Aditya Birla Nuvo Ltd runs about a dozen divisions from telecom to fertilizers, yet investors watch the insurance business more keenly than others. Some brokerages have assigned the insurance business—remember, Nuvo also runs an asset management firm and a loan book—as much as half the company’s valuation. After all, this business accounts for 40% of the company’s revenue and earnings before interest and tax, or Ebit (excluding Idea Cellular Ltd whose results have not been published because of a stay order in a court case).
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It remains the key trigger for the Nuvo stock price and for a second quarter in a row, the insurance business has delivered. Yes, revenue growth from this segment has been muted for the past couple of quarters because of new insurance industry rules in September to curb the mis-selling of the popular unit-linked insurance plans. However, eight of every 10 insurance customers returned to renew their premium the second year.
The company also tightened its expenses by nearly 3 percentage points from a year ago. Thus, despite focusing on traditional products such as term plans, Nuvo indicated that margins haven’t come down, which is a positive.
Consequently, it was able to turn around the insurance business and posted an Ebit of Rs151 crore compared with a Rs51 crore loss a year ago. The increase accounted for 86% of the Rs230 crore gain in overall Ebit.
That huge swing adequately compensated for a mixed bag of profit numbers in other segments. The asset management and loan business together saw a decrease in segment profit by more than three quarters. The business process outsourcing segment quadrupled its profit and with an order book of $775 million (around Rs3,487.50 crore today) for this year, things look bright.
The manufacturing business, however, was disappointing. That was perhaps not surprising since the fourth quarter has hammered most manufacturers with higher input costs. Nuvo, too, experienced the bane of squeezed margins in some segments such as carbon black and rayon.
The differentiator for the stock will be the insurance business. The big question is how Nuvo will ramp up this division when the new business premia are falling. In a post-results conference call with brokerages, the management indicated that growth will resume in the middle of this year. For now, investors seem to be sharing their confidence.
Graphic by Ahmed Raza Khan/Mint
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