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Suresh Krishnamurthy

INVESTMENTS can be considered in the stock of Birla Global Finance. The stock offers exposure to the growing business of mutual funds. Birla Global Finance holds a 50 per cent stake in Birla Sunlife Asset Management Company — the investment managers of Birla Mutual Fund — and is also one of the distributors of mutual fund and insurance products. Investments made now can deliver reasonable capital appreciation over the long-term.

Performance: The performance of Birla Global Finance, the stand-alone entity, has been impressive in the first nine months of 2003-04. This company arranges finance for companies, provides loans against securities and also has a treasury division. Operating income recorded a rise of about 56 per cent and the company reported profits compared to losses in the previous year.

The company's profits, however, were still inadequate to cover even preference dividends. This was mainly due to the provision for dimunition in the value of investments. The preference shares, too, are likely to be redeemed at the end of this year. Given the prevailing low interest rates, their redemption would add to Birla Global's profitability.

Investments: More than the stand-alone entity, it is the value of Birla Global's investments that is attractive. Its 50 per cent stake in the mutual fund business alone can conservatively be valued at Rs 100 per share.

Birla's mutual fund business has grown rapidly in the first nine months of 2003-04. Assets under management have risen by about 50 per cent for most mutual funds and Birla SunLife is no exception.

Birla's mutual fund business is also one of the more profitable asset management companies in the business. The return on net worth of the business is about 35 per cent. The rate of growth in profits is also impressive. Profits, in 2002-03, rose by about 70 per cent.

Given the sizeable growth in asset management business, profit growth in 2003-04 too is likely to be robust.

Birla Global also holds a stake of about 50 per cent in Birla Sunlife Distribution. This distribution venture is into marketing of both mutual fund and insurance products.

This venture made profits and declared dividend in 2002-03. Distribution of mutual funds and insurance products continue to remain attractive and holds immense potential from a long-term perspective.

Under-valued: The stock now trades at about Rs 40. The book value of the stock alone now is about Rs 40.

With sizeable value attached to the mutual fund and the distribution business, the stock trades at a sizeable discount to its intrinsic value.

The difference between the market price and the intrinsic value, however, may not be bridged in the near-term or even over the next year. Investors may need to exercise patience to derive full value from their investment.

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