Profit of 831 crores in 2017. After taking in consideration superior financial parameters and expected growth going forward, We value 100% Stake of Aditya Birla finance at 3.5x P/B or 21 times pre-tax profit at 17,500 Crores.
Aditya Birla Housing Finance – The company forayed into Housing Finance in October 2014 and has grown its loan book swiftly to 4160 crores. The yields stand at 10.2% and average ticket size of the loan is 8-15 Lakhs and focus is on affordable housing segment. There was strong growth of 110% in loan book last year and we expect 40% plus growth to sustain going forward. Aspire, which is a subsidiary of Motilal Oswal has a loan book at end of FY2017 of 4100 crores which is exactly the AUM of Aditya birla finance has; Both are into retail housing finance segment with broadly the same ticket size. Aspire gets an Implied valuation of 6,000 Crores i.e. 150% of AUM, but taking aspire valuation isn’t something which we believe is fair and value the housing finance business at 4,000 Crores. (Caveat – We don’t have adequate information to value this properly and this is just an estimation)
Other Business – The Other Business includes 75% Stake of Aditya Birla Money, Health Insurance business which just started 6 months back with MMI of South Africa with MMI investing 196 crores for a 49% Stake, Aditya Birla My Universe (fintech application) and its Insurance brokerage business. We don’t actually understand or know how to value these small business’ right now and would use them as margin of safety for valuations and give it zero valuations.
Valuation and Conclusion –
The SOTP valuation of the company as per our estimates is 5200 crores for its life Insurance business + 3450 crores for its Asset Management business + 17500 Crores for its amazing NBFC division + 4000 crores for its Housing Finance Division; i.e. the Fair valuation of whole company is 30,000 Crores. We have not considered valuation of other business as margin of safety, and also believe there may be some holding company discount of 10-20%, overall We believe Aditya Birla finance is a great Investment for investors looking for exposure toward the shift from hard Asset to Soft assets at the right price. The company is not listed yet and should be listed in next 2-3 months after it gets demerged from Aditya birla Nuvo (Grasim).
Disclourse – Amit Jeswani and Family have no positions in it, use this for Education purpose only. Stallion Asset is registered with SEBI (INH000002582) but this is not a recommendation.