Aditya Birla Capital lending growth remains strong as NBFC margin recovery is awaited

Investment View and Q1 FY27 Overview

Motilal Oswal Financial Services reiterates its Buy recommendation on Aditya Birla Capital following a steady Q1 FY27, supported by strong lending growth and broadly stable asset quality. However, NBFC margin expansion remains delayed. The broker expects consolidated PAT to compound at about 28% over FY26-FY28E, supported by cross-selling, digital investments and the One ABC strategy. Consolidated return on equity is expected to reach about 14% by FY28E.

Aditya Birla Capital reported consolidated revenue growth of about 29% year-on-year to Rs 14,700 crore in Q1 FY27, while consolidated PAT increased about 40% to Rs 1,180 crore. The combined NBFC and housing lending book grew 32% year-on-year and 6% quarter-on-quarter to Rs 2.19 lakh crore. Total AUM across asset management, life insurance and health insurance increased about 36% year-on-year to Rs 7.53 lakh crore.

The company raised Rs 4,000 crore of growth capital through a preferential allotment, comprising Rs 3,080 crore from promoters and Rs 920 crore from IFC. Management expects about 87.5% of the proceeds to support NBFC growth and does not anticipate further near-term capital raising across the NBFC, HFC or other entities.

NBFC: Strong Growth, but Margin Recovery Is Still Awaited

The NBFC loan book grew about 28% year-on-year and 5% quarter-on-quarter to Rs 1.67 lakh crore. Disbursements increased about 34% year-on-year to Rs 21,200 crore. NBFC NIM including fee income was broadly flat quarter-on-quarter at 6.07%, compared with 6.08% in the preceding quarter, while yield declined about 7 basis points to 12.58%.

Management said stable ex-fee yields and a lower cost of funds offset lower fee income. It expects margins and yields to improve as personal and consumer finance, together with unsecured lending, increases from about 25% of the mix to 28-30%. Management indicated that this improvement would take a few quarters.

NBFC PBT increased about 32% year-on-year and 10% quarter-on-quarter to Rs 1,220 crore, while RoA was about 2.4%. GS2 plus GS3 loans remained stable at about 2.4%. Motilal Oswal forecasts FY26-FY28E NBFC AUM and PAT CAGRs of about 23% and 27%, respectively. FY28E NBFC RoA and RoE are forecast at 2.2% and 15.5%.

Housing Finance: Robust Growth and Improving Profitability

The housing finance business delivered robust growth. AUM increased 50% year-on-year and 9% quarter-on-quarter to Rs 51,800 crore, while disbursements grew 39% to about Rs 7,500 crore. HFC NIM improved about 17 basis points quarter-on-quarter to 5.2%, PBT rose about 95% year-on-year to Rs 300 crore and RoA was 2.12%.

GS2 plus GS3 remained about 0.8%, although Stage 3 provision coverage declined about 190 basis points quarter-on-quarter to approximately 57%. Management is targeting HFC AUM of Rs 1 lakh crore within six to eight quarters, RoE of about 13% by Q4 FY27 and about 15% within six to eight quarters. Motilal Oswal forecasts a 37% HFC loan-book CAGR over FY26-FY28E.

Performance Across Other Businesses

Asset Management

AMC quarterly average AUM rose 6% year-on-year to about Rs 4.28 lakh crore. Equity QAAUM grew about 10% to Rs 1.99 lakh crore, while PAT increased 12% to Rs 310 crore.

Life Insurance

Life insurance individual FYP increased 20% to about Rs 950 crore, and renewal premiums grew 19% to Rs 2,350 crore. Net VNB margin increased 750 basis points year-on-year to about 15.1%, while 13-month persistency was 83%. Management targets an individual FYP CAGR of 20-22% over three years and a VNB margin above 20%.

Health Insurance

Health insurance GWP grew about 50% to Rs 2,200 crore. Market share was about 16.2%, while the combined ratio stood at 106%.

Growth Initiatives and Capital Allocation

Management plans to launch gold loans in Q2 FY27. It is targeting 200-300 standalone branches by March 2027 and about 1,000 branches over three years. The company expects the recently raised growth capital to support NBFC expansion and does not anticipate further near-term capital raising across the NBFC, HFC or other entities.

Valuation and Key Monitorable

Motilal Oswal's March 2028 sum-of-the-parts target price is Rs 480. The valuation framework assigns 2.0 times PBV to the NBFC, 2.2 times PBV to the HFC, 28 times earnings to the AMC, 1.3 times EV to life insurance and 1.0 times GWP to health insurance.

The key monitorable for the investment case is the timing and extent of NBFC NIM improvement. Margins were stable in Q1 FY27 despite the broker's earlier expectation of expansion.