>Aditya Birla Nuvo (UBS)

● Initiate coverage with a Buy rating; deep value even in stress-case scenario. ABNL is a conglomerate with interests in insurance (Birla Sun Life Insurance), telecom (Idea Cellular), other financial services, business process outsourcing and six key diverse businesses. We believe: 1) its strategy to make each business selffunded could play out over the next 12 months; and 2) even in our stress-case scenario (assuming 35% lower growth in insurance and valuing Idea Cellular (Idea), at the market price (instead of UBS’s price target) we estimate 23% upside potential. Our price target of Rs700.00 implies 78% upside potential.

● Direct play on the fast growing insurance and telecom businesses
We forecast a 23% revenue CAGR for Idea in FY09-12. India’s insurance industry has been growing fast; premium collection has recorded a 38% CAGR for the last five years, and we forecast 15-17% long-term growth. Birla Sun Life (BSL) Insurance increased its market share from 3.3% to 5.2% in FY08. We believe the standalone performance is not significant in ABNL’s valuation.

● Debt-funded model unsustainable; alternative funding could be a trigger Although we believe ABNL’s debt funded growth model has worked up to now, it needs to seek alternative sources of funding as its gross debt/equity is likely to rise to 1.01x in FY09 versus 0.68x in FY08. Also, promoter, Aditya Birla Group’s warrants worth Rs37.7bn, which expire in August, are unlikely to be converted. We believe securing alternative long-term funding will lead to the stock re-rating.

● Valuation: sum-of-the-parts-based price target of Rs700.00
Our price target uses: 1) a DCF methodology to value Idea; 2) 14x NBAP for BSL Insurance; 3) 4% of assets under management for Birla Sunlife’s Asset Management Company (BSL AMC); and 4) EV/EBITDA for its standalone businesses. We assume a 30% holding company discount to value its subsidiaries.

To see full report: ADITYA BIRLA NUVO