ADITYA BIRLA NUVO LIMITED

RESEARCH
EQUITY RESEARCH September 07, 2009

RESULTS REVIEW Aditya Birla Nuvo Limited Buy

Telecom, Insurance drive long-term growth
Share Data
Market Cap Rs. 96.7 bn Aditya Birla Nuvo Limited’s (ABNL) Q1’10 results, though adversely affected
Price 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
Q1’10 consolidated net sales, we continue to believe that its growing
Bloomberg ABNL IN
Avg. Volume (52 Week) 46.9 ths telecom, financial services, and life insurance businesses along with the
52-Week High/Low Rs. 1,249.0 / 330.3 improving performances of other businesses will provide long-term value to
Shares Outstanding 95.0 mn the shareholders. Accordingly, we have upwardly revised our fair value
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.
EPS (Rs.) 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
P/E 63.9x NM
India’s relatively robust economic growth outlook and a lower tele-density at
EV/ Sales (x) 1.5x 1.3x
EV/ EBITDA (x) 16.8x 28.4x 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 (%) 2009) will help it capture this growth opportunity and drive economies of
Promoters 42
scale and operational synergies. Accordingly, we expect Idea’s net sales to
FIIs 21
Institutions 16 grow at a CAGR of 32.4% between FY09 and FY11. Moreover, with the cash
Public & Others 22 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
0
~18% yoy in Q1’10, the premium of Birla Sun Life Insurance fell only 12.1%.
Sep-08

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Key Figures (Standalone)

Quarterly Data Q1'09 Q4'09 Q1'10 QoQ% YoY% FY08 FY09 YoY%
ABNL Rebased BSE Index (Figures in Rs. mn, except per share data)
Net Sales 10,812 11,739 9,968 (15.1%) (7.8%) 39,531 47,862 21.1%
EBITDA 1,493 1,324 1,110 (16.2%) (25.6%) 6,212 5,537 (10.9%)
Adj. Net Profit 416 264 (22) (108.4%) (105.3%) 2,425 1,374 (43.3%)

Margins(%)
EBITDA 13.8% 11.3% 11.1% 15.7% 11.6%
NPM 3.9% 2.2% (0.2%) 6.1% 2.9%
Per Share Data (Rs.)
Adj. EPS 4.4 2.8 (0.2) (108.4%) (105.3%) 26.0 14.5 (44.3%)
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 ADITYA BIRLA NUVO LIMITED
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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 Value per share
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) (359)
Fair value estimate 114,940 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. -2-
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EQUITY RESEARCH September 07, 2009

Result Highlights and Outlook

Segmental Performance

Growth businesses
Contribution to ne t s ale s (Q1'10)
Telecom: ABNL operates in the telecom segment through a 27.02% stake in
8% 2% Idea Cellular Limited (Idea). In Q1’10, Idea reported a strong top-line growth
12% 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
23% gaining a better-than-forecasted market share in the new circles of Mumbai
25%
(+70 bps) and Bihar (+170 bps). Moreover, during the last four months, Spice
Lif e Insurance Telecom (acquired by Idea in FY09) has maintained its market share in Punjab and
V alue businesses BPO & IT
Garments Financial services Karnataka at ~16.5% and ~7%, respectively. The overall performance
resulted in maintaining a market share of 11% despite competitive pressures.
Source: Company data
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

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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

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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). EBIT-
level 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. -5-
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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

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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. -7-
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Key Figures (Standalone)

Year to March FY07 FY08 FY09 FY010E FY11E CAGR (%)
(Figures in Rs. mn, except per share data) (FY09-11E)

Net Sales 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%

Margins(%)
EBITDA 16.4% 15.7% 11.6% 12.1% 12.8%
NPM 6.6% 6.1% 2.9% 3.2% 4.0%

Per Share Data (Rs.)

Adj. EPS 25.7 26.0 14.5 16.8 23.0 26.0%
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. -8-
 ADITYA BIRLA NUVO LIMITED
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EQUITY RESEARCH September 07, 2009

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