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Suresh P Iyengar and Thomas K Thomas
The Hindu BusinessLine
19 August 2016

Simplification of promoters’ holding and harnessing synergies within group companies have been the theme of the 159-year-old Aditya Birla Group in the last four years. With the recent reorganisation, it created the Rs.63,000-crore conglomerate in Grasim Industries and a well-entrenched financial services business in Aditya Birla Financial Services. The complex deal has kicked off many concerns and received a mixed reaction from investors. Kumar Mangalam Birla, Chairman, Aditya Birla Group, explains the thought process behind the deal to assuage investors’ concern. Excerpts:

What was the trigger for the restructuring?
We thought the financial services business comes of age with credible mass and Grasim was looking for a share in a fast -growing business like financial services. We had both companies operating in similar space. Both companies had holding in operating companies. We thought it was the most natural thing to do. Having spun off many businesses, we thought this is the right thing to do.

How does the restructuring benefit minority shareholders?
Grasim investors will get to hold very interesting mix of businesses in manufacturing and services space. Some of the business generating cash but little more stable in their growth outlook and other are fast growing. There is an interesting mix within services business. Essentially, it is a play on the India growth story. The transaction has just been announced. What was put out in press was very speculative and understandably so. What minority shareholders reacted to, if at all, was based on speculation. A complex transaction like this needs time to understand. They will be convinced ultimately, because we come from a place of conviction.

Are you concerned over investors assigning holding company discount on Grasim and AB Financial Services?
I do not see any reason why investors should treat shares of these companies at discount. It has a mix of healthy and fast-growing business. It is not meant to be a holding. It has many manufacturing units under it. The company has delivered better returns to shareholders than any benchmark index could. Investors should be more concerned about the business prospects of the company rather than treating it as holding company.

Why did you choose to merge Nuvo with Grasim and then spin of Financial Services separately?
It was done because it gives the financial services business a strong parentage in the new Grasim. This is important for fuelling its growth. We spun off carbon black business and Aditya Birla Fashion and Retail (ABFRL) from Grasim. Even in this restructuring we are creating a listed entity under the financial services business. We cannot take every business and spin it off. For instance, we can take out insulator business and spin it off.

Do you think Idea Cellular will also get the benefit of strong parentage of Grasim?
It is not about Idea. Grasim has got about 25 per cent holding in Idea. It is not been done as part of fuelling Idea’s growth. Idea has spent close to Rs.16,000 crore in the last 10 years and there has been practically no promoters’ funding. Idea is an independent listed company on a fairly strong financial footing. It has raised capital through issuance of QIP (qualified institutional placement) and getting in financial and strategic investors. So Idea really does not have to depend on funds from Grasim to fuel its growth.

So the restructuring has no impact on Idea?
I do not think so. I do not know why it should concern Idea shareholders at all.

Is financial services business being forced on Grasim shareholders as they have not asked for this?
The management has to run the company in such a way that it benefits investors. Shareholders do not run the company. They have to get convinced that this is the right thing. Moreover, the deal has just been announced and it is a complex transaction for anyone to understand in short time. It has to be understood holistically to gauge its impact. They should have trust in the management.

Does the promoter’s holding go up post-restructuring?
No. I do not think so. It is not the driving factor.

What would be your focus area in financial services business?
We would like to focus more on the NBFC business. Having said that all the legs of business including life insurance, housing finance and payment bank business have the potential to grow faster. The allocation of capital will be more to lending business.

Which part of your business will grow faster?
I think cement, Viscose Staple Fibre, chemicals and financial services are the fastest growing sectors.

Is there more restructuring on cards?
No. As of now, I do not think there can be any business that can be spun off into a separate entity. So we are almost done with it. There has been a theme to what we have been doing for last three to four years.

What is your contribution for India growth story?
We have just come out of huge capex cycle. We have just invested Rs.20,000 crore in our purchase of JP Associate’s cement asset. We have invested Rs.30,000 crore in Hindalco during the last three-four years. So you got to see what part of cycle we are in. We are in a phase were several of our businesses have come up with large capex. Now it is the time to see returns coming up from those capex.

Do you see any headwinds in your business?
I do not think there are any major headwinds that worry us. The ease of doing business has improved considerably in last couple of years. GST (Goods and Services Tax) is another shot in the arm. There is nothing much to talk about in terms of headwinds. In fact, we are already seeing green shoots in commodity driven business such as aluminium and copper. Cement has started seeing sprout of growth.

Are you convinced on the India growth story because the government is facing challenges in getting Bills passed in Parliament?
More than before everyone now feel optimistic. The Government is doing all the right things. Passing the GST Bill is a big event for India.

What next for the Birla Group?
I think lot of work has been done. These have been the building blocks. For example, ABFRL has created huge value for its shareholders. Our investments in Hindalco and ramping up of cement capacity will start delivering as the economy recovers.

 


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