AV Birla NUVO –Value of embedded businesses are twice the market cap
Aditya Birla Nuvo (CMP Rs 836) is a classic play on the Indian emerging sector theme . The company holds interests in businesses like Insurance, Telecom, Branded clothing and Asset management.
The company is overly diversified into a set of old and new businesses. Since the growth in new businesses is stronger then the growth in old businesses the share of the old business is coming down.
Year |
2005 |
2006 |
2009(E) |
Share of Revenue from old businesses, Rayon, Carbon black Textile, Fertilizers, insulators |
52% |
56% |
75% |
|
48% |
44% |
25% |
Financial Synopsis |
Market Price |
Rs 836 |
Market cap |
Rs 6977 crores |
Sales FY 06 |
Rs 4830.34 crores |
EPS Fy 06 |
Rs 24.44. |
Sales FY 07 Q1 |
Rs 1500.38 crores |
EPS Fy 07 Q1 |
Rs 7.76 |
PE |
26.35 |
Book Value |
Rs 364.67 |
RoE |
6.7% |
Dividend |
Rs 5.00 per share |
There is nothing to write about AV Birla NUVO’s financials. The company is sitting on a clutch of income streams that are yet to materialize. The best part about AV Birla Nuvo is its RoE. At less then 7% people would discard it but that is the opportunity. Most of its new businesses like telecom and insurance are yet to reach scale. With continuing thrust on these divisions the company is available at a very steep discount to what it could be had these businesses been split up.
I have tried to discuss the newer business since that is the growth engine. The company is a growth cum value play. We shall see as we get along.
Telecom:
n AV Birla Nuvo holds 35.74% stake in Idea Cellular Limited.
n Idea Cellular Limited is a profit making cellular company operating in eight telecom circles.
n Idea has a 8.1% market share circles with a subscriber base of over nine million.
n Expected rollout at 3 new circles this would increase its presence to 11 circles.
n The company recently completed an acquisition for 15% of Idea at Rs 1372 crores.
Now if we compare this value in Idea to the listed telecom player “Bharti Airtel”. The numbers that I get are mind boggling.
I could have deducted 40% from that number since Bharti is the market leader with foreign promoters and other businesses. On the other hand idea shall benefit because it is getting into 3 new circles and that can ramp up growth over the next few quarters while Bharti Airtel is already is spread out..
|
Subscribers |
Market Cap |
Remarks |
Bharti Airtel |
19.6 million |
Rs 80,000 |
Foreign holding and other businesses premium is embedded. |
Idea Cellular |
9.0 million |
Rs 22,040 |
On a per subscriber basis with 40% discount to Bharti’s valuation |
AV Birla NUVO’s stake @ 35.74% |
Rs 7,877 crores |
|
Value for each of the 8.35 crore shares |
Rs 943.36 |
|
Asset Management
n The Domestic AUM increased to Rs 14,611 Cr from Rs 11,457 Cr in Q1 FY06
n Share of equity is 26%
n Offshore funds grew by 94% to Rs 1198 Cr.
n Higher share of equity component.
n The company also has a share in the corporate finance business.
Current Assets under Management |
Rs 14,611 crores |
Value @ 5% of AUM |
Rs 876 crores |
Value for each of the 8.35 crore shares |
Rs 87.49 |
Insurance
Insurance as business model is insulated from recession and with telecom is the only sector where at company enters a new year with assured customers (the ones who are already running a policy. During the quarter the company invested Rs 30 crores as capital in its insurance JV “Birla Sun Life Insurance Company Limited”
- The high GDP growth backed by buoyant capital markets and a favorable tax structure augur well for the life insurance industry.
- In FY 07 Q1 the annualized premium from new business premium grew by 91%. While the number of policies issued increased to 38,000.
- Birla Sun life has recently put through an automated underwriting system (AURA) to enhance the underwriting efficiencies.
- Company is establishing self-service kiosks that would provide will make customers to transact more easily. .
- The average premium per year at Rs.30,680 is one of the highest average per policy premium in the industry
- The segment is still under losses and the company hopes to break even later in the current year.
- A disturbing sign here was the decrease in market share to 6.2% among private insurers
HDFC Standard life valuations |
Premium collection for 2005-06 |
Rs 1570 crores |
Valuation assigned by prominent brokerages |
Rs 5800 cores |
Birla Sun life |
Premium collection for 2005-06 |
Rs 1398.78 crores |
Valuation assigned @ 30% discount |
Rs 3617 cores |
Value for each of the 8.35 crore shares |
Rs 433.17 per share |
Garments
n Fashion Brands have been registering a strong growth of 22%
n The company is trying for a renewed thrust on exports business
n Tied up 1.2 lac sq ft of retail space in upcoming malls
n New large format exclusive brand outlets to be opened
n Despite high advertisement for new collections and brand building Peter England’s expanded reach led to robust growth
Revenues Fy 06 |
Rs 620.64 crores |
Value @ 1 time Market cap to sales |
Rs 620crores |
Value for each of the 8.35 crore shares |
Rs 74.25 |
BPO & IT Services
Signed agreement to acquire Minacs Worldwide Inc Deal size estimated at US$ 125 million. The company is trying to increase its off shoring mix. Significant stride towards gaining strength in BPO through increased share of high margin offshore revenues and improved manpower utilization.
Revenues Fy 06 |
Rs 249.09 crores |
Value @ 1 time Market cap to sales |
Rs 249.09crores |
Value for each of the 8.35 crore shares |
Rs 29.83 |
Other businesses
Apart from these the company is also engaged in other businesses like Rayon, Carbon black Textile, Fertilizers and insulators.
Revenue from Rayon, Carbon black Textile, Fertilizers and insulators.
In Fy 06 |
Rs 2095.64 crores |
Valuation at Market cap to sales of 0.75 |
Rs 1527 crores |
Value for each of the 8.35 crore shares |
Rs 182.87 |
The Value of the three emerging businesses as computed above are:
|
Telecom |
Rs 943.36 |
Insurance |
Rs 433.17 |
Asset management |
Rs 87.49 |
Garments
|
Rs 74.25 |
BPO & Software |
Rs 29.83 |
Total value of these five businesses |
Rs 1,568.10 |
Value of Other businesses in the market price |
Rs 182.87 |
Total value for the group on per share basis |
Rs 1750.97 |
Market price |
Rs 836.00 |
|
|
Recommendation: It is a no brainier Av Birla Nuvo is a great buy. Now I was worried with the numbers that I was getting (and checked again) since it seems to be very large. I have also made a 40% provision for the telecom business and 30% for the insurance business (in valuations) when comparing it to Bharti Airtel and HDFC. The stock could double from here very easily.
On the other hand all declines are great opportunities for buying. In case the company decided to spin off these business then valuation could rise multifold in no time.
Edited by basant - 03/Oct/2007 at 5:50pm