ADITYA BIRLA NUVO LTD : HUGE VALUE UNLOCKING OPPOURTUNITY !!!

Scrip Code: 500303 / ABIRLANUVO

CMP:  Rs. 1,735.70; Market Cap: Rs. 22,587.33 Cr; 52 Week High/Low: Rs. 1916.15 / Rs. 1032.25 ; Total Shares: 13,01,33,885 shares; Promoters : 7,44,44,697 shares – 57.21 %; Total Public holding : 5,56,89,188 shares – 42.79 %; Book Value: Rs. 859.77; Face Value: Rs. 10.00; EPS: Rs. 96.82; Dividend: 70.00 % ; P/E: 17.92 times; Ind. P/E: 31.69; EV/EBITDA: 7.28.

Total Debt: 18,429.86 Cr; Enterprise Value: Rs. 40,350.65 Cr.

ADITYA BIRLA NUVO LIMITED: The Company was incorporated in 1956 and was earlier known as Indian Rayon Corporation Limited and changed its name to Indian Rayon and Industries Ltd in 1987. The company in the year 2005 again changed its name to Aditya Birla Nuvo Ltd. 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 Fashion & Lifestyle Brands Division; its brands are Louis Philippe, Van Heusen, Allen Solly, Peter England, Espirit, People, The Collective- A international retailing brand, Peter England Menswear Brands Division, Peter England Fashions & Retail, Madura Garments Lifestyle Retail Co. Ltd., and Madura Garments Exports Ltd. Its Textiles business consists of Jaya Shree Textiles. Its Agri Business manufactures and markets urea, agricultural seeds and agrochemicals under the brand name of Indo Gulf Fertilisers, Birla Shaktiman Urea Gold, Birla Shaktiman Urea KrishiDev neem coated, traded fertilizers, Birla Shaktiman seeds - mainly paddy and wheat, and Birla Shaktiman pesticides. Its Insulators business consists of Aditya Birla Insulators. Its Viscose Filament Yarn (VFY) unit, consist of Indian Rayon and Ray One, producer of viscose filament yarn in India. Company’s Carbon Black business consists of Hi-Tech Carbon. Company’s IT services business consists of Aditya Birla Minacs IT Services Ltd., which offers clients domain-centred 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 and is a 74:26 joint venture between ABNUVO & Sun Life Financial, Canada. ABNUVO’s Asset Management consists of Birla Sun Life Asset Management Company Limited (BSLAMC), and is a 50:50 joint venture between the ABNUVO 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. ABNUVO also has NBFC named Aditya Birla Finance Ltd- a 100% subsidiary of ABNUVO. Company also includes Other Financial Services namely ADITYA BIRLA MONEY which provides money management & brokerage services to domestic & international clients, Aditya Birla Capital Advisory Private Ltd which is into Private Equity, Aditya Birla Money Mart Limited which is into Wealth Management, Aditya  Birla Insurance Brokers Limited which is into General Insurance Advisory. ABNUVO is the major shareholder with 23.29 % in Telecom company - Idea Cellular Limited (IDEA), which is a major GSM mobile service operator in India. ADITYA BIRLA NUVO is locally compared with Bajaj Finserv Ltd, Piramal Enterprises and Globally compared with Berkshire Hathaway of USA, Agricultural Bank of China of China, Royal Dutch Shell of USA, HSBC Holdings of Hong Kong, Exxon Mobile Corporation of USA, General Electric Company of USA, JPMorgan Chase & Co of USA, China Construction Bank of China, Industrial & Commercial Bank of China of China, MNRB Holdings Berhad of Malaysia, Great Eastern Holdings Ltd of Singapore, Lifenet Insurance Company of Japan, PetroChina Company Ltd of China.

Investment Rationale:

Aditya Birla Nuvo is a US$4 billion conglomerate operating in the services and manufacturing sectors, where it commands a leadership position. Its service sector businesses include Financial Services - Life Insurance, Asset Management, NBFC, Private Equity, Broking, Wealth Management and general insurance advisory, Fashion & Lifestyle - Branded apparels & Textiles and Telecom. Its manufacturing businesses comprise the Agri, Rayon and Insulators Businesses. Aditya Birla Nuvo is part of the Aditya Birla Group, a US$40 billion Indian multinational. The Group operates in 36 countries across the globe and is anchored by an extraordinary force of about 120,000 employees belonging to 42 nationalities and derives more than 50 per cent of its revenue from its overseas operations. The company sells two branded apparels every second from its Fashion & Lifestyle Business & is one of the largest branded apparel players in India. Louis Philippe, Allen Solly and Van Heusen are the prime and amongst famous brands & continue to be the best selling brands in India. It opened one store per day & now had expanded its retail presence to 1,750 exclusive brand outlets-stores, spanning nationwide across 4.3 million square feet. Companies has its insurance business and the Indian Life insurance industry currently comprises 23 life insurers and one public sector life insurer – LIC. The top 7 out of 23 private players contributed to 74 % of the private sector’s total new business premium in 2013-14. In 2013-14, the industry’s new business premium was up by 3 % to Rs. 59,041 Crore. LIC grew by 8 % while private players de-grew by 5 %. Consequently, the share of private players in the total pie declined from 40 % to 37 %. In terms of Individual Life new business, private life insurers as well as LIC de-grew by 3 % (Source: IRDA). Given the macro-economic environment and product transition to meet regulatory guidelines, sales growth across the industry was impacted. Following major regulatory changes in 2009, there has been a perceptible slowdown in the industry. However, this has given an opportunity to existing insurance players to review their operating models to drive towards higher efficiencies and focus on more balanced growth objectives. ABNUVO has its Retail Segment, and operates in the organised retailing market; clothing and fashion retailing. These are the largest and the most penetrated segment. The organised apparel market is growing at a faster pace than the overall apparel retail market driven by multiple factors including significant growth in discretionary income and changing lifestyles. Easy availability of credit and use of ‘Plastic Money’ have contributed to a strong and growing consumer culture in India. Expansion in the size of the upper middle class and higher advertisement outlays have led to high brand consciousness- awareness and encouraged more spending on luxury products. Within the organized apparel market, men’s category is the largest segment with more than 50 % share. Menswear will continue to dominate the market in the years to come, however, the women’s wear and kids wear are expected to grow faster and enhance their share in the overall expanding pie. In fiscal 2013-14, persistently high inflation coupled with a slowdown in the economy had a bearing on the clothing and fashion retailing segment too due to subdued consumer discretionary spending, which is now changing into positive and will be good for retail arm of ABNUVO. The Company has its Telecom business and the mobile telecommunications industry in India is divided into 22 Service Areas – 3 metro Service Areas, and 19 other Service Areas. As of March 31, 2014, India had a total reported subscriber base of 904.5 million and a VLR (active) subscriber base of 790.9 million. As of March 31, 2014, mobile Tele-density was at 72.9 % based on reported subscriber and 63.8 % based on VLR subscribers. Indian Mobile Subscriber stats as on December 2014 were 94.4 Cr Total with 83.3 Cr Active subscribers, 14.3 Cr MNP Request and Broadband subscribers of 8.57 Cr. In fiscal 2013-14, the gross revenue of the Indian wireless sector grew year-on-year by 10% to Rs. 1,65,100 Cr (US$ 28 billion). The top three cellular operators in India - Bharti Airtel, Vodafone and Idea Cellular, garnered 70 % revenue market share up from 68 % a year ago. The competitive intensity in the Telecomm industry has decreased since the quashing of the licenses and the associated spectrum by the Supreme Court of India in February 2012. The Small operators are forced to exit or reduce their presence in India. The number of licensees has therefore decreased to 6-10 mobile operators per Service Area. In addition, increasing losses have forced operators to start rationalizing tariffs to protect their investments. As a result, realizations have started to improve. And Idea the Telecom arm of ABNUVO has good footing in this sector with good sales promotion and better tariff to offer. This is surely a plus point for ABNUVO. The company’s Financial Services is Gaining its market share in the Life Insurance business through good quality sales, driven by an efficient distribution network with acceptable expense levels, and with Growing profitable assets while maintaining fund performance in the Asset Management business. The company is expanding its book size in the NBFC business, while keeping risk under control. Company has managed to capture the growing Housing Finance business and has also forayed into the Health Insurance business; this will drive the profitable growth in other businesses. The Company has been successful in Capitalising on Brand !DEA, which has strong cash flows and expanding spectrum profile & infrastructure in the Telecom business will help further to capture opportunities in the voice & the emerging wireless broadband business segments. Leveraging brand leadership of Company’s Fashion & Lifestyle by scaling up retail space & enriching product portfolio in Branded Apparels business will be added advantage, It has Expanded its linen yarn capacity to tap sector growth & is now focusing on high margin linen fabric retail in Textiles. Capturing such growth sectors gives immense opportunities and will improve margins in the Manufacturing businesses.

Outlook and Valuation:

Aditya Birla Nuvo Ltd (ABNL), a US$ 4 billion diversified conglomerate by revenue size and is a part of Aditya Birla Group, a US$ 40 billion Indian business house. Aditya Birla Nuvo Limited has an interesting mix of value-creating businesses that represent domestic consumption sector like telecom, fashion and garments, import substitution like fertiliser, viscose fibre yarn and financial services like insurance, NBFC lending, asset management among several others. These business lines give ABNUVO a unique competitive advantage in allocating funds across varied businesses and lower cost of capital. It can finance longer gestation businesses and withstand short-term earnings volatility while keeping in sight long-term goals and value creation. ABNUVO was predominantly a manufacturing house till a few years ago but now it’s a huge diversified conglomerate. It has embarked on a programme to build a new economy services sector business backed by cash flows from the manufacturing business and captured that transition successfully. During FY05-13, the share of manufacturing in revenue dropped from 67 % to 28 %. Services and consumption revenues now constitute the bigger part and reflect future opportunities. The company has painstakingly gained leadership position across business lines and has widened the moat on the back of disciplined execution. These key milestones achieved by the company have defined the entrepreneurial spirit of the company and laid the foundation for robust growth in future. ABNUVO has successfully built a pan-India telecommunications powerhouse, “Idea Cellular” and this telecom business has crossed the regulatory minefield and increased its market share to the current 16 % and is considered amongst top 3 in India, while competition intensity has reduced considerably. The company is the sole investment vehicle of the Aditya Birla group in telecom sector and has 23.30 % investment in Idea Cellular. The sector was marked with high capital investments of around Rs. 9,000 crore by ABNUVO and it gave poor returns. However, with the reduction in competitive intensity the return on capital employed (RoCE) has improved for the company and it’s now one of the successful feathers in the wings of the company. The ABNUVO has built a high-growth fashion and branded garment business, Madura Lifestyle that generates RoCE in excess of 20 % a year and is leader in its sector. This business was a loss-making acquisition for a long time, but with its unique operating structure and stable earnings of the group has led to business creation over the last eight years, while most competitors have floundered in the downturn. Recently, Allen Solly, the premium Readymade brand from Madura Garments citied to set a target of a turnover of Rs. 1,000 Cr in FY16 and expects to touch Rs. 800 Cr in sales this fiscal and Rs. 1000 Cr in the next. The Allen Solly brand has been growing at 34 % CAGR for the last three years and expects to maintain that. Last fiscal its revenue stood at Rs. 600 Cr. Mens wear enjoys a lion's share of the Allen Solly revenue with womens apparel constitutiong only 18 % & childrens wear 7 % & exports around 5 % mainly to SAARC countries & West Asia. Allen Solly brand also has footwear, handbags and accessories which contributes around 5 % of the sales. Allen Solly has a 10 year licencing agreement for Wimbledon merchandise through Solly to sell mens wear. Also, ABNUVO has built insurance business with 8 % of market share and in asset management, it has 9.4 % market share, this business is a JV and is among the top 5 players in terms of market share and profitability. It is also one of the prime candidates among 26 applicants for new banking licences to be issued by the Reserve Bank. ABNUVO also has presence in retail broking, wealth management, distribution of financial products and general insurance advisory and has forayed into private equity as well. While ABNUVO transformed its portfolio and grew new businesses, its market cap has grown only marginally. Shareholders have for long complained about lack of focus, low RoE-RoCE generated by the operating businesses and investment structures with long payoffs. But these all is changing & Companies efforts are being paid off. During 2007-2013, ABNUVO seeded new businesses. Its key businesses are now attaining critical mass within their industry segments. Now it is positioned to deploy sizeable capital and realise attractive returns. The company has switched from investment mode to harvest mode now, and has a three-pronged strategy to achieve this. The first part is to consolidate segment leadership with bolt-on acquisitions. In 2012, ABNUVO acquired the retail format business of Pantaloon for Rs 1,200 crore, employing its management bandwidth to harness synergy and turn around this business. This creates a combined fashion enterprise of about Rs 4,000 crore (sales) with revenue growing in excess of 15 % a year, synergies of scale and a tight control over working capital. Given that most competitors operate in niches or lack the financial capability to drive consolidation in the industry, the company is well placed to lead the rapid transition from unorganised to organised markets. It is also eagerly waiting for policy guidelines for the fertiliser business and is geared up to make significant investments in this business, which has a good RoCE. Second, ABNUVO is realigning its business portfolio. It has divested the low-margin carbon black business and redeployed capital in the NBFC lending business, which is generating higher RoCE over an economic cycle. It has also marked out the Rs. 2,400-crore IT-ITES business, which generates a RoCE of less than 9 %, for divestment. This will release capital of Rs. 2,000 crore that can be deployed in other businesses. The third part of the strategy relates to “Value Unlocking”. ABNUVO has considerable experience in financial services through its activities in NBFC lending, life insurance and asset management. With its impeccable track record, the group was always a strong contender for a banking licence. If that happens, the financial services businesses will be spun off into a separate structure, thereby unlocking the value of the investments and reducing the holding company discount attributed to the listed company. ABNUVO’s Sales, profit after tax and book value have grown at a CAGR 30 % over the past eight years. The company has achieved this with minimal dilution of equity. It generated cumulative operating cash flow of over Rs. 15,000 crore, which has been deployed in various growth businesses as well as to reduce debt. Overall, the total debt level is close to 1.65X, much less if we remove the leverage by NBFC. Most of the new businesses have attained a reasonable size and market leadership in their respective industry. There could be a significant improvement in consolidated RoCE from the current 11 % for the next three years. With Superior RoCE in various businesses will benefit the company and could trigger re-rating for the company. At the current market price of Rs. 1735.70, the stock is trading at a PE of 18.37 x FY15E and 16.83 x FY15E respectively. It can post EPS of Rs. 94.46 for FY15E & of Rs. 103.08 for FY16E. It is expected that the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also.

KEY FINANCIALS	FY13A	FY14A	FY15E	FY16E
SALES (₹ Crs)	25,490.20	25,893.39	27,964.86	29,922.40
NET PROFIT (₹ Cr)	1,058.89	1,142.88	1,228.79	1,340.90
EPS (₹)	88.09	87.86	94.46	103.08
PE (x)	17.73	17.78	16.54	15.15
P/BV (x)	2.05	1.82	1.63	1.46
EV/EBITDA (x)	11.05	10.84	10.31	9.87
ROE (%)	12.92	10.92	10.39	10.10
ROCE (%)	21.54	22.10	22.14	22.12

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