Mumbai: For Kumar Mangalam Birla, 42, chairman of Grasim Industries Ltd and the $29.2 billion (Rs1.4 trillion) Aditya Birla Group, Saturday brought yet another defining moment.
Grasim’s directors met in the boardroom on the fifth floor of Mumbai’s Aditya Birla Centre to approve a proposal to separate the company’s cement business and merge it with wholly owned subsidiary Samruddhi Cement Ltd.
“When we look back 10 years, this is clearly a transformation,” Birla, who took charge of the group at 28, told the board. “The cement business needs greater financial and strategic flexibility to tap the next stage of growth, while preserving the benefits of Grasim sponsorship.”
Cement push: Birla on Saturday told the board that the business needs more financial and strategic flexibility to tap the next stage of growth. Scott Eells / Bloomberg
Birla has presided over a group that has seen its cement capacity shoot up from 3.5 million tonnes 11 years ago to around 49 million tonnes now, making it the biggest maker of the building material in the country, now seeing a revival in the real estate business. The group says it plans to add another 25 million tonnes in the next three-five years, to coincide with a planned increase in infrastructure spending.
Saturday’s meeting marked a key stage in the process of eventually consolidating the group’s cement operations under one entity—UltraTech Cement Ltd—exceeding the combined capacities of Holcim’s units Gujarat Ambuja Cements Ltd and ACC Ltd. That unification is expected in eight-nine months.
Grasim will control 65% of Samruddhi Cement, with the company’s shareholders owning the rest.
The cement push began in 1998, when Grasim took over the cement business of the erstwhile Indian Rayon and Industries Ltd. At the time, Birla had said, “Given its present size, the company’s cash flows and requirements of other businesses, Indian Rayon’s cement business would have been marginalized without adequate growth prospects.”
The move resolved the dilemma over which of the two—Indian Rayon or Grasim—would serve as the incubator for the cement business. With Grasim’s core viscose staple fibre business generating cash surpluses—Rs3,942 crore in the last eight years—the money could be used to fund the group’s move into its next big business: cement.
The rationale for the current restructuring is the same—to combine the cement business under UltraTech, a subsidiary of Grasim, says Adesh Gupta, Grasim’s chief financial officer. Gupta, who completed the Indian Rayon transaction and is one of the key forces behind the new restructuring, has been with the group for 30 years.
The eventual merger with UltraTech will create more headroom for future equity and allow the group to exceed the cement industry’s growth pace of 8-9% a year, says D. Muthukumaran, head, group corporate finance.
Nirmalya Kumar, professor of marketing at the London Business School, says most conglomerates such as General Electric Co. (GE) or Orkla Group of Norway use cash from low-growth mature businesses to fund high-growth new businesses. “In fact, that is the logic of having a conglomerate,” he said in an email response.
Birla’s growth plan is the classic method adopted by large groups of companies.
“That’s the strategy of a conglomerate. That’s how a business group grows disproportionately. You take cash flows to build newer and newer businesses. Over time, these new businesses deliver massive returns,” says Manish Chokani, director at Enam Securities Pvt. Ltd.
At Aditya Birla Nuvo Ltd, the carbon black and fertilizers business funded the telecom business before it achieved scale and was spun off as an independent telecom company called Idea Cellular Ltd, now India’s fifth largest telephony player. Idea has cash of nearly Rs7,000 crore and can run on its own. Similarly, Nuvo is now funding the life insurance business, which over time will get the scale and profitability to become independent.
Making strategy work isn’t easy for conglomerates, says Kumar of the London Business School. “Historically, in developed free markets, this has been hard to demonstrate consistently (in terms of above-?average shareholder returns) though there are a few notable exceptions like GE.”
Birla has broken some of the shackles, says Chokani. The strategy of an Indian conglomerate is quite unlike multinational companies operating in the country. They concentrate on their core businesses and seldom stray outside it.
“In the short term, it’s fashionable to stay focused on core business strengths,” says Chokani.
Vallabh Bhansali, chairman, Enam Securities and a veteran investment banker, has done business with three generations of Birlas. He believes Kumar Mangalam Birla is not weighed down by any particular philosophy. “He tries to balance so many things. In this case, ever since the time L&T Cement (which became UltraTech) was acquired, the question was when (the cement units) were coming together,” he says.
Birla is no stranger to restructuring and has on occasions made bold moves that even involved selling businesses, something that Indian businessmen are traditionally reluctant to do. He didn’t hesitate to exit from Mangalore Refineries and Petrochemicals Ltd, which his late father Aditya Vikram Birla had invested in along with public sector firm Hindustan Petroleum Corp. Ltd. He didn’t baulk from writing off the sea water magnesia plant within days of its commissioning, as he saw that the business had no future. More recently, he sold off the Vikram Ispat plant to Welspun Power and Steel Ltd. “From time to time, he has looked at the portfolio” to review the status of the businesses, says Bhansali.
By the time Samruddhi is merged into UltraTech, economies of scale will kick in. “They generate $1 billion each year. They can, if they want, raise an additional $3 billion of equity and $3 billion of debt, and with that money they can actually double their capacity from the existing level,” said Chokani.
When the cement holdings are brought under UltraTech’s roof, it can create an additional 5 million tonnes just from the cash flow, said Pankaj Jaju, executive vice-president at Enam Securities. While taking on more debt could boost capacity addition, the company has targeted a conservative additional 25 million tonnes in three-five years to take it to 75 million tonnes.
Group officials dismiss talk that Century Textiles and Industries Ltd’s cement division, run by his grandfather B.K. Birla, would also come into the UltraTech fold.
Bhansali recounts a conversation he had with Birla in the past. “Kumar is so fastidious and so clear in his mind. I can talk anything but when it comes to this topic, he doesn’t want to talk about it,” Bhansali said, and recalls what Kumar told him when he broached the topic: “Dadu (B.K. Birla) runs it. Dadu decides.”
Joel Rebello contributed to this story.