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Aditya Birla Nuvo

Aditya Birla Nuvo - Result highlights

The consolidated revenues of Aditya Birla Nuvo (ABN) increased by 28.6% year on year (yoy) to Rs3,594.1 crore in Q2FY2009.

The operating profit margin (OPM) declined by 499 basis points to 4.9% in Q2FY2009 primarily due to the losses in the insurance, garment and business process outsourcing (BPO) businesses. Furthermore, margin pressure in the major business segments further deteriorated the overall operating profit margin (OPM). Consequently, the operating profit declined by 36.6% to Rs174.4 crore despite a strong revenue growth during the quarter.

For the quarter the company has reported a net loss after minority interest of Rs104.6 crore compared with a profit after minority interest of Rs47.8 crore in Q2FY2008. An increase in the interest (up 54.8%), depreciation (up 29.0%) and tax (up 38.5%) expenses resulted in the loss. The interest expenses increased due to a higher short-term debt during the quarter. The company’s tax expenses were higher as the benefit of the loss in the insurance business was not fully reflected in the consolidated numbers.

We believe that the value (insulators, textiles, fertilsers, carbon black and rayon) businesses would experience margin improvement on the back of the declining raw material cost due to the sharp fall in the commodity prices. However, looking at the liquidity crunch, the growth (garments, life insurance, BPO, software and telecommunications) businesses will remain under pressure in the near term. We expect deceleration in growth of the new business premium in the insurance business, as the company could cut down on its aggressive branch expansion plans due to the ongoing global financial meltdown. In the telecommunications business, although the Spice acquisition will add to the subscriber base, yet we expect contraction in the OPM due to the higher operational expenses related to the commencement of operations in the new circles. A high debt-to-equity ratio of 1.4 and lower possibility of warrant conversion by the promoters remain the key issues that might affect the financing of its capital expenditure (capex) plans.

At the current market price, the stock trades at a price/earnings ratio of 39.5x FY2010E consolidated earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.7x FY2010E. Buy the stock with a price target of Rs1,061.