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Key value contributors struggle, support cast robust, one-time loss
A profitable 2QFY11 cannot mask ABNL’s concerns from two of its biggest value contributors, Idea
Cellular and life insurance, which are dogged by competition and regulatory pressures, respectively.
Erstwhile loss-making businesses such as BPO and garments have turned the corner, and stable
manufacturing businesses continue to hold up well, but they have little significance to overall
valuation. The company’s financial distribution businesses have borne a one-time loss of Rs1.03bn on
account of “certain trades of their clients”. We expect the holding-company discount to be 30%, and
retain ADD, while our target price of Rs 883 indicates 8% upside on a 12-month basis.
Insurance - testing times: First-year premiums declined 14.1% YoY for the sector and declined 38.6% YoY
specifically for the company in September (the first month of policies under new IRDA pricing guidelines). We
believe that IRDA’s restrictions on policy pricing (including cap on surrender charges) will lead to significant
erosion of margins (as outlined earlier by our financials research team), leading to cuts in the distribution
network, which in turn will hit growth (as evidenced). Accordingly, we assume new business to decline 10% in
FY11 and then remain flat in FY12, while FY12ii margins are assumed at 10% (from 19% earlier).
Idea facing intense competition: 3G is expected to raise revenues ultimately, but cost concerns remain. Given
the increasing regulatory uncertainty and continuing competitive intensity (set to get amplified by RIL’s entry), our
telecom research team retains REDUCE with a 12-month target price of Rs59 (including a rollover to September).
Headline numbers strong; other businesses’ performance satisfactory: Profits in 2QFY11 can largely be
attributed to a Rs200m profit in life insurance (instead of losses that it was accumulating in the corresponding
quarter), a resurgent BPO business, new growth and higher profitability in Madura Garments, and continued
strength in the manufacturing-based “value businesses” like carbon black, rayon, textiles and fertilisers.
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