Stock Review: ADITYA BIRLA NUVO

Aditya Birla Nuvo's March '11 quarter results, excluding telecom firm Idea Cellular, were substantially better as the company continued with the trend seen in past four quarters. In the past few quarters, it was mainly the turnaround in textiles, BPO & IT and insurance businesses that drove growth. However, many of its segments reported margin pressures, both year-on-year and sequentially, which could be of concern to investors, going ahead. Idea could not publish its March '11 quarter numbers as it is awaiting judicial approval for the merger of Spice Communications. On a comparable basis, the company's consolidated net profit for the March '11 quarter was 64% up at . 180.2 crore. However, unlike in the past, its standalone profits fell against the March '10 quarter due to margin pressure. Several of its businesses faced margin pressure despite a healthy revenue growth.

 

Earnings before interest and tax as a proportion to net sales was the lowest in the year for segments such as garments, carbon black, insulators, textiles and financial services. A superior show by BPO & IT and insurance businesses helped it post a decent profit growth.

The stock has gained 7.3% in the past one week against a rise of 0.8% in the BSE Sensex. It is now trading at 13.7 times its consolidated earnings of FY11, excluding Idea.

It has lined up a . 667-crore capex programme for FY12 and FY13, of which . 243 crore will be the expenditure on expanding capacities and . 435 crore on process improvement and upgradation.

It follows a strategy of using strong cash flows from its mature manufacturing businesses to invest in its service verticals for future growth. In line with Idea's listing in FY07, it plans to list its financial services and IT services subsidiaries. Although this may not happen for another couple of years, it would be a healthy trigger for the scrip's valuation. The company needs to battle inflation woes that are hurting margins. In the last quarter, nearly one-fourth of its consolidated net sales went towards raw material costs — a ratio that was between 15% and 20% in the past couple of years. Its ability to maintain buoyant margins will be the key to its future performance.