The Economic Times
19 August 2016
Over the long weekend, the top brass of the AB Birla Group have been trying to give their side of the story of the recently announced mega-merger after they sensed that the move has backfired in the stock market. It's evident that shareholders of Grasim and Aditya Birla Nuvo are not very happy with the stock prices of Grasim and AB Nuvo plummeting 16% and 21%, respectively, from their recent highs amid concerns that the slide could continue and may eventually cast a shadow on the deal. Under these circumstances, ET met three of the senior-most officials — group CFO Sushil Agarwal, corporate strategy head Saurabh Agrawal, and head of group corporate finance Ashish Adukia — to find out what they have to say to defend the deal which many perceive is an elaborate plan to keep telecom company Idea Cellular in the game. Edited excerpts of their conversation with Jwalit Vyas:
What really is the rationale?
The financial services business has reached the size and scale where it cannot stand on its own. So far AB Nuvo was putting its own money. During the five years alone, AB Nuvo has invested more than Rs 3,000 crore to support the finserv business. Going forward, we don't think ABNL has sufficient cash flows to take care of the aspirations of the financial services business
You could have separately listed it and raised capital from the markets...
We did think of that option. But that would not provide a strong parentage. First for regulatory approvals, second for funding cost, rating agencies always see the parentage. Moving into Grasim would take the ratings one-two notches higher over a period of time, which over the next 5 years would not only save us a significant amount but will also allow to lend at a lower rate and to less risky borrowers. Post merger, Grasim's strong balance sheet would help us put money even in the worst times of the cycle.
There are many NBFCs which despite strong parentage have created large value...
Presently, most NBFCs (nonbanking financial companies) are doing well due to present issues with the public sector banks. But over a longer time, it will be very important to have a strong parentage to compete with banks especially private banks which are able to raise money at a cheaper rate through retail deposits. All large financial companies have strong parentage — L&T, ICICI, HDFC, Tata and M&M, Murugappa Group, TVS Group, Bajaj Group etc. Grasim will provide that to our finserv business which ABNL's cash flows or independent listing cannot provide.
All this at the cost of promoters reducing their stake in the financial business from 59% to 39% and reducing minority shareholders' stake significantly...
Sometimes when you need a certain thing, you need to get a long-term structure right. This was needed and we are not afraid to do this, otherwise minority would have been even more hurt. By doing that we are showing that if this is right for us as a long-term shareholder, it would be right for a smaller shareholder as well.
Is it not unfair to the Grasim shareholders who have nothing to do with the financial or telecom business?
Grasim shareholders have been telling us that they need another growth engine like UltraTech. Finserv will be another growth engine for Grasim. In FY11, our NBFC book size was Rs 1,850 crore, in FY16 it is Rs 27,728 crore book, over 70% growth and with a net NPA of 0.22%, one of the lowest in the industry. For Asset management, AUM has grown from Rs 88,201 crore in FY11 to Rs 1,84,276 crore in FY16. Idea, too, should start doing well.
On the contrary, Grasim shareholders are concerned about Idea Cellular as a part of their company — debt laden and capital intensive. We have raised Rs 16,000 crore for Idea; where did all this come from? It came through IPO, QIP, and strategic investor; as a group we have put only Rs 3,000 crore, the value of which is Rs 16,000-17,000 crore, even in the worst times. We believe the current prices reflect most of the negatives. And Idea is a separate balance sheet, it has nothing to do with the Grasim balance sheet. The way Grasim shareholders should see this is that their stake in a higher-valued business is getting diluted in exchange of businesses that is trading at all time low. Financial services will provide another growth engine to Grasim shareholders, just like UltraTech.
What do you have to say on stake of the promoter in cement going up and exposure in telecom coming down?
We explained the whole rationale of the transaction. Promoter stake going up or down in various businesses is only the outcome and not the intent.
Post-merger is there possibility of rights issue to fund Idea's financial needs? Also, an easy way to further increase promoter holding in Grasim...
At present Idea is well capitalised to take care of its funding requirement for spectrum for capex. Its FY16 post tax cash profit is Rs 10,930 crore. It has a comfortable net debt- EBIDTA (ratio) of slightly above three times. Its capex plans will be funded by its planned cash profits. In future, if we need more money we can easily monetise our towers, we can do a QIP or bring in a strategic partner or even raise debt. Rights issue will be done only when promoters feel the price or value is not worth diluting stake in the business. Even if we do rights issue, the size would be too small to have any impact on Grasim. Post-merger, the market capitalisation of the two companies reflect around 60% holding discount to their subsidiary businesses. There are other group holding companies that trade at 70%-80% discount.
What makes you believe that Grasim would not end up with such a fate eventually with the new conglomerate structure?
Grasim and ABNL are not just holding companies. EBIDTA of combined standalone businesses for FY16 was Rs 2,706 crore. They have strong operating businesses that have market as well as cost leadership in the respective sectors. Holding discount in Grasim should eventually climb up. ABNL discount was possibly wider due to lower float and liquidity. We may look at other measures as well. Also, the room for FIIs (foreign institutional investors) will increase by another 4% in the new Grasim. One point we would like to make here is that Prime Minister Modi has laid out the foundation of "Make in India". We wanted to create an entity that can help capitalise on it and can offer India to the investors. That's exactly what we will be offering through new Grasim. It will have cement, telecom, financials, chemicals and textiles businesses all under one listed co.
By that logic, should shareholders be worried about Hindalco also getting merged with Grasim...
No. We are not going to do anything now, not at least in the immediate future.
Once before also AB Nuvo shareholders were disappointed when their most lucrative business - Madura garment was merged with loss making high debt Pantaloon Fashion, now known as AB Fashion retail. Don't you think all this hurts the group image?
Pantaloons was acquired in 2012 to complement the existing fashion offerings of Madura which were predominantly in the menswear and premium segments. Pantaloons which is positioned as "branded fashion at affordable prices" provided us an established platform to penetrate the larger addressable market size.
Is there a likelihood of a deal sweetener for either of the shareholders?
There won't be an iota of change to the announced structure. During the earlier restructuring of cement, which was also a complex structure and investors were not so confident, but the confidence was restored through the performance of the underlying business and the shareholder returns to both Grasim as well as UltraTech. We are certain that even this time both the sets of shareholders will understand the merit of the proposed merger.