Birlas: Right number

Birlas have bought Tatas' stake in Idea at a fair price

Aditya Birla group's acquisition of the Tata group's 48.14 per cent stake in Idea Cellular at Rs 4,406 crore is at a fair price, according to analysts.

The deal places Idea Cellular's equity value at Rs 9,152 crore (approximately $2 billion) and with an estimated debt of slightly below $1 billion, the enterprise value (EV) works out to $3 billion.

The EV per subscriber works out to about $407, a reasonable discount to the largest player Bharti, whose EV/subscriber for mobile services is estimated at about $700. The discount of $300 takes care of Bharti's expensive valuations and also Idea's weaker position, being the fifth largest player in the market with 7.37 million subscribers.

Even in terms of enterprise value to FY07 revenues, Birlas have a good value at 3.8 times as compared to Bharti's EV-revenues of over 5.

Though the Idea management was doing its bit to grow the business, the end of the Tata-Birla fight will mean that there will be a renewed focus on entering new markets and expanding existing market share.

Aditya Birla Nuvo (ABNL) will see its stake in Idea increase from 20.74 per cent to 35.74 per cent, after this buy. Till September 2005 when it acquired Cingular's stake at Rs 17.5, ABNL owned 4.28 per cent in Idea.

The ABNL share has gone up about 10 per cent to Rs 836 in the past three trading sessions on news that Birlas were likely to acquire this stake.

ABNL also announced the merger of Indo Gulf Fertilisers and Birla Global Finance in September, which will provide some cash flow to the company. Going forward, telecommunications will become one of the two important businesses for ABNL, with the other being insurance (through Birla Sun Life).

So this increase in stake will result in higher revenues and segment profits in ABNL's consolidated results, while insurance is still loss-making.

In the December 2005 quarter, the telecom business (which mainly comprises revenues from Idea Cellular) contributed 13.85 per cent of revenues and 26.93 per cent of segment profit before interest and tax. The ABNL stock trades at an estimated FY06 P/E of about 60.

Praj Industries: The Khosla Effect

The Praj Industries stock has gained about 54 per cent over the past 11 trading sessions compared with 9 per cent gain in the BSE Midcap Index along with huge volumes.

Investor sentiment for this manufacturer of alcohol/ethanol and brewery plants has been buoyed by expanding global opportunities for supply of equipment for production of ethanol.

For instance, a recent Citibank report highlighted that in the key US market, ethanol consumption was set to jump from 4 billion gallons to 8 billion gallons over 5 to 6 years. Ethanol is being increasingly used as an environment-friendly fuel additive for transport in several countries, given surging crude prices.

In the domestic market too, nine states have also introduced 5 per cent ethanol blending in petrol. Since India is a large sugar producer, Praj too has also seen a steady stream of fresh orders for supply of ethanol distilling equipment, with the most recent one being a Rs 100 crore contract from Bajaj Hindusthan. Praj is also attempting to expand its presence in Europe via an alliance with Holland-based Aker Kvaerner.

However, commodity analysts highlight that domestic demand for ethanol from oil marketing companies has still remained lacklustre, given differences over pricing with suppliers.

Nevertheless, it is understood that domestic demand for ethanol over the next few years could reach 350 million litres per year, say analysts.

These emerging opportunities seem to have attracted well-known Silicon Valley-based venture capital firm Kleiner, Perkins, Caulfield & Byers (KPCB).

According to reports, KPCB's Vinod Khosla signed an agreement to buy up to 10 per cent stake in Praj at Rs 125.2 per share or about a 20 per cent premium to the 26-week average stock price prior to this announcement.

Venture capitalists have traditionally helped companies they are invested in to expand their business and enter new markets. The appreciation in the Praj stock indicates that the market seems to expect a lot from the KPCB alliance as the stock trades at a trailing 12-month P/E of around 68.