Aditya Birla Nuvo

Aditya Birla Nuvo's diverse businesses provide a natural hedge to investors.

Companies having diversified business portfolios are generally better off than those that are in a single business as an economic downturn in one business can be compensated by growth in other businesses.

Besides, there is always a possibility of unlocking value in future by demerging or having a separate subsidiary.

One such company worth looking at is Aditya Birla Nuvo (earlier Indian Rayon). Aditya Birla Nuvo (ABN), not only provides numerous businesses in one basket, but its strategy of investing in relatively new and high growth potential businesses such as life insurance, asset management, telecom and branded apparel retail apart from IT and BPO services also puts the company into a different orbit altogether.

Despite being a major out-performer in the past year, the stock still has a potential to give a robust upside of roughly 30 per cent in next one and half years according to the consensus estimates of sum-of-parts valuation done by major broking firms.

A truly diversified play The company, which started off with rayon business in 1956, has entered into many businesses in the last five decades, some of them either through acquisitions or mergers. It has divided its numerous businesses into two areas-value and growth.

In value businesses, it has rayon (including viscose filament yarn), carbon black, textiles (linen yarn and fabrics), fertilisers and insulators.

Its growth businesses include life insurance and asset management (in a JV with Sun Life, Canada), telecom (Idea Cellular where it has a 32 per cent stake), apparel retail (brands like Van Heusen and Allen Solly), IT (PSI Data Systems) and BPO services (Transworks and its subsidiary, Minacs).

The company does not have any plans of value unlocking though it is open to the idea at the right price.

Says Bharat Singh, managing director, ABN, “The company’s growth businesses are still at an investment phase and value unlocking is feasible once a business achieves a certain scale as in the case of telecom.”

Dominant position Besides diverse businesses, ABN has also created high entry barriers and achieved leadership in some of its businesses, new and old, which shows that it has not lost focus.

For example, in its value businesses, the company is the world’s third largest and India’s largest producer of insulators; the world’s fourth largest and India’s second largest manufacturer of carbon black; the largest manufacturer of linen fabric and India’s second largest VFY producer.

In a short span of time, the company has emerged as one of the dominant players in its growth businesses.

For instance, its BPO business is among the world’s top 15 BPO companies and in India’s top three; its telecom business is among India’s top five mobile services providers; it is the sixth largest life insurance player and the seventh largest mutual fund.

Says Singh, “The company has successfully positioned itself from a pure manufacturing company to a branded player and a services company.”

Share of growth business to rise ABN wants to take the share of its growth businesses to 86 per cent in the next three years from the current 66 per cent and 35 per cent in FY03.

This is another positive as all the newly entered businesses are less penetrated in India and offer tremendous potential for growth.

For example, the life insurance penetration in India is low at 4.8 per cent to GDP against the world average of 7.5 per cent. Similarly, mutual fund penetration is below 10 per cent of total savings in the country.

Also, the tele-density in India especially in rural areas of less than two per cent and addition of 7 million subscribers every month augurs well for telecom players including Idea. BPO and branded garments are also high growth areas.

Not that its traditional businesses are on a weak wicket. Carbon black and insulators are doing well due to strong demand from auto and tyre industries and power sector respectively.

Huge investments lined up Sensing these opportunities, the company has plans to spend Rs 1,000 crore over the next three years to grow its branded garments, apparel retail and BPO businesses.

The company is aggressively expanding its financial services and retail businesses. While it is adding 200 branches to the existing 139 this month for life insurance, ABN plans to double its distribution presence to 100 at the end of this fiscal.

Further, the company has already locked in retail space of 2.5 lakh sq ft this financial year, which will take its retail space to over 5 lakh sq ft which will double in the next three years.

Financials to improve Though the company has witnessed a growth of 47 per cent and 68 per cent a year in sales and net profit over the last four years, its year-on-year quarterly performance especially since December 2006 has not been encouraging as its margins (both operating and net) are on a decline.

In the June 2007 quarter, operating margins were affected by factors like appreciating rupee impacting its export intensive businesses like textiles, garments exports and IT services, plant shutdown for maintenance in fertiliser and carbon black segment, low margins in its overseas BPO business, loss-making life insurance business and escalating costs, especially employee costs.

Net margins were further affected by higher interest outgo mainly due to acquisition of Minacs and investments in Idea Cellular.

Going forward, the company believes that volumes will be robust though margins may remain thin. Life insurance will break even in FY10 and direct employee costs are unlikely to go up further.

Enam Securities expects a top line and bottom line growth of 20 per cent plus over the next two years. The consolidated debt-equity ratio of about 1.4 is likely to remain constant as the money needed for investments have already been locked in.

A decent upside Based on a sum-of-parts valuation for FY09 by Edelweiss Securities and Enam Securities, investors can expect a decent return over the next year.

Telecom, life insurance and apparel retail are expected to be the biggest growth drivers.

Investors who are looking to tap the growing Indian opportunities due to changing demographics, higher aspiration levels and rising income levels can consider investing in the stock.