ADITYA BIRLA NUVO LTD: Value Unlocking Candidate !!!

Scrip Code: 500303 / ABIRLANUVO

CMP:  Rs. 913.90; Buy at Rs.900 levels.
Short term Target: Rs. 950, Long term Target – Rs. 1050; STOP LOSS – Rs. 810.00; Market Cap: Rs. 10,373.65 Cr; 52 Week High/Low: Rs. 994.00 / Rs. 707.00

Total Shares: 11,35,09,729 shares; Promoters: 5,79,44,697 shares –51.05 %; Total Public holding: 5,55,65,032 shares – 48.95 %; Book Value: Rs. 475.41; Face Value: Rs. 10.00; EPS: Rs. 33.60; Div: 55.00 %; P/E: 27.19 times; Ind. P/E: 24.44; EV/EBITDA: 16.59

Total Debt: Rs. 4006.21 Cr; Enterprise Value: Rs. 15,259.11 Cr.

ADITYA BIRLA NUVO LTD: The Company was incorporated in 1956. Aditya Birla Nuvo Limited is a large diversified conglomerate, which engages into apparel, viscose filament yarn, carbon black, branded garments, textiles, agri business activities, life insurance business, IT solutions & telecom business. Its Apparel business consists of Madura Garments Lifestyle Brands Division, Peter England Menswear Brands Division, Peter England Fashions & Retail, Madura Garments Lifestyle Retail Co. Ltd., and Madura Garments Exports Ltd. Its Agri Business manufactures and markets urea, agricultural seeds and agrochemicals under the brand name of Birla Shaktiman Urea Gold, Birla Shaktiman Urea KrishiDev neem coated, traded fertilizers, Birla Shaktiman seeds - mainly paddy and wheat, and Birla Shaktiman pesticides. Its Viscose Filament Yarn (VFY) unit, consist of Indian Rayon, producer of viscose filament yarn in India. Company’s IT services business consists of Aditya Birla Minacs IT Services Ltd., which offers clients domain-centered solutions for the financial supply chain, enterprise solutions and business assurance. Its Life Insurance business consists of Birla Sun Life Insurance Company Limited (BSLI), which offers insurance-related wealth accumulation products and services for individuals, groups and NRIs. ABNUVO’s Asset Management consists of Birla Sun Life Asset Management Company Limited (BSLAMC), a joint venture between the Aditya Birla Group and Sun Life Financial Services of Canada, which provides ethical, innovative, research and analysis based investments and wealth management services. & also operates as the investment manager of Birla Sun Life Mutual Fund. It also includes ADITYA BIRLA MONEY which provides money management & brokerage services to domestic & international clients. ADITYA BIRLA NUVO is the major share holder with 51 % in telecom company - Idea Cellular Limited (IDEA), which is a major GSM mobile service operator in India.

Investment Rationale:

Manufacturing business:

This segment witnessed expansion led by revenue growth, margins impacted by raw material cost push. The manufacturing business (comprising of agri, carbon black, rayon and textiles) saw a strong revenue growth of +25.5 % on a Y-o-Y basis for the quarter, largely driven by a growth in textiles, agri and rayon yarn. Sales in the insulator segment declined by 8.2 % YoY as the dispatches got deferred. The EBIDTA margin in the manufacturing segment declined to 13.1 % during the quarter as against 17.6 % in Q2FY2011. EBIDTA remained flat at Rs. 44 cr against Rs. 42 cr in Q2FY2011. The business reported a profit of Rs. 12 cr for the quarter against Rs. 16 cr in the same quarter last year

IT & IT SERVICE:

ABNL acquired 11.72 % holding in Aditya Birla Minacs. The IT and the ITES subsidiaries have been merged and ABNL holds 99.71 % in the merged entity. For the quarter, the segment posted a top line growth of 19% on a Y-o-Y basis to Rs. 481 cr.

TELECOM:

Idea Cellular (Idea) services, Margins contracted due to the higher rural subscriber base Subdued revenues and the increasing overheads, coupled with enhanced losses from the circles resulted in an operating margin contraction from 26.7 % to 25.7 % in the quarter under review. Consequently the EBITDA declined by 1.4 % on a sequential basis. Earnings are down due to subdued operating performance, increased charges on 3G related expenses, and a foreign exchange (forex) loss; the reported earnings were down by a substantial 40.3 % on a sequential basis. GSM operators including Idea have increased tariff rates by 20%. But, with all this adversities the telecom business’ profitability was up by 37.2 %. The revenue and operating profit and OPM are likely to remain strong. It is expected that Idea can post a compounded annual growth rate (CAGR) of 23 % in the EBITDA over FY2011-13.

Life Insurance Business:

The efficiency and cost management efforts in the life insurance business made this segment to post an increase in profitability from Rs. 22.5 cr in Q2FY2011 to Rs. 105 cr in the quarter. The life Insurance business is in line with the industry trend, the new business premium for Birla Insurance also showed a deceleration of 14 % on a Y-o-Y basis. Last year with effect from September 1, 2010, the new ULIP guidelines came into force, which has not affected the new business premium much. With waning base & a growing in-force book and a lower new business strain led to a significant uproar in the profitability. The net profit showed an around 5x fold rise from a mere Rs. 20 cr in Q2FY2011 to Rs. 97 cr in Q1FY2012. For the full year FY2011 the insurance arm’s NBAP margin was amongst the highest in the industry at 27.5 % with the exit margin at 22 %.  Going forward, it is believed that second half of FY2012 is likely to witness a good growth in the new business premium. Thus experts estimate a 7 % growth for FY2012. The management remains confident of the medium to long term growth trajectory of the business and has guided for a steady and stable new business shall achieve a premium (NBAP) margin of 20-21 %.

Branded apparel:

This segment showed robust performance led by a strong volume growth of 28 %, the net sales showed a growth of 24 % on a Y-o-Y basis while the same store sales growth for the quarter stood strong at 15%. Due to rise in cotton prices and the mandatory excise duty level, the margin expanded from 9.4 % to 9.8 %. But the EBITDA posted a strong 28.9 % growth. The company launched 90 Exclusive Brand Outlets (EBOs), the company now has presence of 1,021 EBOs or a 1.5 million square feet of retail space. Company continues to explore value unlocking opportunities and is awaiting foreign direct investment (FDI) guidelines in this respect. Which is expected soon may be by end of DEC 2011.  

Outlook and Valuation:

Recently Department of Industrial Policy and Promotion (DIPP) floated the cabinet note proposing a 51% FDI in multi-brand retail and hike of 100% in single-brand retail. At present, the country allows 51% FDI in single brand retail, 100% in cash and carry (wholesale) business, but bars it completely in multi-brand retail. Cabinet have laid few conditions like  for Single Brand Retail - Cabinet note proposes that products should be sold under the same brand internationally;Single brand product only for manufactured brands;Foreign investor should be the owner of the brand. For Multi brand retail - note proposes that minimum amount to be brought in by Foreign Direct Investment should be US$ 100 million; At least 50 % of total FDI should be in back ended infra; 30 % of procurement of manufacturing products should be done from small industries; Government will have first right to procurement of agri products; fresh agri products can be unbranded; Retails locations should be in cities with the population above 10 lakhs. If this proposed note is approved in this winter session of parliament then the major beneficiary will be ADITYA BIRLA NUVO. On consolidated basis Aditya Birla Nuvo Ltd (ABNL) reported strong Q2FY2012 results with the consolidated net revenue growth of 17.80 %, operating profit growth at 25 % and adjusted profit grew at 11.6 % Y-o-Y basis. The company had strong growth in the fertilisers and agri business followed by telecom and the fashion & lifestyle business which led to the revenue growth, Efficiency and cost management efforts in the life insurance and the telecom businesses resulted in a strong operating performance. ABNL is best valued using the sum-of-the-parts (SOTP) method. Looking at the robust and resilient performance of the key segments, ADITYA BIRLA NUVO can bought with the price target of Rs. 1,050. 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
NET PROFIT (Rs. Crs)	283.80	302.2	367.50	473.00
EPS (Rs.)	25.00	26.60	32.40	41.70
PE (x)	38.10	35.70	29.40	22.80
P/BV (x)	2.30	2.20	2.10	1.90
EV/EBITDA (x)	17.60	15.50	13.90	11.80
ROCE (%)	7.70	8.20	8.90	10.00
RONW (%)	6.10	6.30	7.10	8.30

I would buy ADITYA BIRLA NUVO LTD with a price target of Rs. 1050 for the short term and Rs. 1150 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 810.00 on every purchase.
As the author of this blog I disclose that I do hold ADITYA BIRLA NUVO LTD in my investment portfolio.