Tuesday, March 27, 2012

>ADITYA BIRLA NUVO: Sell Madura Garments for $500 million

We continue with our bullish outlook and Buy rating on Aditya Birla Nuvo, a conglomerate with exposure to varied strong sectors and strong market positioning. Of late there has been a lot of speculation in the media over the company’s businesses. In this note, we clarify the situation and present our understanding and analysis of the recent news flow on the company.

Media flash 1: Aditya Birla Nuvo to sell Madura Garments for $500 million

  •  Media reports state that as per their sources Aditya Birla Nuvo is selling its branded apparel business, Madura Garments. Madura Garments is a 100% subsidiary of Aditya Birla Nuvo and owns marquee apparel brands like Louis Philippe, Peter England, Van Heusen, Allen Solly and Espirit in its portfolio.
  • This news had surfaced earlier also, stating that private equity player, Apax Partners, was looking to buy Madura Garments. But the deal did not go through owing to a mismatch of valuations. However, some media sources say that a consensus might have been reached and the deal might go through.
  • Kumar Mangalam Birla had bought Madura Garments from Coats Plc at around Rs240 crore in 1999.
  • As per the media reports, Madura Garments is valued at $550 million, ie approximately Rs2,250 to Rs2,500 crore or between 1.5x and 1.6x its FY2012 expected revenues. But in our sum-of-the-parts (SOTP) valuation, we have assumed a 0.8x multiple to arrive at the fair value of Rs1,225 crore. The current valuation seems to be at a 100% premium. Thus, going by the stated media valuation, the stake sale, if it happens, would be positive for Aditya Birla Nuvo.

Media flash 2: Idea Cellular on the block
We believe Aditya Birla Nuvo is the cheapest way of gaining exposure to Idea Cellular
  • For a long time there has been speculation in the market and the media that Idea Cellular is on the block. Idea Cellular’s management has categorically stated on various forums and at associations with the analyst community (during Idea Cellular’s conference calls as well as Aditya Birla Nuvo’s conference calls) that there are no plans to sell stake in Idea Cellular.
  • In terms of performance, Idea Cellular has been growing its subscriber base as well as revenue market share over the last two years. During this period, it has seen a phenomenal improvement of over 300 basis points in its revenue market share. Further, the losses from the new circles have been either fairly constant or reduced while the margins and profitability from the old established circles have been on an upmove.
  • Our analysis and research on Idea Cellular puts an equity value of about Rs34,000 crore (the current market capital is Rs32,000 crore). Though Idea Cellular looks fully valued, we believe that exposure to Idea Cellular through Aditya Birla Nuvo (which holds a 25.4% stake in Idea Cellular) is still cheap and offers a decent upside.

Issue of warrants to promoters also speaks of positive sentiment
  • Today at the meeting of its board of directors Aditya Birla Nuvo decided to issue 1.65 crore warrants of face value Rs10 each to the promoter/promoter group on a preferential allotment basis, entitling the holder of the warrants to apply for and obtain the allotment of one equity share against each warrant in accordance with the provisions of the rules.
  • The 16.5 crore warrants would entail a 12.7% equity dilution on an expanded capital base, after the conversion of warrants into equity shares. We view this development as a positive.

Outlook and valuation
We continue to like the strong positioning that Aditya Birla Nuvo’s businesses enjoy in their respective fields. The company is amongst the top five players in the insurance, asset management, telecommunications (telecom; Idea Cellular—the fastest growing telecom company; the third in ranking) and apparels (Madura Garments with its marquee brands, consistent and resilient growth, and profitable set-up) businesses. Given its presence in diverse businesses, we value Aditya Birla Nuvo on an SOTP basis, assigning a piecemeal value to each of its businesses and then adjusting the same with the company’s consolidated debt to arrive at a price target. Thus, our price target for the stock is Rs1,050 and we maintain our Buy rating on the stock.