Aditya Birla Nuvo: A blue-chip going for a song

As the market scrambled for blue-chip stocks during the recent rally, the Birla group flagship Aditya Birla Nuvo remained under the radar, thanks to its vast and complicated portfolio of businesses, ranging from financial services and apparel retailing to agri-business.

The stock lost 15 per cent this year, following the company’s failure to bag a banking licence. But whether or not it owns a bank, Nuvo’s businesses hold huge potential to scale up in size and profitability over the long term. Buy-and-hold investors should grab the opportunity to acquire the stock.

The current price-earnings multiple for the stock, at just 10.5 times its 2013-14 earnings, certainly does not do justice either to its large-cap status, the company’s rock solid balance-sheet or promising portfolio of consumer-facing brands, such as Idea Cellular, Louis Philippe, Van Heusen, Peter England, Pantaloon Fashions and Birla Sun Life Insurance. Even a conservative valuation of all its businesses, based on a sum of the parts (assuming a 20 per cent holding company discount), yields a price of about ₹1,400 per share, suggesting good upside from the current stock price of ₹1,065.

Over the last three years, Nuvo has wrought a significant transformation to its portfolio, shedding industrial businesses that generate low shareholder returns, such as its carbon black, fertiliser trading and BPO operations. The cash thus freed up has been deployed in consumer-facing sectors such as lifestyle, fashion retail, telecom and financial services. These three sectors now together make up nearly three-fourths of Nuvo’s revenues.

Idea Cellular, in which Nuvo holds a 25.3 per cent stake, is a promising play in the Indian mobile telephony market despite near-term pressures from spectrum fees and capital expenditure. Idea has steadily gained market share, , thanks to mobile number portability and a high, active-user base; it will gain from rising tariffs as well as the surge in mobile data usage.

Nuvo is also the largest branded apparel retailer in India (annual revenue of ₹6,000 crore), thanks to Madura Garments, which dominates the men’s formalwear market, and Pantaloon Retail, which is mainly into women’s value retail. Here, a pan-India footprint of stores and a focus on its own brands and price increases are likely to bolster profit margins.

The company’s financial services business, with a 74 per cent stake in Birla Sun Life Insurance, a 51 per cent holding in Birla Sun Life Mutual Fund and a wholly-owned NBFC, distribution and broking arm, is today a mixed bag. A decline in the insurance business has offset high growth in the lending and mutual fund operations. But each of these businesses is at a nascent stage and offers potential for value unlocking once policy hurdles are cleared.

Despite owning a number of capital-guzzling businesses ranging from retail to financial services, Nuvo has managed to restructure its balance-sheet to reduce debt in the last three years. Its net debt-to-equity ratio stood at a modest 0.6 times as of end-December 2013.

While its medley of businesses may confuse investors, they have made Nuvo quite resilient to economic cycles. Over the last five years, the company’s consolidated revenues grew 12 per cent annually, while net profits have vaulted by over 50 per cent annually. Operating profit margins have also improved from 6 per cent to 18 per cent over this period.

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