Aditya Birla

ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009

Aditya Birla Nuvo Limited

RESULTS REVIEW

Buy

Telecom, Insurance drive long-term growth

Share Data Rs. 96.7 bn

Aditya Birla Nuvo Limited’s (ABNL) Q1’10 results, though adversely affected

Rs. 1,018.20

by the global slowdown, are better than the previous quarter’s and higher

BSE Sensex

16,016.32

than our expectations. While the company registered a 3.7% yoy growth in

Reuters

ABRL.BO

Market Cap Price

Bloomberg

ABNL IN 46.9 ths

telecom, financial services, and life insurance businesses along with the

Rs. 1,249.0 / 330.3

improving performances of other businesses will provide long-term value to

95.0 mn

the shareholders. Accordingly, we have upwardly revised our fair value

Avg. Volume (52 Week) 52-Week High/Low Shares Outstanding

estimate to Rs. 1,210, which is 18.8% upside from the current stock price.

Valuation Ratios (Consolidated) Year to 31 March

2008A

2009A

Thus, we reiterate our Buy rating on the stock.

15.9

(45.5)

Significant value from the telecom business: ABNL’s stake in Idea

(50.2%)

NM

comprises over one-third of our fair value estimate for the stock. Owing to

63.9x

NM

1.5x

1.3x

16.8x

28.4x

EPS (Rs.) +/- (%)

Q1’10 consolidated net sales, we continue to believe that its growing

P/E EV/ Sales (x) EV/ EBITDA (x)

India’s relatively robust economic growth outlook and a lower tele-density at 36.98% (TRAI), we believe the Telecom sector has a high growth potential. We further believe that Idea’s pan-India presence (by the end of December

Shareholding Pattern (%) Promoters

42

FIIs Institutions Public & Others

21 16 22

2009) will help it capture this growth opportunity and drive economies of scale and operational synergies. Accordingly, we expect Idea’s net sales to grow at a CAGR of 32.4% between FY09 and FY11. Moreover, with the cash inflow from the Providence Equity Partners deal, Idea is well positioned to fund its growth plans and participate in the 3G auction.

Relative Performance

Financial services and insurance businesses provide potential for

1,600

growth: We believe that ABNL’s financial services and insurance businesses

1,200

hold immense future value potential for shareholders. During Q1’10, revenue

800

from financial services segment increased by 33% yoy and the reported EBIT

400

margin stood at 19.9%. While private life insurers new business premium fell Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

0

ABNL

Rebased BSE Index

~18% yoy in Q1’10, the premium of Birla Sun Life Insurance fell only 12.1%. Key Figures (Standalone) Quarterly Data Q1'09 Q4'09 Q1'10 (Figures in Rs. mn, except per share data) Net Sales EBITDA Adj. Net Profit

10,812 1,493 416

11,739 1,324 264

QoQ%

YoY%

FY08

9,968 (15.1%) (7.8%) 39,531 1,110 (16.2%) (25.6%) 6,212 (22) (108.4%) (105.3%) 2,425

FY09 47,862 5,537 1,374

YoY% 21.1% (10.9%) (43.3%)

Margins(%) EBITDA NPM

13.8% 3.9%

Per Share Data (Rs.) Adj. EPS 4.4

11.3% 2.2% 2.8

11.1% (0.2%) (0.2) (108.4%) (105.3%)

Please see the end of the report for disclaimer and disclosures.

15.7% 6.1% 26.0

11.6% 2.9% 14.5

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(44.3%)

ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 Similarly, total assets under the management of Birla Sun Life Asset Management Company Limited grew 35% yoy to reach Rs. 585.1 bn in Q1’10, the second highest growth rate amongst the top five players and much higher than the industry’s average growth of 19%. We believe that the Company’s improving market position will help it capture a greater share of the rapidly growing financial services sector in India.

Slowdown adversely affects the value businesses: The value businesses of the Company, which include textiles, rayon, insulators, fertilisers, and carbon black, were adversely affected by the slowdown in the global economy; however, the decline was in line with our expectations. During Q1’10, revenue from the value businesses decreased 12.6% yoy to Rs. 7.9 bn, while the overall operating margins of these businesses declined 325 bps yoy to 12.3%. Nevertheless, we believe that these businesses will improve with the recovery in the global economic outlook, given the fact that the Company is a leader in a majority of these businesses.

Valuation: We have valued the Company by using the Sum-of-the-Parts methodology—our fair-value estimate of Rs. 1,210 suggests an 18.8% upside potential from the current market price. Hence, we reiterate our Buy rating. SOTP Business

Basis

In Rs. mn

Standalone business EV*

DCF

31,803

335

Idea

DCF

66,165

696

Insurance

NBAP Multiple of 13.7x

30,126

317

AUM

3% of FY10E AUM

8,777

92

Birla Global Finance

15x FY10E earnings

3,726

39

Apollo Sindhoori

22.7x FY10E earnings

1,865

20

BPO and others

0.5x FY10E sales

6,552

69

Net debt (Standalone)

(34,074)

Fair value estimate

114,940

Value per share

(359) 1,210

* Standalone business includes rayon, carbon black, insulators, textiles, and fertilizers Source: Indiabulls research

Please see the end of the report for disclaimer and disclosures.

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ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 Result Highlights and Outlook Segmental Performance Growth businesses

Contribution to ne t s ale s (Q1'10) 8% 2% 12%

Telecom: ABNL operates in the telecom segment through a 27.02% stake in Idea Cellular Limited (Idea). In Q1’10, Idea reported a strong top-line growth

30%

of 6.2% qoq and a 20-bps improvement in the EBITDA margin (excluding the impact of the reduction in the termination charges). Idea has shown creditable execution by defending its market share in its legacy circles and by gaining a better-than-forecasted market share in the new circles of Mumbai

23% 25% Lif e Insurance V alue businesses Garments Source: Company data

(+70 bps) and Bihar (+170 bps). Moreover, during the last four months, Spice

Telecom BPO & IT Financial services

(acquired by Idea in FY09) has maintained its market share in Punjab and Karnataka at ~16.5% and ~7%, respectively. The overall performance resulted in maintaining a market share of 11% despite competitive pressures. With the addition of three more circles to the coverage area, we expect Idea to add 40 bps to its market share by March 2010.

We expect Idea to maintain its consolidated EBITDA margin at the current level of ~29% in FY10 and FY11, backed by its consistent operating performance during the last two quarters despite its entry into new circles and the increasing industry-wide pricing pressure. Idea’s strategy of a high-opex business model, which had suppressed its margins since Q2’09, has started to pay off with the increasing scale of operations. Even its robust subscriber ramp-up has helped it contract the losses faster in the newer circles. On the other side, the integration with the erstwhile Spice has progressed well with the latter witnessing synergies in its network operating costs.

Life insurance: ABNL operates its life insurance business through a 74% stake in Birla Sun Life Insurance Company Limited (BSLI). Owing to the volatility in the equity markets and the dampened consumer confidence, the new business premium in Q1’10 fell by 12.1% yoy and by 57.4% qoq to Rs. 4.4 bn. However, in the same period, the private life insurers slumped at a much higher rate of 18%, indicating a relative better performance by BSLI. We also noted a marginal qoq fall in the market share of BSLI to 8.13%, though the share improved on a yoy basis. The overall premium (including Please see the end of the report for disclaimer and disclosures.

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ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 renewal premium) increased by 17% to Rs. 9.2 bn. This growth was supported by a 64% increase in renewal premium, which is also an indicator of high persistency. The net loss of the insurance business reduced from Rs. 1.46 bn in Q1’09 to Rs. 1.11 bn in Q1’10 due to a lower strain on new business premium. To support growth plans, the promoters infused equity of Rs. 500, which included Rs. 370 mn of Nuvo’s share.

The Insurance Regulatory and Development Authority (IRDA) has imposed a cap on the overall charges recoverable from ULIP policyholders. The restriction on charges has been effected indirectly through a cap on the difference between gross and net yields (adjusted of all charges) at 3% for policies with a term of less than 10 years and 2.25% for policies with a term greater than 10 years. Fund management charges (as a percentage of AUM) have been capped at 1.25–1.50%. We believe this regulation will have a negative impact on the insurer player’s standings and the product mix.

We expect growth in premium income to remain moderate in FY10 and remain in line with the equity markets and the movement of the economy. However, we believe that BSLI’s expanded customer reach and improving market position, along with its suite of contemporary products, will provide support to its premium growth. In the coming quarter, we would like to watch a) signs of benefits of expanded reach and b) the impact of the new IRDA circular on BSLI’s top line. Asset management: The performance of the financial services segment was impressive in Q1’10. The segment reported revenue of Rs. 846 mn (a 33% yoy increase) and EBIT margin of 19.9%. Birla Sun Life Asset Management, which commands an 8.4% market share of the Indian mutual fund industry, was the largest contributor to the revenue in this segment. In Q1’10, the average AUM of the Company registered 35% yoy to reach Rs. 585.1 bn. The domestic equity component of the AUM grew 70% qoq to Rs. 78.2 bn, the highest growth rate in this segment among the top five players. The growth in business was supported by an expanded distribution reach of 114 branches and over 30,000 financial advisors. Revenues grew by 13.2% from Rs. 431 mn in Q1’09 to Rs. 488 mn in Q1’10, driven by a higher average Please see the end of the report for disclaimer and disclosures.

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ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 AUM. Consequently, net profit increased from Rs. 51 mn in Q1’09 to Rs. 53 mn in Q1’10, representing a 3.9% yoy growth.

With the economy showing early signs of recovery, we expect the AUM to register a growth of 15–20% in FY10.

BPO/IT: During the quarter, revenue from the BPO/IT segment fell by 14.1% yoy to Rs. 3,922.7 mn, negatively impacted by the global slowdown. Both the Asia-Pacific and North America regions witnessed a fall in revenue. While North America was profitable at the EBIT level, Asia-Pacific reported a negative EBIT due to a) lower revenues and b) higher manpower and SG&A costs. The segment suffered a net loss of Rs. 77mn in Q1’10, as against a loss of Rs. 224 mn in Q1’09.

We believe that the slowdown in the US economy will continue to adversely impact the segment’s revenue growth in the coming quarters. Additionally, we anticipate that the Company’s efforts to rationalise sites and seat allocation will help in reducing its losses and improving its margins. Garments: During Q1’10, the garment segment’s top-line increased by 13.7% yoy, vis-à-vis a 1.1% yoy decline in Q4’09, to Rs. 2,550.8 mn. The primary driver of top-line growth was the branded garments business; on the other hand the contract exports business witnessed a fall in revenue on a yoy basis (as the order flow remained weak due to the global slowdown). EBITlevel losses declined by 20.6% yoy and 45.1% qoq to Rs. 451.3 mn. The reduction in operating losses was achieved through a) higher sales coupled with savings from rent and sales expenditure rationalization, closure of unviable stores, and manpower rationalization and b) a significant reduction in working capital through improved inventory management. This segment’s performance is likely to remain subdued in the coming quarter as the economic slowdown is expected to continue to negatively impact consumer spending. However, it is likely to turn around by the second half of FY10.

Please see the end of the report for disclaimer and disclosures.

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ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 Value businesses

Rayon: Net revenue increased 4.4% yoy in Q1’10 to Rs. 1,401.5 mn, driven by the Viscose Fibre Yarn (VFY) division. The VFY division’s revenue for Q1’10 increased 14% yoy to Rs. 899 mn due to a 16.7% yoy increase in VFY realisation. However, the sales volume of the division declined by 2.6% yoy. Meanwhile, revenue from the chlor-alkali division decreased 9.1% yoy to Rs. 502 mn due to a 12.8% yoy lower realization rate.

Overall, the segment reported the highest ever quarterly PBDIT of Rs. 470 mn, which was primarily a result of a) higher VFY realisation, b) higher caustic soda sales volumes, and c) lower sulphur prices. The segment’s EBIT margin improved 560 bps yoy to 27.5% in Q1’10

We expect VFY demand to grow at a modest rate in the near term and margins to improve with the softening of the commodity prices. Carbon black: Revenue from carbon black increased by 3.2% on a sequential basis to Rs. 2,457.4 mn, however, it fell by 17.4% on a yoy basis. Driven by lower feed stock (CBFS) prices and a revival of demand from the tyre sector, the hi-tech carbon business turned around by earning an EBIT of Rs. 249.9 mn in Q1’10, compared to a loss of Rs. 137.5 mn in the previous quarter. The capacity utilisation for this segment rose to 100% from 79% in the previous quarter. However, operating profit fell 39.7% on a yoy basis mainly due to part consumption of high priced feed stock, which got completely exhausted in May 2009.

Going forward, the imminent recovery in the auto sector is likely to revive the demand of carbon black, thereby improving the segment’s performance. The Patalganga facility’s capacity expansion by 75,000 MTPA, targeted by March 2010, will help tap the expected buoyancy in the domestic auto sector.

Insulators: Revenue from the insulators segment fell by 13.5% yoy in Q1’10 to Rs. 784.3 mn, while the EBIT margin fell 560 bps yoy to 21.8% due to increased fuel and input costs. Even on a sequential basis, the segment Please see the end of the report for disclaimer and disclosures.

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ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 registered a decline both in revenues and margins due to a) lower dispatches and b) subdued global demand resulting in pressure on realizations.

We expect this segment’s top-line to improve in Q2’10 as the Company is expanding its capacity from 38,800 MTPA to 52,800 MTPA in two phases and the demand for insulators from the power sector is expected to rise as a significant amount of capacity is under construction. Fertilizers:

Revenue

from

fertilizers

declined

16.5%

yoy

to

Rs. 1,914.3 mn during the quarter as demand was subdued due to a delayed monsoon in major parts of the country. Further, the plant could operate only for 67 days during the quarter due to a planned maintenance shutdown for 15 days and a subsequent breakdown for 9 days. Consequently, the EBIT margin shrank 850 bps yoy to 5.9%. We believe this segment’s performance will improve in the coming quarters due to improved productivity as fewer interruptions are expected in the production. Textiles: The Textile segment’s revenue fell by 11.8% yoy to Rs. 1,311.4 mn in Q1’10 as the global slowdown and liquidity crunch hit both domestic and international demand. Further, the reasons for the fall in revenue also include a) higher wool prices reflected in realisations in Q1 last year and b) continued de-stocking by clients, which dragged down fabric volumes. Moreover, a fall in revenue was noted in both the linen and wool segments. The EBIT margin shrank 400 bps yoy to 3.5% due to high input prices.

The Government of India recently imposed an anti-dumping duty on cheaper linen fabric imports from China. This, along with the depreciation of the Indian rupee against the US dollar, will likely to provide relief to the Indian textiles industry. The global slowdown, however, remains a cause for concern.

Key Risks Failure to secure funds to expand the Company's life insurance business may adversely impact ABNL’s growth of this business. However, we believe that the easing of the FDI norms will help the Company raise funds for the life insurance segment. Please see the end of the report for disclaimer and disclosures.

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ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009 Key Figures (Standalone) Year to March

FY07

FY08

FY09

FY010E

FY11E

(FY09-11E)

(Figures in Rs. mn, except per share data) Net Sales

CAGR (%)

34,205

39,531

47,862

50,250

53,994

6.2%

EBITDA

5,593

6,212

5,537

6,068

6,897

11.6%

Adj. Net Profit

2,259

2,425

1,374

1,599

2,182

26.0%

16.4%

15.7%

11.6%

12.1%

12.8%

6.6%

6.1%

2.9%

3.2%

4.0%

Margins(%) EBITDA NPM

Per Share Data (Rs.) Adj. EPS

25.7

26.0

14.5

16.8

23.0

PER (x)

41.3x

53.7x

70.4x

60.5x

44.3x

Source: Indiabulls research, Company data

Please see the end of the report for disclaimer and disclosures.

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26.0%

ADITYA BIRLA NUVO LIMITED RESEARCH EQUITY RESEARCH

September 07, 2009

Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

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