Deep Value Quick take BUY CMP Rs811 Target Price Rs1,166 (ABNL), a diversified business conglomerate, emerged from the three-way merger of Indian Rayon, Birla Global Finance and Indo Gulf in 2005. ABNL is the holding company of several subsidiaries and has business interests in insurance, asset management, financial services, garments, carbon black, insulators, rayon, fertilisers, IT and ITeS businesses. The company also holds ~25% stake in Idea Cellular. Exhibit 1: ABNL s Business Structure Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Diversified 8,353 1 1054/704 45,676 10 18,115 5,440 ABRL.BO ABNL@IN Shareholding Pattern (%) Promoters 46.1 MF / Banks / Indian Fls 18.5 FII / NRIs / OCBs 21.7 Indian Public / Others 13.7 Source: Company, Angel Research Abs. (%) 3m 1yr 3yr Sensex 4.2 13.8 19.7 ABNL (1.3) (8.9) (45.7) On account of the diverse nature of ABNL s businesses, we have considered each of its business segments as an independent entity for valuation purposes. Hence, we have adopted the sum-of-the-parts (SOTP) methodology to evaluate the company. Valuation Methodology a) Manufacturing business: The company s manufacturing business constitutes carbon black, agri business (fertilisers), insulators, rayon and textiles, which we have valued on EV/EBIDTA basis. b) Fashion and Lifestyle: We have valued ABNL s fashion and lifestyle business (garments) on EV/Sales basis, as the company has yet to report profit at the EBIDTA level. c) IT-ITeS: We have value the IT-ITeS segment (88.3% holding of ABNL) on Mcap/Sales basis, as the business is at the stabilisation stage. d) Other Financial Services (excluding Birla Sunlife AMC): The company s Other Financial Services (excluding Birla Sunlife AMC) comprise the NBFC, broking, private equity, wealth management and general insurance advisory segments. We have valued this segment on P/E basis. Viraj Nadkarni 022 4040 3800 Ext: 309 virajm.nadkarni@angeltrade.com Please refer to important disclosures at the end of this report 1
e) Life Insurance business: ABNL holds 74% stake in its insurance arm. We have valued the segment on the basis of Embedded Value and Value for New Business declared by the company in 1QFY2011. We have assigned a holding company discount of 20% to ABNL s stake value. f) Asset Management: ABNL holds 50% in Birla Sunlife Asset Management Company (BSAMC). We have valued the AMC at 3.5% of the assets under management (AUM) as declared by the company in 1QFY2011. g) Telecom: ABNL holds 25.4% stake in Idea Cellular (Idea). We have valued this stake on the basis of market cap of Idea at our target price of Rs55 and assigned 30% holding company discount to the same. h) We have considered net debt, on a standalone basis, as we have valued the standalone businesses on the EV parameter. Exhibit 2: SOTP valuation Source: Company, Angel Research Outlook and Valuation ABNL has started delivering improved performance in its manufacturing businesses. The BPO and garments businesses have been profitable since the last two quarters. The insurance business and the AMC are also well geared to benefit from the significant market opportunity lying ahead. Thus, due to the diversity in the nature of ABNL s businesses, we have valued it on SOTP basis and assigned 20% conglomerate discount. We recommend a Buy on the stock, with a Target Price of Rs1,166, implying an upside of 44% from current levels. August 3, 2010 2
Profit & Loss Statement (Consolidated) Y/E March (Rs cr) FY2006 FY2007 FY2008 FY2009 FY2010 Net Sales 4,994 8,338 11,810 13,645 19,508 Total operating income 4,994 8,338 11,810 13,645 19,508 % chg 57.5 67.0 41.6 15.5 43.0 Total Expenditure 4,449 7,294 10,886 13,041 18,070 Net Raw Materials 1,411 1,846 2,099 2,657 2,503 Other Mfg costs 368 771 404 482 547 Personnel 439 1,263 1,996 2,404 2,254 Other 2,231 3,413 6,387 7,497 12,765 EBITDA 545 1,044 924 604 1,438 % chg 171.5 91.5 (11.6) (34.6) 138.1 (% of Net Sales) 10.9 12.5 7.8 4.4 7.4 Depreciation& Amortisation 225 423 525 696 866 EBIT 320 622 399 (92) 572 % chg 336.0 94.1 (35.9) (123.0) - (% of Net Sales) 6.4 7.5 3.4 (0.7) 2.9 Interest & other Charges 117 387 476 721 662 Other Income 80 119 229 263 248 (% of PBT) 28 33 150 (54) 175 Recurring PBT 282 361 153 (483) 141 % chg 238.4 27.7 (57.7) (416.9) - Extraordinary Income/(Exp.) (0.83) 6.28 0.48 66.03 (16.40) PBT (reported) 283 354 152 (549) 158 Tax 94 112 126 81 114 (% of PBT) 33.2 31.6 82.8 (14.8) 72.3 PAT (reported) 189 243 26 (630) 44 Add: Share of Asso. Earning - - - - (0) Less: Minority interest (MI) (15) (38) (125) (195) (111) ADJ. PAT 205 275 150 (502) 171 % chg 233.1 34.0 (45.3) (433.8) - (% of Net Sales) 4.1 3.3 1.3-0.9 Basic EPS (Rs) 34.2 29.4 15.8-16.6 Fully Diluted EPS (Rs) 34.2 29.4 15.8-16.6 % chg 233.1 (14.0) (46.2) - - August 3, 2010 3
Balance Sheet (Consolidated) Y/E March (Rs cr) FY2006 FY2007 FY2008 FY2009 FY2010 SOURCES OF FUNDS Equity Share Capital 60 93 95 95 103 Preference Capital 100-50 26 26 Reserves& Surplus 1,914 3,025 3,885 5,615 5,327 Shareholders Funds 2,074 3,119 4,030 5,735 5,456 Total Loans 2,365 5,462 6,648 8,887 7,439 Minority Interest 43 143 174 179 186 Policy Holders Fund 2,379 3,763 6,513 8,733 15,671 Deferred Tax Liability 168.7 179.6 226.2 219.8 240.6 Total Liabilities 7,030 12,666 17,592 23,754 28,992 APPLICATION OF FUNDS Gross Block 3,944 6,332 8,316 9,267 10,633 Less: Acc. Depreciation 2,199 3,157 3,530 4,087 5,012 Net Block 1,745 3,176 4,786 5,180 5,621 Capital Work-in-Progress 170 381 441 726 433 Goodwill 1,181 2,815 2,791 4,188 3,827 Investments 2,917 4,543 7,320 11,082 16,956 Current Assets 2,026 3,435 4,696 5,638 5,541 Cash 154 816 794 1,534 795 Loans & Advances 802 1,070 1,871 1,914 2,674 Other 1,070 1,549 2,030 2,189 2,073 Current liabilities 1,008 1,684 2,443 3,061 3,387 Net Current Assets 1,018 1,750 2,253 2,577 2,154 Mis. Exp. not written off - - - - - Total Assets 7,030 12,666 17,592 23,754 28,992 August 3, 2010 4
Cash Flow Statement (Consolidated) Y/E March (Rs cr) FY2006 FY2007 FY2008 FY2009 FY2010 Profit before tax 283 354 152 (549) 158 Depreciation 225 423 525 696 866 Change in Working Capital 179 197 277 459 443 Less: Other income 80 119 229 263 248 Direct taxes paid 94 112 126 81 114 Cash Flow from Operations 743 599 261 1,105 (Inc)./ Dec in Fixed Assets (121) (303) (2,433) (1,562) (1,599) (Inc)./ Dec in Investments 10 (60) (2,777) (3,762) (5,874) (Inc)/ Dec in loans and advances 7 (37) (802) (43) (760) Other income 80 119 229 263 248 Cash Flow from Investing (25) (281) (5,782) (5,103) (7,985) Issue of Equity 10 3 2-8 Inc./(Dec.) in loans (22) 359 1,186 2,239 (1,448) Dividend Paid (Incl. Tax) (4) (15) (273) (190) (258) Others 106 (146) 4,247 3,534 7,838 Cash Flow from Financing 90 200 5,161 5,583 6,141 Inc./(Dec.) in Cash 65 662 (22) 740 (740) Opening Cash balances 89 154 816 794 1,534 Closing Cash balances 154 816 794 1,534 795 August 3, 2010 5
Key Ratios Y/E March FY2006 FY2007 FY2008 FY2009 FY2010 Valuation Ratio (x) P/E (on FDEPS) 23.7 27.6 51.3-48.9 P/CEPS 11.3 10.9 11.4 39.7 8.1 P/BV 2.3 2.4 1.9 1.3 1.5 Dividend yield (%) 0.9 0.7 0.7 0.5 0.6 EV/Sales 2.1 1.5 1.2 1.1 0.7 EV/EBITDA 19.1 12.1 14.9 24.8 10.1 Per Share Data (Rs) EPS (Basic) 34.2 29.4 15.8-16.6 EPS (fully diluted) 34.2 29.4 15.8-16.6 Cash EPS 71.8 74.7 71.1 20.4 100.7 DPS (Rs) 7.0 5.5 5.7 4.0 5.0 Book Value 346 334 424 604 530 Dupont Analysis EBIT margin 32.3 37.2 3.4-2.9 Tax retention ratio 66.8 68.4 17.2 114.8 27.7 Asset turnover (x) 0.2 0.2 1.1 0.9 1.5 ROIC (Post-tax) 4.6 6.2 0.6-1.2 Cost of Debt (Post Tax) 5.0 6.8 1.4 10.7 2.2 Leverage (x) 1.3 1.2 1.5 1.4 1.3 Operating ROE 4.0 5.5 - - - Returns (%) ROCE (Pre-tax) 6.2 6.3 2.6-2.2 Angel ROIC (Pre-tax) 4.8 5.4 2.4-2.1 ROE 12.8 10.6 4.2-3.1 Turnover ratios (x) Asset Turnover (Gross Block) 1.8 1.6 1.6 1.6 2.0 Inventory / Sales (days) 120 110 121 115 127 Receivables (days) 31 33 34 34 24 Payables (days) 50 56 60 70 57 Working capital cycle (ex-cash) (days) 46 39 37 33 22 Solvency ratios (x) Net debt to equity 1.1 1.5 1.5 1.3 1.2 Net debt to EBITDA 4.1 4.4 6.3 12.2 4.6 Interest Coverage (EBIT / Interest) 2.7 1.6 0.8-0.9 August 3, 2010 6
Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock Yes 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) August 3, 2010 7