Mumbai: Aditya Birla Nuvo Ltd (ABNL), part of the $30 billion (Rs 1.3 trillion) textile-to-telecom Aditya Birla Group, expects to more than double revenue over the next three years to $10 billion as several businesses that it has incubated have matured and are poised for growth.
The $4 billion enterprise, which has in its portfolio businesses as diverse as financial services, manufacturing, telecom, fashion and back-office processing, expects to reach this figure by 2015, contributing to chairman Kumar Mangalam Birla’s vision of clocking $65 billion revenue for his group.
“We grew from $3 billion to $4 billion in the last fiscal and the growth is more than 20% but it’s still the tip of the iceberg in terms of unlocking the real value,” managing director Rakesh Jain said in a recent interview. An employee of GE for two decades, Jain has been inspired by his previous employer in building the ABNL business model.
Despite the consistent rise in revenue, ABNL posted a Rs 430.52 crore loss in the fiscal ended March 2009 in the wake of the global financial crisis. It made a profit of Rs 84 crore in the next year, rising ninefold to Rs 752 crore in the fiscal ended March.
The turnaround over the past eight quarters was three-pronged, led by the commercial success of its financial services, apparel and business process outsourcing businesses.
“Aditya Birla Nuvo today is like a mirror image of India’s growing economy,” Jain said. “Our growth drivers will be very similar to India’s growing sectors like infrastructure, financial sector inclusion, telecom with value-added services like data and video, fashion and lifestyle, knowledge process outsourcing and the agri sector.”
He sees each of the incubator’s various businesses growing to a billion dollars or more, organically and inorganically, and becoming a leader in its market segment.
The outsourcing and the carbon black business have the potential to clock a billion dollars in revenue annually in a few years time, said Santanu Chakrabarti, an analyst who tracks ABNL for India Infoline Ltd. But there are headwinds in the insurance and telecom sectors.
“As the biggest value drivers of Aditya Birla Nuvo’s business, these two will be the most important movers of its destiny,” he said. “So, if we see an improvement in the larger markets in which these operate, then strong growth in both revenues and profitability is possible.”
The only listed entity in its portfolio, Idea Cellular Ltd, has seen a near 47% erosion in its market capitalization since January 2008, during which time the benchmark Sensex has dropped about 14%, despite a rise in revenue. The sector has seen intense competition, with several new entrants cannibalizing profit by cutting down tariffs.
ABNL holds a 25.35% stake in Idea, a late entrant into the world’s second largest mobile market by customers.
Biswajit Subramanian, managing director of Providence Equity Advisors India Pvt. Ltd, which owns a 9.99% stake in Idea Cellular, said although the company was doing well operationally, the stock price had unexpectedly taken a hit due to competition—something that wasn’t factored in when the fund made its investment in October 2006.
“What we didn’t expect was that so many new players would be introduced,” Subramanian said in an interview last week. “What we hope is that when the new telecom policy comes in there will be more sanity in the sector and the sector over-capacity will go away.”
Jain expects that the next couple of years are when the parent will reap the benefits of remaining patient with Idea Cellular during the tough years.
Since launching mobile number portability services in late November, Idea’s subscriber share in the wireless market has risen slightly to 11.12% in April 2011—the latest data available—from 10.80% in November 2010.
Idea Cellular also has a 16% stake in Indus Towers Ltd—a mobile phone tower joint venture with Bharti and Vodafone launched in December 2007— which currently has about 110,000 towers.
Jain said that there were no immediate plans to unlock value from the stake in Indus Towers but expects Idea to make more money for its parent over the next two to three years.
Financial services, dominated mostly by the insurance business but now expanding across the rest of the space, is the largest chunk of the company’s operations by revenue. The life insurance business, which contributed nearly a third of revenue in the last fiscal, finally turned earnings before interest and taxes (Ebit) positive in the last fiscal after being incubated for a decade.
“It still needs a lot of capital but you need to look at further growth,” Jain said. “We continue to look at how we can further incubate the non-banking financial company, private equity and our ambition and hope is that the government will come up with clarity on the banking licence.”
The Reserve Bank of India has drafted guidelines on granting new banking licences for the first time in seven years but is now in the process of fine tuning these with the finance ministry.
On the consumption side is fashion apparel business—Madura Fashion and Lifestyle— acquired from Madura Coats. in 1999, primarily as a contract manufacturer for western labels but that has since shifted focus to the India growth story. The local apparel market is tipped to grow from $26 billion in 2009 to $37 billion by 2014, according to a study by Crisil.
Driving growth are four brands—Peter England, Allen Solly, Van Heusen and Louis Philippe—each catering to different income groups, coupled with a recent entry into men’s formal shoes. It also has a distribution tie-up with American lifestyle brand Espirit and also retails some other international brands. Revenue in the last fiscal grew 45% to Rs 1,809 crore, while earnings before interest, taxes, depreciation and amortization (Ebitda) swung to Rs 137 crore from a loss of Rs 4 crore in the previous year, even as like-to-like store sales—a key measure of volume— rose 30%.
“As a company I see it as more than a couple of billion dollars in the next five years,” Jain said. “We’re slowly transferring from export to domestic market. When the market in India is going to grow, why only be a contract manufacturer where the margins are razor thin.”
This strategy makes sense, according to Arvind Singhal, chairman of Technopak Advisors Pvt. Ltd, a consultancy firm that focuses on retail.
“The company is built on good systems, processes and values, has reached a level of maturity to grow rapidly with the financial backing of the Aditya Birla Group,” he said. “Along with Arvind Brands, it is the best positioned to be a leader in the Indian apparel space.”
In the agricultural sector, Indo Gulf Fertilizers is expanding across the chain from urea to seeds to pesticides. Part of the strategy is to move up the value chain with branding.
“Even if it’s a commodity you’re selling, if you add value, it means you understand the customer’s needs and the customer’s customers’ needs, which is very important,” Jain said.
Another reason to be bullish about the business is the location of its urea plant, currently operating at full capacity utilization. The factory is in Jagdishpur in the middle of the Gangetic plains, serving the markets of Uttar Pradesh, Bihar, Jharkhand and West Bengal, which together account for 35-40% of urea consumption in India.
“As soon as that sector frees up (from regulations) it has a lot of potential to not only double the capacity but do much more than that because in that region there is huge potential and limited supply,” Jain said.
On the manufacturing side, the company is the world’s largest producer of carbon black with a 37% domestic market share. Catering mainly to the tyre industry, carbon black is used as a pigment and reinforcement in rubber and plastic products.
It has plants at Renukoot in Uttar Pradesh and Gummidipoondi in Tamil Nadu, apart from units in Egypt, China and Thailand. Besides expanding capacity at Patalganga last year, it acquired Atlanta-based Columbian Chemicals Co. in January for $875 million, giving it access to the North and South American markets. The company has no plans to sell shares in individual businesses, Jain said.
“GE didn’t list all its units. For 20 years, the sum of the parts was higher than individual parts. It (ABNL) may currently look very diversified with (disparate) businesses but that’s the beauty of it,” he said. “Do we need to list for the sake of listing? I don’t think so. If we have a strong balance sheet, we don’t need to list.”
This is part of a deliberate strategy, based again on what GE did by making its own balance sheet strong with contributions from the industrial side of the business that gave its debt an AAA rating. This allowed it to raise money at very competitive rates.
“There are several companies like Hewlett-Packard and IBM that follow this approach of a constant growth strategy that’s nurtured by new business initiatives supported by organic or inorganic growth or a mixture of the two,” said Sunny Mukherjea, head, performance and technology, for global consultants KPMG. Still, after eight quarters of consistent growth, Jain is concerned that the business is “highly undervalued”.
“Before 2009, it was still struggling in terms of the balance sheet, higher leverage, and each of the businesses was smaller. But now, most businesses are standing on their own without any support and the only capital required is capex for individual growth,” he said.
A foreign brokerage, which recently initiated coverage on the company with a target price of Rs 950, has a 30% “conglomerate discount” on the stock. This refers to the tendency of the stock market to undervalue the shares of such businesses.
It arises from the sum-of-parts valuation and is the reason why many conglomerates divest subsidiary holdings. The discount is calculated by adding up estimates of the intrinsic value of each business in a conglomerate and subtracting the market capitalization.
On Wednesday, ABNL’s shares gained 0.58% to Rs 898.30 on the Bombay Stock Exchange. The benchmark Sensex rose 1.09%.
Even as ABNL’s various units succeed in their respective fields, “my biggest challenge is to effectively balance our portfolio”, Jain said. “How do I continue to ensure that there is proper balance, close enough to a similar ratio because it’s a mirror of the Indian economy?”
KPMG’s Mukherjea said this will involve combining the best of Indian and overseas practices.
“Marrying the nimbleness and urgency of growth of an Indian organization along with infusing a degree of maturity in managing growth will be key,” said Mukherjea. “The three main factors are smart people managing the business, a focus on innovation and a governance model that works with the right processes, methodologies and matrices.”