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 Stock Update >> Aditya Birla Nuvo

 Sector Update >> Construction

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Aditya Birla Nuvo Reco: Buy

Stock Update

Price target revised to Rs1,550 CMP: Rs1,243

Company details Result highlights

Price target: Rs1,550  Aditya Birla Nuvo Ltd (ABNL)’s Q4FY2014 result is not directly comparable on a Market cap: Rs16,170 cr Y-o-Y basis, as last years’ performance included the carbon black business, which was sold off in April 2013. Excluding the impact on a like-to-like basis, 52 week high/low: Rs1,290/996 the overall performance was good, with a revenue growth at 10% YoY. Led by NSE volume: 1.5 lakh efficiencies in the business verticals (barring the acquired Pantaloons and (no. of shares) fertiliser businesses owing to a plant shut-down), the operating profit grew by BSE code: 500303 23.8% YoY, while the net earnings were impacted by one-offs. Excluding the NSE code: ABIRLANUVO one-offs, the adjusted profit grew by 42% YoY from Rs199 crore in Q4FY2013 to Sharekhan code: ABIRLANUVO Rs283 crore in Q4FY2014. Free float: 5.6 cr  The company sounded confident on its non-banking finance business and (no. of shares) continues to nurture its plans to grow the loan book size. Further, on the life Shareholding pattern insurance vertical, it sounded positive on the product portfolio front and expects a revival in the business with a recovery in the macro-economy front, while the Public & Others acquired Pantaloons business would be in the investment mode for FY2015 as 10% Foreign well. 19%  ABNL’s strong positioning in each of the business verticals it operates in (life Institutions insurance, telecommunication, lifestyle and asset management) along with its 12% quest for profitable growth and attractive valuation keeps us positive and hence Non-promoter we maintain our Buy rating with a revised price target of Rs1,550 (valuation corporate based on SoTP method). Promoters 2% 57%

Price chart Results (consolidated) Rs cr 1290 1230 Particulars Q4FY14 Q4FY13 YoY % Q3FY14 QoQ % 1170 Total income from operations 7,111.8 6,996.0 1.7 6,544.8 8.7 Operating profit 1,167.2 943.2 23.8 1,224.0 -4.6 1110 Other income 96.2 109.5 -12.1 72.5 32.6 1050 Interest 471.8 383.7 23.0 355.7 32.6 990 Depreciation 429.9 345.2 24.5 407.1 5.6 PBT 361.7 323.7 11.7 533.7 -32.2 Feb-14 Nov-13 May-13 Aug-13 May-14 Tax 160.1 124.6 28.5 157.7 1.5 Price performance Minority interest 6.8 0.2 2843.5 30.7 -77.9 Net profit 238.9 198.9 20.1 345.3 -30.8 (%) 1m 3m 6m 12m Exceptional & One off items 44.1 0.0 0.0 Adjusted PAT after MI 283.0 198.9 42.3 345.3 -18.0 Absolute 12.0 15.2 2.1 12.3 EPS 21.8 16.5 26.5 OPM (%) 16.4 13.5 293BPS 18.7 -229BPS Relative 4.0 -2.1 -12.8 -8.0 to Sensex PATM (%) 3.5 2.8 61BPS 5.7 -229BPS Tax rate (%) 44.3 38.5 578BPS 29.6 1472BPS

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Valuations (stand-alone) crore on the broking business coupled with a one- Particulars FY12 FY13 FY14 FY15E FY16E time interest payment of Rs88 crore on Minacs Revenues (Rs cr) 8675.3 9595.2 7950.5 9237.3 10260.1 shadowed the strong operating performance, and Net profit (Rs cr) 426.6 423.1 656.9 538.3 584.2 resulted in a reported earnings decline of 20.1% on a Shares in issue (Cr) 11.4 13.0 13.0 13.0 13.0 Y-o-Y basis. After adjusting for the one-offs, the net Adj. EPS (Rs) 32.8 32.5 50.5 41.4 44.9 earnings grew by 42% on a Y-o-Y basis. Growth YoY % 12.4 -0.8 55.3 -18.0 8.5 Key result positives PER (x) 37.9 38.2 24.6 30.0 27.7 Book Value (Rs) 500.2 527.1 561.2 602.6 647.5  A strong performance reported by Madura Garments, P/BV (Rs) 2.5 2.4 2.2 2.1 1.9 a robust 35.1% Y-o-Y growth in the revenues, led by EV/EBIDTA (x) 23.4 22.2 21.4 17.5 15.8 the store expansion and a healthy 7% same-store sales RoCE (%) 8.1 8.2 9.6 8.6 8.7 growth. RoNW (%) 7.5 6.2 9.0 6.9 6.9  The telecom business reported a strong performance with the revenues (up 15.5% YoY), and earnings before  Excluding carbon black, revenues grew by 10% YoY: interest and tax (EBIT; up 42.7% YoY). On a reported basis, ABNL’s consolidated Q4FY2014 posted a 1.7% growth on a year-on-year (Y-o-Y) basis.  The financial services business grew strong on the The result was not comparable on a Y-o-Y basis as revenue as well as profitability front (EBIT up 77.1% last year the carbon black business revenues were YoY). included. Excluding the carbon black business, the  The overall life insurance revenues rebound to a revenues grew by 10% on a Y-o-Y basis. On a business positive territory after seven consecutive declining performance basis, barring the fertiliser business that quarters (albeit led by renewal premium as the new witnessed a 37.3% Y-o-Y decline in the earnings owing business premium continues to decline). to a plant shut-down of 41 days, all the other businesses reported a healthy revenue growth with  The net debt to the earnings before interest, tax, the financial services business growth at 33.6% on a depreciation and amortisation (EBITDA) improved to Y-o-Y basis. The lifestyle business of Madura Garments 2.6x in FY2014. grew at 35% year on year (YoY) in a challenging environment. Key result negatives  The Pantaloons business continued to struggle both  Operating efficiencies led to margin expansion: The on the revenue (reported a 1.6% Y-o-Y decline in the margin improvement across a slew of businesses— same-store sales front) as well as earnings front financial services, telecommunication (telecom) and (reporting enhanced loss from Rs31 crore in Q4FY2013 manufacturing (like insulators, textile and rayon)— to Rs46 crore in Q4FY2014). aided in a strong 293-basis-point (BPS) margin improvement for the quarter, consequently the  The life insurance business profitability continues to operating profit grew by 23.8% on a Y-o-Y basis. In deteriorate owing to a change in the product mix (EBIT Q4FY2014, the margin stood at 16.4% vs 13.5% in declined by 10% YoY). Q4FY2013.  The fertiliser business showed a lackluster  Reported earnings includes one-offs; adjusting the performance on the revenues as well as profitability, same net earnings grew strong 42% YoY: The one- owing to a plant shut-down and higher energy cost. offs for the quarter like the impairment of Rs18.6

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Consolidated segmental performance

Segmental results Particulars Q4FY14 Q4FY13 YoY % Q3FY14 QoQ % Segment revenues (Rs cr) Branded apparels 1243 1062 17.0 1,232 0.9 Rayon yarn 223 209 6.7 220 1.3 Insulators 159 115 38.6 135 17.7 Other textiles 345 283 22.0 331 4.0 Fertilisers 408 651 -37.3 754 -45.9 Financial services 533 399 33.6 494 7.9 Life insurance 1739 1637 6.2 983 76.9 IT and ITeS 724 614 18.0 742 -2.4 Telecom 1752 1516 15.5 1,670 4.9 Total revenues 7112 6996 1.7 6,562 8.4 Segmental PBIT (Rs cr) Branded apparels 36.1 44.6 -19.1 97.9 -63.2 Rayon yarn 44.8 35.2 27.1 43.6 2.8 Insulators 22.6 4.1 453.1 17.7 27.7 Other textiles 37.2 30.1 23.8 41.5 -10.4 Fertilisers (30.2) 17.9 -268.8 31.2 -196.8 Financial services 89.5 50.5 77.1 99.2 -9.8 Life insurance 80.4 89.3 -10.0 80.2 0.2 IT and ITeS 52.8 43.3 21.9 46.5 13.5 Telecom 274.4 192.3 42.7 224.7 22.1 Total segmental PBIT 607.5 527.0 15.3 682.5 -11.0 PBIT margin (%) Branded apparels 2.9 4.2 -130BPS 7.9 -505BPS Rayon yarn 20.1 16.9 322BPS 19.8 29BPS Insulators 14.2 3.6 1066BPS 13.1 111BPS Other textiles 10.8 10.6 16BPS 12.5 -174BPS Fertilisers (7.4) 2.7 -1015BPS 4.1 -1154BPS Financial services 16.8 12.6 412BPS 20.1 -329BPS Life Insurance 4.6 5.5 -83BPS 8.2 -354BPS IT and ITeS 7.3 7.1 23BPS 6.3 102BPS Telecom 15.7 12.7 298BPS 13.5 221BPS Blended 8.5 7.5 101BPS 10.4 -186BPS

Key management takeaways  Guided for about Rs900 crore capex for FY2015 on a to lay a strong foundation for strengthening and consolidated basis: The management guided for a communicating the brand values and identity with the consolidated level capital expenditure (capex) of Rs900 consumers, which the company is strongly undertaking. crore for FY2015, with a stand-alone capex at Rs460 It also guided that in this period, the margins and return crore, and the Pantaloons business capex at Rs150 crore, ratios for Pantaloons may remain sub-optimal and while guided for an infusion in non-banking financial expects the same to rebound and reach the industry companies (NBFC) to the tune of Rs300-350 crore. levels in the next two years timeframe. Thus, for FY2015 as well, Pantaloons would be in the investment mode.  Pantaloons business may take around two years to reach industry level margins and returns: The Madura  Focus on the NBFC business to continue: The Garments business has been growing very strong with a management in the conference call sounded positive 7-8% same-store sales growth in a challenging about the NBFC business and is confident of the growth environment, displaying the brand strength. For the in the other financial services business, namely the Pantaloons business, the management believes that the mortgage and capital market business, as their portfolio transition in terms of the organisation restructuring has is well diversified. Along with that, the management been done in FY2014, while FY2015 would be the time has deployed better man-power in the segment and

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hence is positive of scaling up and growing its lending plant coupled with a new increased fixed cost book. It maintained its guidance for Rs350 crore reimbursement available for players (the government investment in FY2015 (it has already infused Rs525 crore has increased the fixed cost reimbursement for urea FY2014). It further mentioned that the scale and players by Rs350 per tonne) the business is expected leverage benefits in the NBFC segment will enable it to to show a good performance ahead. reach a 16-17% return on equity (RoE) by FY2015.  Life insurance business to witness revival in FY2015:  Agri-business to perform ahead: For the year, the On the life insurance business, it stated that despite a fertiliser business showed a lack luster performance challenging environment, the company was able to owing to various reasons ranging from a conscious grab a market share in the industry, and further with decision to stop trading potassium and phosphorous now a stable product offering coupled with a revival fertilisers coupled with a planned 41 day plant shut- in the macro-economy front the overall industry is down of a plant in Q4FY2014 that affected the expected to witness growth. performance. Going forward, with a resumption of the

NBFC—book size (Rs cr) NBFC book composition as on March 31, 2014 (%)

14000 11550 12000 Others 10100 Mortgage 1% Capital market 10000 8400 7900 8300 26% 28% 8000 6500 6000 5150 4250 3425 4000

2000 0 Infra financing Corporate finance 4QFY12 Q2FY13 Q4FY13 Q2FY14 Q4FY14 22% 23% Book size (Rs cr)

Telecom business—Idea Cellular Q4FY2014 performance Rs cr Idea—key performance indicators Particulars Q4 Q4 YoY Q3 QoQ Particulars Q4 Q4 YoY Q3 QoQ FY14 FY13 % FY14 % FY14 FY13 % FY14 % Total revenue 7,044 6,061 16.2 6,613 6.5 Traffic (bn minutes) 157.1 143.4 9.5 144.6 8.6 Operating profit 2,230 1,673 33.3 2,056 8.5 Average revenue per user 173.0 167.0 3.6 169.0 2.4 Interest 196.6 224.4 -12.4 157.5 24.8 Depreciation 1,138 909 25.2 1,167 -2.4 Average minutes of use 397.0 406.0 -2.2 376.0 5.6 per user PBT 895.6 539.5 66.0 731.7 22.4 Tax 305.8 231.3 263.9 15.9 Average realised 43.6 41.2 5.8 44.9 -2.9 PAT 589.8 308.2 91.4 467.8 26.1 rate (paisa) EPS (Rs) 1.78 0.93 91.4 1.41 26.1 Blended churn (%) 4.2 4.3 -2.3 5.6 -25.0 OPM (%) 31.7 27.6 406BPS 31.1 58BPS

Lifestyle business—Madura Garments Particulars Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 No Of EBOs 1,167 1,197 1,233 1,443 1,339 1,405 1,478 1,541 Retail Space (mn Sq ft) 1.7 1.7 1.8 1.9 1.9 2.01 2.11 2.2 Revenue 484.0 647.0 694.0 662.0 638.0 840.0 855 893 EBITDA 24.0 65.0 58.0 97.0 37.0 118.0 116.0 117 Segment EBIT 7.0 46.0 34.0 75.0 17.0 93.0 96.0 93 Capital Employed 563.0 581.0 522.0 479.0 465.0 456.0 446 457

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Construction

Sector Update Road developers set to reap benefits of uptick in road sector investment

Key points

 NHAI’s project award trend during FY2013-14 has been dismal over the last five years with 1,250km awarded on an average during the fiscal compared with an average of 5,500km awarded during FY2010-14. The incoming government is likely to address the issues plaguing the road sector, like land acquisition, forest and environmental clearances and rebidding of stalled projects, in order to increase the project award activity in the sector.  The formation of a stable government is likely to boost build-operate-transfer (BOT) project award activity and only a few large established players would be able to get the bulk of such projects; that too on much better terms due to weak competition from most of the other players (due to stressed balance sheets and funding constraints).  We expect the large established players like Larsen & Toubro (L&T), IL&FS Transportation Networks (ITNL), IRB Infrastructure Developers (IRB Infra) and Ashoka Buildcon to improve their book/bill ratio and bag higher-return projects over the next five years.  The outlook has certainly improved for the large road players and is visible in the renewed interest of the large institutional investors in some of the established names, like ITNL, L&T, Ashoka Buildcon and IRB Infra. We have revised our price target for ITNL to Rs284 and that for IRB Infra to Rs221, rolling forward our DCF valuation for their projects to FY2016 estimates and increasing the multiple for their engineering, procurement and construction (EPC) business.

Detailed analysis

NHAI to pull up socks after deteriorating project award Project award trend activity during FY2014 10000 250 For FY2013-14, the internal target that had been fixed at 9000 8000 200 9,000km of national highways was revised halfway to just 7000 5,000km, factoring in the dismal response to the public- 6000 150 private partnership (PPP) projects. However, the National 5000 4000 100 Highways Authority of (NHAI) was able to award projects 3000 of approximately 1,400km as against the target of 3,000km 2000 50 for FY2014 (which is a dismal 28% of the set target). On the 1000 0 0 back of the dismal performance, the NHAI has set a target FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 of awarding road projects totalling 6,000km (2,300km EPC Target Project aw ard (km) Actual Project aw arded (km) and 3,700km PPP) and worth Rs55,000 crore during FY2015. % achievement (RHS)

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Only two PPP projects during FY2014, bagged by ITNL the stalled projects. Asset developer companies like IRB and IRB Infra and ITNL will be positively affected by a pick-up in In FY2011-12, the NHAI awarded an all-time high of 48 PPP new project award activity and earn better returns. We projects for a total length of 6,380km. In FY2012-13, only believe these companies stand the best chance of benefiting ten PPP projects offered by the NHAI for a length of 950km from the same as these have a strong balance sheet and an received bids. Further, during the first ten months of FY2013- impressive execution record, and would get to handpick 14, only two PPP projects for a length of 223km have been larger and profitable projects. We have revised our price awarded to ITNL and IRB Infra. The decreasing interest of target for ITNL to Rs284 and that for IRB Infra to Rs221, developers in the PPP projects has forced the government rolling forward our discounted cash flow (DCF) valuation to balance the project awards between EPC and PPP. of projects to FY2016 estimates and increasing the multiple for their EPC business. Bank credit funding to roads shows improving trend Bank credit to the road sector which had slowed down during Bank credit growth to road sector (Rs cr)

September and October of 2013 started improving from 180,000 60.0 November 2013 with March of 2014 showing a 20% growth 160,000 50.0 year on year (YoY). The investment in the road sector is 140,000 expected to improve from FY2014-15 with the revival of stalled 120,000 40.0 100,000 30.0 projects and improvement in the project award activity. 80,000 60,000 20.0 Conclusion 40,000 10.0 We believe that the new government will have the mandate 20,000 - 0.0 to address issues like funding from banks, falling project award activity, premium rescheduling and structural Jun-13 Oct-13 Jun-12 Oct-12 Jun-11 Oct-11 Jun-10 Oct-10 Feb-14 Feb-13 Apr-13 Feb-12 Apr-12 Feb-11 Apr-11 Apr-10 Dec-13 Dec-12 Dec-11 Dec-10 Aug-13 Aug-12 Aug-11 Aug-10 bottlenecks such as environment and forest clearances for Roads YoY growth (%)

Projects awarded during FY2014 (till January 2014) Stretch NH Total Funded TPC Agency No length by (Rs cr) (in km) 1 Two-laning of Raipur-Jassa Khera 458 32 NHAI 149 GR Infra Projects 2 Two-laning of Lambia-Jaitran-Raipur 458 53 NHAI 158 GR Infra Projects 3 Two-laning of Jhalawar-/MP border 12 62 NHAI 177 Dilip Buidcon 4 Six-laning of Barwa Adda Panagarh 2 123 BOT 1665 ITNL 5 Two-laning of Bheem to Parasoli section (package II) 148D 36 MORTH 114 GR Infra Projects 6 Two-laning of Bheem to Parasoli section (package I) 148D 33 MORTH 100 GR Infra Projects 7 Two-laning of Nimbi Jodha-- section 458 140 NHAI 368 Dinesh Chandra R Aggrawal Infracon 8 Two-laning of Bhilwara- section 758 68 NHAI 240 Zignego Company Inc-GHV (India) Pvt Ltd(JV) 9 Two-laning of Sitarganj Bareily section 74 74 NHAI 301 VIL 10 Jalandhar - Amritsar 1 20 NHAI 524 Dineshchandra R. Agarwal Infrocon Pvt Ltd 11 Two-laning of Gulabpur-Uniara section 148-D 214 NHAI 524 Gammon India 12 Bhatinda-Suratgarh 32-B 48 Gawar Construction 13 Four-laning of Solapur- Vedishi 211 100 BOT 973 IRB Infra 14 Padi – Dhod 113 86 EPC 279 M/s Dinesh Chandra Aggarwal Total 1041 5620

Valuation matrix Companies Price P/E (x) EV/EBITDA (x) target (Rs) Reco FY14 FY15E FY16E FY14 FY15E FY16E IRB Infra 221 Buy 12.5 12.9 11.7 9.0 8.7 7.5 ITNL 284 Buy 11.2 9.7 9.7 10.0 9.0 7.7

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