Nuvo may unlock value by listing growth businesses in the times to come

12th June, 2009

Outlook PROFIT
12 June 2009

Mr. Sushil Agarwal, Chief Financial Officer, Aditya Birla Nuvo in conversation with Outlook PROFIT.

Can you explain the reasons for the dismal fourth quarter?
The Q4 consolidated loss of Rs. 141.2 crore was primarily because of losses in the carbon black and garments businesses. The carbon black industry worldwide was adversely affected by inventory losses following a sharp decline in crude oil prices and the slowdown in auto/tyre industry. This is a one-time aberration and it will change with a revival in demand.

Domestic garments players have reported lower footfalls, prolonged discounting, and weak export orders. In our garments business, though retail expansion supported revenue growth, the bottom line was impacted owing to new store openings and the launch of new concepts like "The Collective" and "Peter England People".

We are pursuing restructuring and cost-control measures to restore profitability. Also, we have brought in a new team with hands-on experience of the industry.

The strategy to expand growth businesses (garments, telecom, insurance, BPO and software) with surplus cash generated from value businesses (insulations, textiles, fertilisers, carbon black and rayon) is under pressure. What steps are you taking to restore momentum?
The strategy to increase the share of growth businesses has done well over the years. In FY09. the share of growth businesses in consolidated revenues went up to 72 per cent compared with 33 per cent in FY03, which is a CAGR of 41 per cent. The decline in margins and profit of the value businesses has to be seen in the context of the economic slowdown. Even in a tough FY09, value businesses together maintained operating profits at Rs 578 crore. This was despite lower profitability of the carbon black business by Rs. 100 crore. If not for this, the operating profits of the value businesses would have grown by about 16 per cent.

For a large diversified conglomerate, it is natural to have different growth rates in various businesses. Our growth businesses, in particular financial services and telecom, are growing far better than the overall industry rates. But this increases the funding requirements to keep the momentum in the initial high growth years. The telecom business is now self-sufficient to manage growth on its own. Similarly, we are committed to take the financial services business to the next level. Nuvo has adequate cash on the balance sheet to support its immediate growth strategy in life insurance.

What initiatives have you taken to cope with the slowdown?
In the carbon black business, the thrust is to regain profitability by managing procurement costs of carbon black feedstock and aligning the completion of the 75,000 mtpa expansion in sync with a revival in demand.

In fertilisers, the strategy is to scale up the agri-input business as well as higher capacity utilisation as supplies from the Krishna-Godavari basin remove constraints. In the rayon business, we are looking at improving yarn quality to derive a premium in matured markets. The focus in textiles is to ramp up presence in the high-margin retail segment under the Linen Club brand.

In financial services, the strategic direction is towards balanced growth with an eye on leadership. We have also undertaken off-shoring of back end support systems in BPO and IT services from high-cost to low-cost locations such as India and the Philippines.

Overall, Nuvo has realigned its capital expenditure with tight working capital management across businesses to match the growth outlook.

What options is the management considering to raise funds?
We keep on evaluating funding options available to us. We may unlock value by listing a few of the growth businesses after they attain the required size. As of now, we have sufficient cash on the balance sheet to fund our immediate growth requirements in life insurance and so on. We believe that the current debt-equity ratio of 1:1.1 is reasonable, considering that 72 per cent of revenues come from high growth businesses.

What is the status of expansion plans in the retail space?
We are realigning opening of new stores to match consumer demand and the growth outlook. The thrust is on achieving improved sales from the existing distribution set-up. The export demand continues to be bleak and this will improve only with the easing of the global slowdown. Our emphasis now is on rightsizing the business model to regain profitability.

What's the outlook for raw material prices over the next one year? And the overall demand scenario for viscose filament yearn and ECU?
Prices will stabilise gradually. VFY being a mature market, demand will remain stable. ECU realization is also likely to remain at the present level.

What is the status of capacity expansion for insulators?
We are optimistic about the insulations business considering the immense potential in the power sector. The recent capacity addition in porcelain insulators of 10,000 tonne is under trial and we plan to expand capacity by a further 4,000 tonne later in the year.

What's the outlook for life insurance in the current market environment?
Though the growth rate has softened in the life insurance sector, long-term fundamentals remain unchanged. Even in this challenging environment, new business premium for Birla Sun Life Insurance grew by 44 per cent against a 3 per cent fall for the industry overall.

India is one of the fastest growing life insurance markets supported by sustainable economic growth, a favourable demographic mix, lower penetration levels and rising public awareness.

In India, the ratio of life insurance premium to GDP is about 4.3 per cent, which is much lower than the 6 per cent to 9 per cent in developed countries, typically, the financial services business grows faster than GDP growth. These are big positives for the business.

Growth in new business premium is slowing down, so is Birla Sun Life Insurance becoming less aggressive?
BSLI is realigning branch openings to match its growth outlook. The thrust is on achieving better sales from the existing distribution setup and devising low cost channels to achieve sustainable growth.

What's the outlook for the financial services businesses?
The long term outlook for the asset management and mutual fund distribution industry is quite positive with the increasing preference for professional fund managers, coupled with high savings. The AMC has gained substantial market share by focusing on fixed income assets. In the case of the NBFC, the increased volatility in the capital markets has slowed the pace of new public offerings, though there is a marked improvement in sentiment of late. The election results and a good monsoon should further support the market.

What was the purpose of acquiring Apollo Sindhoori?
With this acquisition, Nuvo has entered the retail broking business. Apollo Sindhoori Capital Investments is among the leading stock brokerages, serving 1.75 lakh customers through a distribution network of over 240 owned and 840 franchisee branches across 150 cities. We will capitalise on this reach with our bouquet of financial services, and strengthen our position as an integrated and broad based manufacturer and distributor of financial services.

How do you intend to reduce losses in the BPO business?
Aditya Birla Minacs closed three sites and is shifting to more cost-effective sites. Cost control measures have been initiated to reduce overheads and the full benefit of this will be available going forward. Two new low cost locations are on the cards with over 1,000 seats.

What's the outlook for the high growth telecom business?
Idea is operating in 16 service areas and will achieve pan-India coverage with the roll-out of services in six more areas by the end of 2009. With a strong balance sheet, it is well positioned to fund its growth plans and participate in the 3G auction. As on 31 March 2009 the net debt-equity ratio (net of cash and cash equivalents of Rs. 5131.6 crore) was at 0.27. Though Idea is generating cash inflows, it may need this for its own growth plans for some more time.