Mumbai: It may be in businesses as mundane as cement, telecom, viscose yarn and metals but Aditya Birla Group is looking at a future business portfolio that includes alternative energy, water management, and new-age, eco-friendly materials that can be used instead of plastics.
The group has to visualize operating in a world without oil and a possible war for water in the future, says Dev Bhattacharya, group executive president, strategy and business development, Aditya Birla Group. “The group has to keep in mind its existing and future portfolio. We are doing a lot of things to understand our requirement and dependence on fossil fuel and huge amount of work has gone into sustainability of water.”
At the core of this transformation—being articulated for the first time by this group—is a desire to make investors pay a so-called conglomerate premium for the group’s stock, where the market valuation of the conglomerate is higher than the estimated market value of each of its parts.
Aditya Birla Group operates through several firms, each of which is a mini-conglomerate. And investors would appear to be valuing each of these diversified firms with a conglomerate discount—which means the market value of the firm is actually lower than the estimated market value of each of its parts.
Grasim Industries Ltd, which has a cement manufacturing capacity of 21.3 million tonnes (mt) a year, is the world’s largest viscose staple fibre maker, and also operates in businesses such as chemicals and textiles, has a market value of Rs16,392.32 crore as on 29 April. ACC Ltd, formerly the Associated Cement Companies Ltd, which is purely in the business of cement and has a capacity of 20mt a year, has a market value of Rs12,310 crore. Grasim also owns 51% stake in Ultra Tech, the 16mt cement company acquired in 2006 from L&T.
Rakesh Arora, associate director of Macquarie Capital Securities, said Grasim would be valued higher if it focuses on cement and viscose yarn. The divestment of sponge iron segment is a move in this direction and the company needs to do the same with textiles, he added.
Similarly Aditya Birla Nuvo Ltd, which is in businesses such as fertilizer, financial services, business process outsourcing and garments, has a market value of Rs5,374 crore while Reliance Capital Ltd a pure financial services firm has a market value of Rs12,108 crore as on 29 April. Nuvo owns 27% stake in Idea Cellular Ltd also.
A research analyst with a foreign brokerage firm said even globally, holding companies do not get the original value of their businesses and that the discount depends on the country and the state of its stock market.
The perception of investors is that Aditya Birla Nuvo’s financial services business is small compared with its peers such as Reliance Capital and that the company needs to unlock value at some point if it wants its market value to rise, she said. Unlocking value in Idea Cellular was one such move, she added. The analyst asked not to be identified as she is not allowed to speak to the media.
Aditya Birla Group is India’s fourth largest conglomerate after Reliance Industries Ltd, Reliance-Anil Dhirubhai Ambani Group (R-Adag) and Tata group. In terms of the diversity of businesses within companies of these conglomerates, though, only Reliance Industries comes close to Aditya Birla Group. Both R-Adag and Tata group operate through companies focused largely on specific businesses.
Focus may be one reason conglomerates such as Aditya Birla Group, or its operating companies, trade at a discount, said one expert.
Focused business will do better and commands a better value, says a senior lawyer at a law firm that advises conglomerates on mergers and acquisitions.
Conglomerates are like a loaf of bread, you should know what to chop off and what to keep, he said, asking not to be identified as he is not authorized to speak to the media.
That’s one reason conglomerates spin-off businesses into separate companies. In 2008, for instance, Aditya Birla Group spun-off Idea Cellular from Aditya Birla Nuvo of which it had been a part until then. Since then, Idea has grown bigger by growing organically and buying Spice Communications Ltd. Its market value is Rs18,651 crore as of 29 April. Unlocking value in 2007 created value for Idea Cellular. The market value is much higher than Grasim Industries and its parent Aditya Birla Nuvo.
Among the new businesses Aditya Birla Group is focusing on are water harvesting, waste management, and solar and wind energy.
“We have started these initiatives in our group businesses. Grasim’s cement plant in Jaipur generates power from municipal waste. The group would definitely do this commercially after it meets power needs for its several units,” says Bhattacharya.
The new focus will also entail a focus on science and technology.
The US firm is a role model for Aditya Birla Group and it plans to divide its resources and focus equally between old businesses and new ones. “We are always open to look at new business and realign their portfolio according to the market need,” says Bhattacharya.
Investors, says Bhattacharya, prefer growth over cash. They don’t invest in companies that generate a lot of cash but in those that have the potential to grow. “The new businesses give us growth opportunities,” he says.