Life insurance segment boosts Aditya Birla Nuvo again

Aditya Birla Nuvo Ltd reported a net profit of Rs. 214 crore for the September quarter, double that of a year ago. However, adjusted for a one-time loss of Rs. 104 crore suffered by its securities units a year ago, net profit growth is a tepid 2.6%.
 
At the operating profit level, the 25% growth in the September quarter was less than the 45% seen in the three months ended June, reflecting the general slowdown in the economy. Yet, investors greeted the second quarter earnings enthusiastically, pushing up the stock by 4.48% on Monday.
 
The key reason for this cheering could be because investors are seeing some traction in the life insurance business. Although new business premium collections continued to fall, gross premium collections grew 5.6% from a year ago, the fastest in at least three quarters. In September, Aditya Birla Nuvo's life insurance unit showed 61% growth in premiums compared with a 14% decline for the whole private sector.
 
One swallow doesn't make a summer and it remains to be seen whether the company can sustain the trend. The base effect would probably help. On the positive side, the growth seen in previous years is reflecting well on its profit.
 
For the September quarter, the life insurance segment reported an almost fivefold increase in profit to Rs. 97 crore. At the earnings before interest and tax (Ebit) level, this division now accounts for almost one-fourth of the company's profit. That also helped mask the disappointing results from other divisions in the financial services business, which collectively reported a 1.8% decline in Ebit.
 
The asset management and securities businesses posted a dip in revenue and profit; and the pot at the end of the financial services rainbow is still some distance away for Aditya Birla Nuvo. Among other divisions, telecom continued to do well, while the fashion and lifestyle segment reported a 42% increase in Ebit, helped by the festive season.
 
However, manufacturing reported a 10% decline in Ebit, despite increasing revenue, suggesting a contraction in margins because of rising raw material and production costs.
 
Still, the bottom line for investors seems to be the insurance business - a segment to which brokerages assign as much as half the company's valuations.
 
Things, at least for now, are looking up for this business and the stock will likely continue to outperform the market.