Target: ₹260
CMP: ₹176.40
AB Capital is one of our top picks and on is track to double in 3 years. It is one of our rising stars.
AUM growth has come down from a peak level of over 40 per cent to 20 per cent currently driven mainly by a sharp slowdown in the personal-loans business. AB Capital had a heavy dependency on digital partners, and one of the partners had a major issue due to which they had to cut down business completely with the large fintech partner.
Also, during the past 12 months, margins have come down and credit costs have inched up primarily due to the unsecured loan business. This has resulted in ROA coming down from a peak level of 2.4 per cent in June 23 to 2 per cent now.
As an AAA-rated NBFC and being cost conscious, which keeps cost ratios at low levels, we believe sustainable ROA is around 2.3-2.4 per cent once the unsecured NPL cycle normalises. We believe unsecured personal-loan growth should pick up and margins should also improve due to a falling rate cycle, aiding recovery in ROA.
Recent underperformance offers a good opportunity to buy an AAA-rated NBFC with a 2.3% sustainable ROA at 0.9x FY27E P/BV. Key catalysts: Rising margins driven by falling rates, growth in higher yielding unsecured loans, and falling credit costs leading to higher ROA.
