Interesting theme playing out in Aditya Birla Capital. Was reviewing the June 2020 results as well as the Investor presentation for Management commentary. I understand that currently, the profitable businesses are the lending business (NBFC + Housing Finance, Broking as well as AMC). Life insurance and health insurance continue to show traction on the topline and increased underwriting. However, claims % are also fairly high making these businesses marginally loss-making.
But an interesting thing to note is the steep discount on the profitable businesses being AMC and lending businesses. Comparable businesses in the AMC such as HDFC AMC (AUM of 3.6 trillion), Nippon (AUM of 2.7 trillion), etc. the competitors are valued at > 30-40 times its earnings. If one were to look at Market Cap to AUM ratio, those Companies are in the range of 7% - 12% depending on market share and sizes.
NBFCs and Housing Finance companies given the COVID scenario have taken a huge hit given possibilities of lower collection efficiencies and higher credit costs, so typically trade at 1-1.5 times book value.
Now going to the marginally loss making businesses of Life and health insurance. It would not make sense to look at the CY PE but look at a forward PE. Solvency ratio is 186% which is marginally lower than industry competitors. The trend for insurance in India both life and health has tremendous opportunities given the low levels of penetration of the industry. Insurance to GDP ratios of the Country stands at a meagre 3.7% as compared to over 19% in the Hongkong and Taiwan. The ratio is about 12% in the US. Now undoubtedly a large chunk of this growth will go to LIC but historically, there has been no business which is controlled by the Government which has created and maintained wealth over longer periods of time.
I am willing to bet that inefficiencies and lack of technology adoption will likely slowdown the Goliath (LIC) which will enable private players to claw into the market share. The current market cap of Aditya Birla Capital is about the same as Nippon Asset (similar AUMs). There is effectively no value given to the lending business (which as per the Investor Presentation has no ALM risks (no asset-liability mismatches)) and has a healthy book. There is again no value given to the Insurance businesses (health insurance has seen tremendous growth in the last 1-2 years of over 5x premiums written). There is again no value given to the broking businesses as well. All these businesses are profitable businesses (ex-insurance) and an important thing to note is that the Company has an AUM of over 3.5 trillion (including AMC AUMs).
Could this be an opportunity? Time will certainly tell.
PS: The listing happened at ~ Rs. 250 per share, the CMP is Rs. 61.