Key Rating Drivers & Detailed Description
Strengths:
Benefits from strong parentage
ABG holds 68.98% of ABCL's equity shares via promoters and the promoter group companies as of December 31, 2023 with Grasim being the majority shareholder holding 52.69% stake. Further, ABCL is the holding company for financial services, and remains strategically important, given the growth opportunities in this sector. Hence, there is strategic oversight provided to ABCL group, including having key personnel from group’s senior management on ABCL’s board. ABCL also benefits from being a part of ABG, in terms of synergies derived from various businesses and cross-selling opportunities to the entire ABG ecosystem.
ABG (including Grasim) has provided capital support to the ABCL group; of the Rs 3,000 crore capital raised by ABCL in current fiscal (FY24), ABG infused Rs 1,250 crore (of which Rs 1,000 crore was by Grasim). Considering ABCL’s flexibility to raise capital, along with internal cash accrual, capitalisation of the ABCL group is expected to remain comfortable. CRISIL Ratings believes ABG (including Grasim) would continue having majority ownership in ABCL. Financial services will remain the key focus area for ABG over the medium term.
Diversified presence in the financial services space
ABCL is the holding company for the financial services business of ABG and holds majority stake in various subsidiaries, which operate mainly in the commercial and retail finance, housing finance, asset management, and life and health insurance segments. ABCL also has presence in securities broking, wealth management and insurance broking. The group has successfully scaled up and attained market leadership positions in business segments such as lending, asset management and life insurance.
ABCL has a strong market position in the lending business with Aditya Birla Finance Ltd (ABFL) being among the larger diversified non-banking finance companies (NBFCs) with assets under management (AUM) of Rs 98,601 crore as on December 31, 2023. ABFL offers various products such as personal loans, business loans, loan against property, project loans, construction finance and working capital loans to customers ranging from retail, high networth individuals (HNIs), ultra HNI, SMEs, to mid and large corporates. Through Aditya Birla Housing Finance Ltd (ABHFL), ABCL is present in the housing finance business and had a loan book of Rs 16,538 crore as on December 31, 2023.
ABCL also has strong presence in the asset management business through Aditya Birla Sun Life AMC. It is one of the largest asset management company (AMC) in India with Mutual Fund AUM of Rs 3.12 lakh crore as on December 31, 2023. ABCL (through Aditya Birla Sun Life Insurance) also has a meaningful presence in the life insurance business and is a leading private sector life insurance company in India. Through its securities broking entity Aditya Birla Money Ltd (‘CRISIL A1+’), ABCL offers a wide range of solutions including broking, portfolio management services, and depository services. ABCL also provides health insurance business through Aditya Birla Heath Insurance and has a unique business model of providing health insurance with active customer engagement for driving healthy behaviour and managing customer experience. ABCL is also present in stressed assets space (and has AUM of Rs 3,012 crore as on December 31, 2023) via its asset reconstruction company.
Comfortable capitalisation
ABCL has comfortable capitalisation, with an absolute networth (on a consolidated basis; including minority interest) of Rs 26,449 crore as on September 30, 2023 (Rs 21,820 crore as on March 31, 2023). In the lending business, both ABFL and ABHFL remain comfortably capitalised with total capital adequacy ratio of 16.7% and 19.1%, respectively, as on December 31, 2023 (16.4% and 21.6% as on March 31, 2023), and gearing of 5.9 times and 6.6 times, respectively (6.2 times and 6.1 times as on March 31, 2023). ABCL's consolidated gearing, at 3.7 times as on December 31, 2023, is expected to be ~6 times over the medium term.
ABCL is also adequately capitalised to absorb asset-side risks in the lending business, as indicated by networth coverage to net stage three assets of 11.6 times and 9.4 times for ABFL and ABHFL, respectively, as on December 31, 2023. The capital position was strengthened by Rs 3000 crore capital raised during the current fiscal, wherein Rs 1,250 crore was infused by ABG and remaining Rs 1,750 crore by external investors. ABCL's capitalisation is likely to remain comfortable, considering its flexibility to raise capital, also supported by internal accrual.
Weakness:
Improving, albeit moderate, profitability
While ABCL’s standalone revenue primarily comprises dividend income from its asset management and insurance broking businesses, at a consolidated level, earnings of the group remain well-diversified across lending, insurance, and AMC businesses, resulting in a good mix of fund-based and fee-based revenue. The return on assets (ROA) and return on equity (ROE) for the group were at 1.4% and 11.4%, respectively, for the nine months ended fiscal 2024. While returns are moderate, the same have improved from 0.9% and 7.7%, respectively, for fiscal 2022.
The improvement is primarily being driven by improved returns on the lending business, which is the majority contributor in the group’s earnings. ABFL witnessed an improvement in RoA to 2.3% for nine months ended December 31, 2023 from 2.1% fiscal 2022. This was on account of lower credit costs and shift in portfolio towards retail, HNI and SME segments, supporting yields even with higher borrowings costs. ABHFL reported an RoA of 1.9% for the nine months ended December 31, 2023, and continues the improvement trend. Provisioning coverage ratio is comfortable at 48% as on December 31, 2023.
Nevertheless, the earnings profile of the life insurance business remains modest, with health insurance business yet to breakeven. However, with diversification in lending book, ABCL’s overall profitability is expected to gradually improve over the medium term.
Liquidity: Strong
ABCL, on a standalone basis, had cash and equivalents worth Rs 1,616 crore as on February 29, 2024. Liquidity remains supported by dividend income from operating subsidiaries and high flexibility to raise funds from the market driven by the strong brand name of ABG. Nevertheless, borrowings were nil as on December 31, 2023.
In the lending business, the group maintains adequate cash and equivalents and unutilised bank lines, totalling to Rs 13,426 crore as on December 31, 2023, to cover upcoming debt repayment of Rs 16,361 crore till June 30, 2024. While the structural asset and liability management statement for ABFL and ABHFL had negative cumulative mismatches in few buckets up to 1 year as on December 31, 2023 and September 30, 2023, respectively, the same were well-managed by the presence of unutilised bank lines. The companies also benefit from linkages with ABG.
CRISIL Ratings believes that ABCL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment and other sustainability related factors.
ABCL has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.
ABCL’s key ESG highlights:
- ABCL has introduced 25 industry specific ESG score cards based on UN’s Equator Principles in the infrastructure lending business.
- ABCL, through Aditya Birla Group-level commitments, aims to achieve net-zero carbon emissions by 2050, zero landfill contribution, attain ‘zero harm’ at the workplace, and to enhance transparency and trust through robust governance mechanisms. It is reducing its year-on-year emissions by increasing its renewable energy portfolio and by implementing energy efficiency projects. They have installed 20 kW, 12 kW, and 41 kW capacity solar panels in the Pune, Bengaluru, and Noida branches, respectively.
- ABCL has put in place procedures to dispose off e-waste in accordance with the applicable laws, and conducts recycling activities through its service provider ViaGreen which collects dry waste from offices and branches and offers Swachh Bharat Points which can be traded in for environment friendly office stationery made of recycled materials, contribution towards charitable causes and tree plantation drives or for cash. On account of this, ABCL handed over 53,903 kg of dry waste to ViaGreen for recycling in fiscal 2023 and earned 229,071 Swachh Bharat Points.
- Share ofwomen workforce was 29% (in permanent employees) in as of March 31, 2023, higher when compared to certain peers. It has also launched various initiatives to improve representation ofwomen in leadership positions and create a level-playing field for women employees.
- 50% of the board members are independent directors, with segregation in chairman and executive positions. ABCL has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.
There is growing importance of ESG among investors and lenders. ABCL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign investors as well as access to both domestic and foreign capital markets.
About the Company
ABCL is the financial services businesses platform of ABG. The company has been registered with the RBI as a systematically important, non-deposit-taking, core-investment company. ABCL provides end-to-end financial services to both retail and corporate customers and has a presence across life insurance, asset management, asset reconstruction, corporate lending, personal & consumer lending structured finance, project finance, general insurance broking, wealth management, security broking, online personal finance management, housing finance, pension fund management and health insurance businesses. ABCL has about 47,000 employees and a nation-wide reach through 1,462 branches and more than 200,000 agents/channel partners.
ABCL, on consolidated level, reported profit after tax (PAT) of Rs 4,796 crore on total income of Rs 30,201 crore in fiscal 2023 (including one time gain of Rs 2,739.07 crore from stake sale of health insurance business), against Rs 1,706 crore and Rs 22,241 crore, respectively, for the previous fiscal. The PAT for nine months ended December 31, 2023 was Rs 2090 crore on total income of Rs 23,597 crore.
On standalone basis, ABCL reported PAT of Rs 141 crore on total income of Rs 223 crore for fiscal 2023, against PAT of Rs 345 crore on total income of Rs 454 crore (including one-time income of Rs 196 crore) for the previous fiscal. Subsequently, the PAT nine months ended December 31, 2023 was Rs 117 crore on total income of Rs 193 crore.
