Aditya Birla Nuvo Q2FY2017 Results Review: Financial Services boost operating performance; maintain Hold with revised PT of Rs1,250· Operating performance gets a fillip from Financial Services, Manufacturing weak; Idea affects bottomline: Aditya Birla Nuvo (ABNL) posted a 12% YoY decline in its consolidated net profit for Q2FY2017 on account of lower share in Idea Cellular's profitability (affected by costs related to spectrum acquired in earlier years). However, the company's operating performance was boosted by the Financial Services division (revenue up 52% YoY, EBIT up 2.1x YoY). The Manufacturing vertical posted weak results (revenue down 14% YoY, EBIT down 13% YoY) on account of Textiles and Insulators segments' poor performance.
· Expansion in Financial Services and Manufacturing divisions: ABNL would infuse Rs900 crore in the Financial Services business (including new ventures - Payments Bank and Health Insurance). Out of this, it has already invested Rs372 crore in H1FY2017. The ABNL management sees 30-35% YoY growth for its NBFC division in FY2018. The company would also invest Rs325 crore in its Manufacturing division, including Rs191 crore and Rs40 crore toward the expansion of Linen Yarn and VFY capacities, respectively. Of this, it has already invested Rs96 crore in H1FY2017. The amalgamation of ABNL with Grasim is expected to be completed by H1CY2017.
· Valuation and outlook: We believe that the outlook for ABNL's Financial Services business remains bright, although the Manufacturing vertical continues to lag. Further, Idea's profitability is likely to remain under pressure in the near term on account of ongoing capex of Rs6,500-7,000 crore during FY2017. In our stock update (dated August 11), we had advised investors to prefer Grasim over ABNL due to the ongoing plan to merge Grasim and ABNL. Pre- amalgamation, we have revised our price target (PT) for ABNL to Rs1,250 on account of de-rating of its Telecom business and lower operating performance of its Manufacturing verticals. We maintain our 'Hold' rating on the stock.
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