Recommendation: Buy
CMP = Rs 1,507
Price target: Rs 2,035
Key points:
„ The consolidated revenues of Aditya Birla Nuvo (ABN) grew by 43.4% yoy to Rs 3,804.4 crore in Q4FY2008. The growth was driven by the solid performance of the insurance business, which grew by 78.3% yoy to Rs 1,477 crore, contributing 39% to the overall revenues. The garment, insulator, financial service, carbon black and telecom businesses also contributed well to the overall growth. The share of the high-growth businesses (garments, life insurance, BPO, software and telecom) in the total sales in Q4FY2008 improved to 76% as compared with 73% in the same period last year.
„ However, the operating profit margin (OPM) declined by 560 basis points to 5.2% on account of margin pressure in the key business segments and increased contribution of the insurance division. Consequently, the operating profit declined by 31% to Rs 197 crore. The telecom, insulator, rayon, textile and financial service businesses witnessed improvement in the profit before interest and tax (PBIT) margin while the margin declined sharply in the garment, carbon black, BPO, fertiliser and life insurance businesses, thereby reducing the overall margin by 430 basis points to 2.1%.
„ The company registered a net loss of Rs 21.8 crore as against a net profit of Rs 82.8 crore during the corresponding quarter last year due to higher depreciation and interest costs. The company continued to invest the cash generated from the value businesses into the growth businesses like life insurance and telecom. The company is also planning for aggressive retail expansion and joint venture for value-added fabrics.
„ At the current market price, the stock trades at a price/earnings ratio of 40.2x FY2009E consolidated earnings and enterprise value (EV) / earnings before interest, depreciation, tax and amortisation (EBIDTA) of 13.0x FY2009E.
„ I maintain a Buy recommendation on ABN with a price target of Rs 2,035 over next 8-10 months.
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