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Refer to "Other Important Disclosures" for information on certain Merrill Lynch entities that take responsibility for this report in particular jurisdictions.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Refer to important disclosures on page 6 to 7. Analyst Certification on Page 4. Price Objective Basis/Risk on page 4.
10754203
Aditya Birla Nuvo Ltd.
Right moves in challenging
markets
????
PO cut to Rs1800/sh
We have cut our 12-month PO by 17% for ABNL to Rs1800/sh, Which primarily
reflects our lower PO for Idea of Rs125/sh, and lower multiples for ABNL’s smaller
businesses that are benchmarked to local market valuations. The contribution of
ABNL’s insurance and asset mgt. businesses is largely unchanged, as lower
valuation multiples are offset by stronger-than-expected growth. The telecom &
insurance/fin-services businesses account for ~80-90% of PO.
1Q helped by seasonality; value businesses hold the fort
1Q FY09 saw a loss of Rs283mn vs Rs218mn loss in 4Q FY08; EBITDA was up
25% QoQ to Rs2.46bn. The QoQ improvement was owing to seasonal slowdown
in insurance business and its associated costs/losses. The company’s carbonblack
biz posted positive surprise while garments biz was disappointing.
Management call highlights
Four key points: 1) Idea’s senior mgt. said that upcoming 3G auctions are unlikely
to drive any equity dilution in Idea (post-TMI) and hence in ABNL’s stake thereof.
2) In the insurance business, ABNL expects to grow faster than the market but
acknowledged that market growth may slow to ~40-45% YoY in FY09E vs ~50%
growth expected earlier. 3) The company reiterated its plans for an integrated
financial services platform thru the organic &/or inorganic route. 4) Performance of
garments and BPO businesses should improve going forward.
Right moves in tough markets; maintain Buy
We foresee improving competitiveness in both the telecom and insurance
businesses of ABNL. We expect Idea to remain careful with its growth strategies
in the face of 3G auctions. In the insurance business, we expect the company to
gain market share, although NBAP margins may see some pressure.
????
(Rs) 2007A 2008A 2009E 2010E 2011E
Estimates (Mar)
Net Income (Adjusted - mn) 2,807 1,149 (990) (1,720) (17)
EPS 30.09 27.54 8.74 2.33 17.29
EPS Change (YoY) 6.5% -8.5% -68.2% -73.4% 642.7%
Dividend / Share 6.28 6.56 6.56 6.56 6.56
Free Cash Flow / Share (145.82) (199.27) (232.55) (126.81) (7.38)
Valuation (Mar)
2007A 2008A 2009E 2010E 2011E
P/E 41.84x 45.71x 143.95x 540.55x 72.78x
Dividend Yield 0.499% 0.521% 0.521% 0.521% 0.521%
EV / EBITDA* 16.59x 17.70x 17.09x 14.92x 12.16x
Free Cash Flow Yield* -11.38% -15.57% -18.48% -10.07% -0.586%
* For full definitions of
iQmethod SM measures, see page 5.
Price Objective
Change
BUY
Equity | India | Industrials/Multi-Industry
05 August 2008
Reena Verma Bhasin, CFA >>
+91 22 6632 8667
Research Analyst
DSP Merrill Lynch (India)
[email protected]
Rajeev Varma >>
+91 22 6632 8666
Research Analyst
DSP Merrill Lynch (India)
[email protected]
????
Stock Data
Price Rs1,259
Price Objective Rs2,175 to Rs1,800
Date Established 5-Aug-2008
Investment Opinion C-1-7
Volatility Risk HIGH
52-Week Range Rs1,035-Rs2,508
Mrkt Val / Shares Out (mn) US$2,823 / 95.0
Average Daily Volume 136,987
ML Symbol / Exchange ADYAF / BSE
Bloomberg / Reuters ABNL IN / ABRL.BO
ROE (2009E) -2.5%
Net Dbt to Eqty (Mar-2008A) 139.1%
Est. 5-Yr EPS / DPS Growth 10.0% / 1.0%
Free Float 56.4%
Aditya Birla Nuvo Ltd.
05 August 2008
2
iQ
profile SM Aditya Birla Nuvo Ltd.
Key Income Statement Data (Mar) 2007A 2008A 2009E 2010E 2011E
(Rs Millions)
Sales 82,580 121,340 157,875 205,960 258,543
Gross Profit 10,751 10,081 10,440 11,956 14,666
Sell General & Admin Expense NA NA NA NA NA
Operating Profit 6,523 4,832 3,589 3,340 5,223
Net Interest & Other Income (2,989) (3,319) (4,512) (5,177) (5,246)
Associates NA NA NA NA NA
Pretax Income 3,535 1,513 (923) (1,837) (23)
Tax (expense) / Benefit (1,116) (1,610) (2,039) (1,811) (1,678)
Net Income (Adjusted) 2,807 1,149 (990) (1,720) (17)
Average Fully Diluted Shares Outstanding 93 114 114 114 114
Key Cash Flow Statement Data
Net Income (Reported) 2,812 1,508 (990) (1,720) (17)
Depreciation & Amortization 4,228 5,249 6,850 8,616 9,443
Change in Working Capital (707) (4,779) (1,558) (1,131) 25
Deferred Taxation Charge NA NA NA NA NA
Other Adjustments, Net 488 1,353 1,972 1,928 1,684
Cash Flow from Operations 6,821 3,331 6,275 7,694 11,136
Capital Expenditure (20,428) (21,952) (28,370) (19,742) (11,837)
(Acquisition) / Disposal of Investments (16,265) (28,236) (44,804) (66,452) (91,101)
Other Cash Inflow / (Outflow) (16,335) 239 0 0 0
Cash Flow from Investing (53,028) (49,950) (73,173) (86,194) (102,938)
Shares Issue / (Repurchase) 7,697 7,511 0 0 0
Cost of Dividends Paid (586) (623) (623) (623) (623)
Cash Flow from Financing 38,988 19,673 22,095 12,048 702
Free Cash Flow (13,606) (18,621) (22,095) (12,048) (701)
Net Debt 46,457 58,539 81,257 93,927 95,251
Change in Net Debt 23,350 12,082 22,718 12,670 1,323
Key Balance Sheet Data
Property, Plant & Equipment 37,776 54,478 75,997 87,123 89,517
Other Non-Current Assets 71,383 99,381 144,184 210,636 301,737
Trade Receivables 9,909 12,034 13,362 14,325 14,304
Cash & Equivalents 8,159 7,940 7,940 7,940 7,940
Other Current Assets 16,276 26,593 29,526 31,655 31,608
Total Assets 143,502 200,425 271,009 351,680 445,106
Long-Term Debt 44,475 51,314 74,032 86,702 88,026
Other Non-Current Liabilities 1,796 2,262 2,262 2,262 2,262
Short-Term Debt 10,141 15,165 15,165 15,165 15,165
Other Current Liabilities 16,844 24,507 27,210 29,172 29,128
Total Liabilities 73,256 93,247 118,668 133,301 134,581
Total Equity 70,248 106,920 152,082 218,120 310,266
Total Equity & Liabilities 143,504 200,167 270,751 351,421 444,847
iQ
method SM - Bus Performance*
Return On Capital Employed 4.7% 1.8% 1.8% 1.2% 1.4%
Return On Equity 11.0% 3.2% -2.5% -4.6% 0%
Operating Margin 7.9% 4.0% 2.3% 1.6% 2.0%
EBITDA Margin 13.0% 8.3% 6.6% 5.8% 5.7%
iQ
method SM - Quality of Earnings*
Cash Realization Ratio 2.4x 2.9x NM NM NM
Asset Replacement Ratio 4.8x 4.2x 4.1x 2.3x 1.3x
Tax Rate (Reported) 31.6% 106.4% NM NM NM
Net Debt-to-Equity Ratio 142.4% 139.1% 191.5% 223.5% 221.2%
Interest Cover 1.7x 1.0x 0.6x 0.5x 0.8x
Key Metrics
* For full definitions of
iQmethod SM measures, see page 5.
Company Description
ABNL is a conglomerate with exposure to 10 diverse
businesses. ABNL is the largest (32% stake)
shareholder of Idea Cellular that is separately listed.
ABNL also owns 74% of the un-listed life-insurance
biz namely, Birla Sun Life. Other key businesses
include carbon black, garment-retailing, BPO
services, rayon, fertilizers, textiles, insulators, and
financial services.
Investment Thesis
We have a Buy rating on ABNL. We expect strong
earnings growth for its telecom exposure and
foresee sustained turnaround in its insurance
business. Telecom & insurance drive nearly 80-90%
of ABNL's stock valuation. The remaining 10-20% of
ABNL's value derives from diverse businesses like
carbon-black, garment-retailing and BPO services
that have a stable outlook, collectively.
Stock Data
Price to Book Value 0.8x
Aditya Birla Nuvo Ltd.
05 August 2008
3
Table 3: EBITDA* trend in key businesses
Yr to 31 March (Rs mn) 1Q FY08 4Q FY08 1Q FY09 YoY QoQ
Telecom 1753 2207 2343 34% 6%
Insurance -323 -2006 -1443 346% -28%
BPO & software (EBIT) 75 -37 -63 -185% 71%
Carbon Black 327 376 477 46% 27%
Rayon 271 338 376 39% 11%
Fertilizers 170 359 378 122% 5%
Garments (+EBIT for contract exports) -28 173 -284 914% -264%
Textiles 159 167 161 1% -4%
Others 669 833 764 14% -8%
*includes other income; Source: Company
Table 4: Target valuation of AB Nuvo on sum of parts
Business Stake held Valuation benchmark ABNL (Rs/sh)
Telecom/Idea
32% PO for Idea (Rs125/sh) 923
Insurance
74% 17x FY10 NBAP 873
BPO & IT
88% 3x EV/EBITDA; discount to FirstSource 15
Carbon Black
100% 8x EV/EBITDA; local market valuation 153
Garments & Textile
100% 0.6x EV/sales; discount to Raymond 72
Rayon
100% 8x EV/EBITDA; local market valuation 95
Fertilizers
100% 8x EV/EBITDA; local market valuation 97
AMC
50% 7% of FY08 AUM 111
Misc. businesses
less Net Debt (excl. Idea) 578
Add potential cash from exercise of share warrants 298
100% 8x EV/EBITDA; local market valuation 51
Total equity value of ABNL 2112
Conglomerate discount 15% -317
Target share price of ABNL 1797
Source: ML
Table 1: Consolidated 1Q FY09 results summary
Yr to 31 March (Rs mn) 1Q 08 4Q 08 1Q 09 YoY chg QoQ chg
Turnover 21,841 38,044 32,283 47.8% -15.1%
Operating costs 18,911 36,074 29,821 57.7% -17.3%
EBITDA 2930 1970 2462 -16.0% 25.0%
EBITDA Margin 13.4% 5.2% 7.6%
Depreciation 1,152 1,501 1,561 35.5% 4.0%
Operating profit
Recurring other income 142 440 246 73.2% -44.1%
1778 469 901 -49.3% 92.1%
EBIT
Interest 857 1,323 1368 59.6% 3.4%
1920 909 1,147 -40.2% 26.2%
Profit before tax 1063 -413 -220
Taxes 213 355 460 115.4% 29.5%
na na
Recurring net profit before minority
Minority interests -90 -550 -397 na na
850 -768 -680 na na
Recurring net profit
Extra-ordinary Inc/(exp) 7 0 0
940 -218 -283
Reported net profit 947 -218 -283 na 29.7%
Source: Company
Table 2: Standalone 1Q FY09 results summary
Yr to 31 March (Rs mn) 1Q 08 4Q 08 1Q 09 YoY chg QoQ chg
Turnover 7,801 11,308 10,789 38.3% -4.6%
Operating costs 6,623 9,777 9,319 40.7% -4.7%
EBITDA 1,178 1,530 1,470 24.8% -3.9%
EBITDA Margin 15.1% 13.5% 13.6%
Depreciation 310 378 388 25.1% 2.7%
Operating profit
Recurring other income 55 269 23 -57.8% -91.5%
868 1,153 1,082 24.7% -6.1%
EBIT
Interest 435 502 460 5.8% -8.3%
923 1,422 1,105 19.8% -22.3%
Profit before tax 488 920 645
Taxes 158 215 228 44.8% 6.1%
32.2% -29.9%
Recurring net profit
Extra-ordinary Inc/(exp) 0 0 0
330 705 416 26.2% -40.9%
Reported net profit 330 705 416 26.2% -40.9%
Source: Company
Aditya Birla Nuvo Ltd.
05 August 2008
4
Price objective basis & risk
Aditya Birla Nu (ADYAF)
We have a price objective of Rs1800 for AB Nuvo based on sum-of-parts using
15% conglomerate/holdCo discount. Valuation for most businesses is linked to
earnings outlook for FY10E, except insurance (17x FY10 NBAP) & financial
services (7% of FY08-AUM), which are linked to NBAP & assets under
management, respectively. Our target valuation for Idea Cellular is around
Rs125/sh. Risks are possible unexpected slowdown in market growth for the
telecom, or financial services.
Analyst Certification
I, Reena Verma Bhasin, CFA, hereby certify that the views expressed in this
research report accurately reflect my personal views about the subject securities
and issuers. I also certify that no part of my compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or view expressed in
this research report.
Special Disclosures
In accordance with the SEBI (Foreign Institutional Investors) Regulations and with
guidelines issued by the Securities and Exchange Board of India (SEBI), foreign
investors (individuals as well as institutional) that wish to transact the common
stock of Indian companies must have applied to, and have been approved by
SEBI and the Reserve Bank of India (RBI). Each investor who transacts common
stock of Indian companies will be required to certify approval as a foreign
institutional investor or as a sub-account of a foreign institutional investor by SEBI
and RBI. Certain other entities are also entitled to transact common stock of
Indian companies under the Indian laws relating to investment by foreigners.
Merrill Lynch reserves the right to refuse copy of research on common stock of
Indian companies to a person not resident in India. American Depositary Receipts
(ADR) representing such common stock are not subject to these Indian law
restrictions and may be transacted by investors in accordance with the applicable
laws of the relevant jurisdiction. Global Depository Receipts (GDR) and the
Global Depository Shares of Indian companies, Indian limited liability
corporations, have not been registered under the U.S. Securities Act of 1933, as
amended, and may only be transacted by persons in the United States who are
Qualified Institutional Buyers (QIBs) within the meaning of Rule 144A under the
Securities Act. Accordingly, no copy of any research report on Indian companies'
GDRs will be made available to persons who are not QIBs.
India - General Coverage Cluster
Investment rating Company ML ticker Bloomberg symbol Analyst
BUY
ABG Shipyard ABSHF ABGS IN Sanjaya Satapathy
Aditya Birla Nu ADYAF ABNL IN Reena Verma Bhasin, CFA
APIL ANSFF APIL IN Amit Agarwal
Bharati Shipyar BSYDF BHSL IN Sanjaya Satapathy
DLF Limited XVDUF DLFU IN Amit Agarwal
Exide Indus Ltd XEDRF CHLR IN Sanjaya Satapathy
HDIL XGHSF HDIL IN Amit Agarwal
Motherson Sumi XMSUF MSS IN Sanjaya Satapathy
Puravankara Projects Ltd XPJVF PVKP IN Amit Agarwal
Renuka Sugars SRNKF SHRS IN Sanjaya Satapathy
Triveni Engg TVIEF TRE IN Sanjaya Satapathy
Aditya Birla Nuvo Ltd.
05 August 2008
5
India - General Coverage Cluster
Investment rating Company ML ticker Bloomberg symbol Analyst
NEUTRAL
UltraTech Cemen XDJNF UTCEM IN Reena Verma Bhasin, CFA
Unitech Ltd UTKIF UT IN Amit Agarwal
UNDERPERFORM
Ambuja Cements AMBUF ACEM IN Reena Verma Bhasin, CFA
Ambuja Cem-GDR XAAJF ABUJ LI Reena Verma Bhasin, CFA
Assoc. Cement ADCLF ACC IN Reena Verma Bhasin, CFA
Bajaj Hindusthan BJJHF BJH IN Sanjaya Satapathy
Balrampur Chini BMPRF BRCM IN Sanjaya Satapathy
Grasim GRSJF GRASIM IN Reena Verma Bhasin, CFA
Grasim -G GRSJY GRAS LX Reena Verma Bhasin, CFA
India Cements INIAF ICEM IN Reena Verma Bhasin, CFA
India Cements -G IAMZY ICEM LX Reena Verma Bhasin, CFA
Omaxe Limited XOMXF OAXE IN Amit Agarwal
Shree Cements SREEF SRCM IN Reena Verma Bhasin, CFA
RESTRICTED
Indiabulls Real IBELF IBREL IN Amit Agarwal
iQ
Business Performance Numerator Denominator
method SM Measures Definitions
Return On Capital Employed NOPAT = (EBIT + Interest Income) * (1 - Tax Rate) + Goodwill
Amortization
Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill
Amortization
Return On Equity Net Income Shareholders’ Equity
Operating Margin Operating Profit Sales
Earnings Growth Expected 5-Year CAGR From Latest Actual N/A
Free Cash Flow Cash Flow From Operations – Total Capex N/A
Quality of Earnings
Cash Realization Ratio Cash Flow From Operations Net Income
Asset Replacement Ratio Capex Depreciation
Tax Rate Tax Charge Pre-Tax Income
Net Debt-To-Equity Ratio Net Debt = Total Debt, Less Cash & Equivalents Total Equity
Interest Cover EBIT Interest Expense
Valuation Toolkit
Price / Earnings Ratio Current Share Price Diluted Earnings Per Share (Basis As Specified)
Price / Book Value Current Share Price Shareholders’ Equity / Current Basic Shares
Dividend Yield Annualised Declared Cash Dividend Current Share Price
Free Cash Flow Yield Cash Flow From Operations – Total Capex Market Cap. = Current Share Price * Current Basic Shares
Enterprise Value / Sales EV = Current Share Price * Current Shares + Minority Equity + Net Debt +
Other LT Liabilities
Sales
EV / EBITDA Enterprise Value Basic EBIT + Depreciation + Amortization
iQ
structured, detailed, and transparent methodology. Guidelines to maximize the effectiveness of the comparative valuation process, and to identify some common pitfalls.
method SMis the set of Merrill Lynch standard measures that serve to maintain global consistency under three broad headings: Business Performance, Quality of Earnings, and validations. The key features of iQmethod are: A consistently
iQ
companies covered by Merrill Lynch.
database ® is our real-time global research database that is sourced directly from our equity analysts’ earnings models and includes forecasted as well as historical data for income statements, balance sheets, and cash flow statements for
iQ
profile SM, iQmethod SM are service marks of Merrill Lynch & Co., Inc.iQdatabase ®is a registered service mark of Merrill Lynch & Co., Inc.
Aditya Birla Nuvo Ltd.
05 August 2008
6
Important Disclosures
ADYAF Price Chart
Rs0
Rs400
Rs800
Rs1,200
Rs1,600
Rs2,000
Rs2,400
Rs2,800
1-Jan-06 1-Jan-07 1-Jan-08
ADYAF
B : Buy, N : Neutral, S : Sell, U : Underperform, PO : Price objective, NA : No longer valid
22-Oct:B
Verma
PO:Rs1940
3-Jan
PO:Rs2620
31-Jan
PO:Rs2435
2-May
PO:Rs2175
Prior to July 31, 2008, the investment opinion system included Buy, Neutral and Sell. As of July 31, 2008, the investment opinion system includes Buy, Neutral and Underperform. Dark Grey shading indicates that a security is restricted with the
opinion suspended. Light grey shading indicates that a security is under review with the opinion withdrawn. The current investment opinion key is contained at the end of the report. Chart is current as of July 31, 2008 or such later date as indicated.
Investment Rating Distribution: Industrials/Multi-Industry Group (as of 01 Jul 2008)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 63 60.58% Buy 14 24.56%
Neutral 16 15.38% Neutral 4 28.57%
Sell 25 24.04% Sell 4 18.18%
Investment Rating Distribution: Global Group (as of 01 Jul 2008)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1664 47.42% Buy 441 29.46%
Neutral 803 22.88% Neutral 224 31.46%
Sell 1042 29.70% Sell 217 22.84%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. For purposes of this distribution, a stock
rated Underperform is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating.
RATINGS
stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its
are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster;
2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least
attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a
stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better
understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
VOLATILITY RISK, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of aCoverage Cluster (defined below). There
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy
Neutral
Underperform N/A
* Ratings dispersions may vary from time to time where Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
? 10% ? 70%? 0% ? 30%? 20%
INCOME RATINGS
to be secure) and 9 - pays no cash dividend.
industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent Merrill Lynch Comment referencing the stock.
In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for
sale: Aditya Birla Nu.
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three months:
Aditya Birla Nu.
MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day
of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 10th day of a month reflect the ownership position at
the end of the second month preceding the date of the report: Aditya Birla Nu.
The country in which this company is organized has certain laws or regulations that limit or restrict ownership of the company's shares by nationals of other
countries: Aditya Birla Nu.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill
Lynch, including profits derived from investment banking revenues.
, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not consideredCoverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common
Aditya Birla Nuvo Ltd.
05 August 2008
7
Other Important Disclosures
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