Aditya Birla Nuvo –Buy- Sharekhan
Aditya Birla Nuvo (ABN) posted a stellar performance for Q3FY2010 on a year-on-year (y-o-y) and sequential bases with the adjusted net profit of Rs80.7 crore vs that of Rs4.1 crore earned in Q3FY2009 (around a 19-fold increase in the profit). Sequentially, the profit after tax (PAT) grew by 36.1%.
The total income from operations increased by 4.6% year-on-year (y-o-y) and by 1.9% on a sequential basis to Rs1,252 crore. The revenue growth was mainly led by the carbon black, garment and textile businesses that grew by 40%, 13.3% and 11% y-o-y respectively.
The operating profit margin (OPM) improved considerably on a yearly as well as sequential basis by 1,180 basis points and 160 basis points respectively to 19% for Q3FY2010. The margin expansion was led by an improvement in the margins across the businesses. Consequently, the operating profit increased by 176% y-o-y and by 11.4% sequentially to Rs238.2 crore during the quarter. We highlight here that this was the highest operating profit reported by the company ever.
The PAT saw a 19-fold increase on a yearly basis and a growth of 36.1% on a sequential basis to Rs80.7 crore on the back of a stupendous margin expansion coupled with declining both interest charge (down 7% sequentially) and depreciation charge (down 2.3% sequentially).
The company surprised with a strong performance by its rayon yarn business. The profit before interest and tax (PBIT) margin of the rayon yarn business improved sharply by 1,195 basis points y-o-y to 22.3% mainly due to higher VFY realization and lower input cost. Further, the PBIT margin of the textile business also improved by 180 basis points quarter-on-quarter (q-o-q) to 8.9%.
The company posted a sharp improvement in the stand-alone apparel retail business. The OPM improved considerably by 230 basis points q-o-q and from (3.1%) a year ago to 4.1% mainly due to rent re-negotiation, manpower rationalization, reduction in the cost of overheads even as ABN expanded the retail space from about 0.7 million square feet (mn sq ft) to about 0.8mn sq ft in M9FY2010. Further, the business of carbon black continued to show improvement in its performance. The margin of the business improved from -11.9% in Q3FY2009 to 22.5% in Q3FY2010.
On a consolidated level, after the minority share, the company turned profitable with an adjusted net profit of Rs8.19 crore in Q3FY2010 vs an adjusted net loss of Rs156.4 crore in Q3FY2009. The profit growth was led by a strong earnings growth in all the segments. Further, the reduced losses in the life insurance business and the turnaround of the business process outsourcing (BPO), garment and carbon black businesses also helped the company to post a profit during the quarter.
In the life insurance business, the net loss declined to Rs142.8 crore in Q3FY2010 vs Rs165.8 crore in Q3FY2009 due to lower strain of new business premium and better absorption of the fixed overheads. The total premium increased by 51 % y-o-y during the quarter driven by 43% growth in the renewal premium. The management expects the life insurance industry to grow at an annual rate of 15-20% and targets a higher growth for its business as compared to the industry growth.
We have revised our earnings estimates for FY2010 and FY2011 to factor in the strong turnaround of the garment and BPO segments along with the margin improvement in the carbon black, insulator and textile businesses. Consequently, our revised earnings per share (EPS) estimates for FY2010 and FY2011 stand at Rs18.5 and Rs22.9 respectively. Further, we have introduced our FY2012 estimates with this note and the EPS estimate for the year stands at Rs27.
Given the diverse businesses of ABN, the company is best valued using the sum-of-the-parts (SOTP) method. We have taken fully diluted shares of 11.4 crore, including warrant conversions, to arrive at the fair value of the stock. A strong improvement in its growth businesses (viz insurance, financial services, BPO and retail) and the increasing efficiency in the value businesses (fertilisers, insulators, carbon black and textiles) bring strong visibility in the business.
We are raising our price target for the stock from Rs925 to Rs1,030. As a result, we are upgrading our recommendation on the stock from Hold to BUY. At the current market price, the stock trades at a price/earnings (PE) ratio of 36x FY2011E stand-alone earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortization (EBIDTA) of 14.1x FY2011E.
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