The Hindu Business Line : Aditya Birla Nuvo: Invest

The company is well-positioned to deploy the surplus cash flows from its existing mature value businesses into high growth portfolio in attractive emerging areas.

Shareholders of Aditya Birla Nuvo can invest in the rights offer being made at an offer price of Rs 793. At a 35 per cent discount to the current market price, the offer represents a good entry point into a fundamentally-strong play on multiple themes.

These themes straddle both value (stable and mature) businesses such as rayon, textiles, fertilisers, carbon black and insulators as well as growth businesses (emerging and high growth) encompassing garments, insurance, other financial services, telecom and IT/ BPO.

The company is well-positioned to deploy the surplus cash flows from its existing mature value businesses into high growth portfolio in the emerging areas.

These include unlisted subsidiaries/ joint venture of Idea Cellular, Birla Sun Life Insurance, Transworks BPO and garments.

Mr Kumar Mangalam Birla, Chairman, Aditya Birla group.

In the past, Aditya Birla Nuvo has bankrolled the group's growth ventures such as telecom and will continue to do so for its existing/ new ventures such as garments and retail.

Out of Rs 780 crore to be raised through this rights offer, Rs 621.45 crore is to be used by the company to prepay/repay debt.

The balance Rs 150 crore is to be used at the management's discretion towards general corporate purposes, including funding acquisitions.

The company's secured loans have shot up sharply from Rs 1,525 crore for 2005-06 to Rs 4,060 crore in the first half of 2006-07 ostensibly to partly fund the Idea Cellular buyout from the Tatas.

This also contributed to a significantly higher interest outgo of Rs 140.57 crore in the first half of 2006-07, up from Rs 103.83 crore for the full year 2005-06. Following the repayment of a part of the debt, interest costs are expected to go down and translate into a healthier bottomline for the company.

High growth segments

As a conglomeration of businesses, Aditya Birla Nuvo's valuation hinges on the growth prospects of three key segments from its high growth portfolio — Idea Cellular, Birla Sun Life Insurance and Transworks/Minacs (for BPO).

Based on a conservative sum-of-the parts valuation, we find that these three segments impound about 60-65 per cent of the overall valuation of Aditya Birla Nuvo, with telecom cornering the biggest slice. The prospects for these three segments are:

Idea Cellular: Aditya Birla Nuvo holds a 35.7 per cent direct equity stake in Idea Cellular. As the latter gears up for listing, the value expected to be unlocked from this exercise will be significant.

As of December 2006, it had a subscriber base of 12.5 million out of a total subscriber base of 146 million.

Idea Cellular, which has a presence in 11 circles, is chalking out plans to emerge as a pan-India player, with applications made for licences in the remaining 12 additional circles. Considering the robust mobile subscriber additions of six million per month, the company is well-placed to ride on the mobile expansion story. For the year-ended March 31, 2006, Idea Cellular recorded revenues of Rs 2,965 crore and post-tax earnings of Rs 211.77 crore.

Aggressive competition and the ongoing consolidation (if the Hutch Essar deal goes through) can impose an unexpected strain on subscriber growth and ARPU (average revenue per user) for smaller players such as Idea. However, as one of the three standalone players, given the huge untapped potential, Idea's value (including control premium), even if it considered at a 15-20 per cent discount to Bharti or Reliance Communications, is only expected to improve. This segment contributed 16.4 per cent of consolidated revenues of Aditya Birla Nuvo and 32.1 per cent of the profit before interest and tax out of the consolidated PBIT.

Telecom and insurance (brand ambassador, former cricketer Kapil Dev) hold the key to valuation.

Birla Sun Life Insurance: Aditya Birla Nuvo has a 74 per cent equity stake in Birla Sun Life (one of the five leading private sector insurance players) with the rest held by Sun Life.

After losing market share to its established private sector peers till mid-2006, it is getting its act together in the insurance space. It has made investments in opening up new branches and enhanced its agency network to negate this impact.

With insurance penetration at low levels and awareness catching on, Birla Sun Life is expected to clock an impressive growth in premium income over the next few years.

This segment accounted for 21.8 per cent of consolidated revenues of Aditya Birla Nuvo, with net losses at the PBIT level.

Transworks/Minacs: Aditya Birla Nuvo has an 88 per cent equity stake in Transworks BPO and 85 per cent in Minacs. Minacs is a Canadian BPO firm acquired recently by Transworks, with strong clients in the auto segment and higher non-voice revenues.

For Transworks, the outbound voice segment will continue to contribute a good chunk of its revenues.

As offshoring goes mainstream, the BPO sector is likely to accelerate the growth of the overall software services sector. Post the Minacs acquisition, Transworks has the necessary scale to grow volumes and business mix to improve margins in the coming years.

Mature segments

Among the mature business segments of Aditya Birla Nuvo, we remain confident about the growth prospects of fertilisers, rayon, textiles and carbon black.

However, all these are commodity businesses (except fertilisers) ruled by inherent risks of demand-supply imbalance and pricing of end-products and raw materials.

Despite being a steady cash flow generator, fertilisers will be subject to the vagaries of government regulation.

Since the stock is priced at a sharp discount to the current market price and based on the sum of the parts valuation for the mature and high growth businesses, we believe that there is good scope for capital appreciation from the offer price.

Offer details: The rights offer is being made to shareholders in the ratio of two equity shares for every 17 held. Enam Financial and DSP Merill Lynch are the lead managers to the issue.

The offer opened on December 26 and closes on January 25.

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