Kumar Mangalam Birla On New Businesses, Acquisitions And India’s Economy
Kumar Mangalam Birla speaks to BloombergQuint about shares his plans for entering new businesses.
The $41 billion Aditya Birla Group just completed the third complex restructuring exercise it has undergone in the past decade. The first involved its cement business, the second its consumer retail business and this time it was the merger of Aditya Birla Nuvo Ltd. into one of the group’s oldest companies - Grasim Industries Ltd. This also resulted in the demerging of the group’s financial services business. Aditya Birla Capital Ltd. listed on India’s bourses on Friday.
In this interview to BloombergQuint’s Menaka Doshi, Aditya Birla Group Chairman Kumar Mangalam Birla shares his plans for entering new businesses such as asset reconstruction, his view on the Indian economy, on organic growth in the metals business and his return to the entertainment content business.
Here’s the entire conversation.
Does this close or end, at least for the foreseeable future, the group’s restructuring activity, the result of which was the listing of Aditya Birla Capital?
As you know this was part of a composite scheme of arrangement that was announced. Which entailed Nuvo merging with Grasim and then the financial services business demerging from Grasim and trading Aditya Birla Capital which has listed today. This is one large piece of the restructuring program which involves at least two of the largest group companies.
In terms of the way the group is structured and owned and unowned in terms of the cross holdings, have you reached a place where you see no further need for any additional...
You can’t talk about too much in the future. For the foreseeable future, I think we have done all that is required to unlock value. Just to give you an example, on account of this restructuring exercise, we have created about Rs 60,000 crore of value in less than one year which I think is substantial. I’m happy to see that the value that we have created over years is now being unlocked in a very appropriate way.
Entering The Asset Reconstruction Business
What are your ambitions for Aditya Birla Capital?
I can’t put a number to it because that will be a little amorphous to do. It’s fair to say that we aim to keep growing higher than industry in each of the vertical that we are in. We aim to grow substantially from where we are today. We are in significant positions in each of these businesses whether its the NBFC space or life insurance or housing finance. But there’s also sufficient and more headroom for growth. And that is the area that we’d look to cover.
We are also looking at entering into the space of asset reconstruction where we’ve applied for a licence. I think we’ve grown at very healthy rates in last five years. So NBFC, for example, has grown at a cumulative growth rate of 44 percent in the last five years, which is substantial. The same number for the AMC is about 26 percent. 30 percent for the last 18 months for life insurance. So clearly, a sector that is growing very fast, a sector that is hugely under-penetrated in terms of when you look at the global averages or also the averages of our Asian players, India is hugely under-penetrated when it comes to financial products.
What do you hope to do differently from other players in the ARC business, and the variety of risk, and the humongous amount of capital it would require. Your thoughts.
What makes it attractive is you have more supply of distressed assets coming into the market than ever before. Given what’s happening in the macro economic environment. Given the whole story of NPAs which are now being dealt with in a different way. I think that is a big part of it. The second part is we have huge operating experience across the group which we hope to bring to bear to this business as and when we get into it. And what will give us the edge is precisely that. The fact that we have operating experience, which not many people in the business do.
You are suggesting an ARC business that is driven more from a strategic point of view than driven from a financial investor point of view.
No I am not talking about that. From a financial investor point of view only, not from a strategic point of view. But the fact that we have operating experience across sectors, is an experience we will bring to bear to turn around assets which are in a distressed situation. Only from a point of view of a financial return.
How are you going to structure this?
Haven’t thought about that yet. It could be a strategic fund, it could be a distressed fund, we’d be open to looking at a partner who brings in appropriate funding in this case. So plans are at a very nascent stage. But I think that this space is very interesting for us.
But it’s a space hasn’t seen necessarily as much success as it ought to have in the last few years?
I think there is an appropriate time for a business, in the context of the space that we are in. Like I said, in the context of what’s been happening with bad loans, and the way they are being addressed by RBI and banks, I think this is a very good time to get into the business.
Is there any specific sectors or bad loans that you can look at?
No it would-be sector agnostic. It’s more about the operating skills and financial strength that we could bring to bear.
What kind of capital do you hope to commit to this?
This is still at a very nascent stage. Since this is a financial services play, it could pretty much be housed under Aditya Birla Capital.
NBFC: Key Challenges
What do you see as the top challenge to get into the NBFC business?
The big challenge is the whole process of risk management, which I am very cautious about and focused on. The quality of the book is very important and I feel particularly happy because the quality of the book of our NBFC is superior to most others in the industry. We have a net NPA of about 0.2 percent, almost next to zero. So I think, the big thing to look out for is the quality of the book that you build.
How difficult will it be to maintain that quality? How concerned are you about the health of the economy, because your NBFC business and in fact your businesses are directly linked to that?
I don’t think one quarter’s numbers on the economy should change one’s fundamental view on the economy. I still remain very bullish on the Indian economy, and what the government is doing to stimulate growth, do some damage repair. In terms of quality of assets, it’s kudos to the team, because they have built a very high-quality book during the phase which had its own economic challenges in the last five years. It’s my faith in the team which I stress on, in terms of been able to continue that good work of building a very high-quality book. If you can’t do that, then the solution is to grow slower if the macroeconomics don’t allow you to build high-quality books. That is something we are all aligned on.
You think you might have to walk down that path of slower growth?
Slower growth if at all, would be because we have had such high rate of growth in the past five years, like I said, 44 percent. So it will be little difficult to sustain beyond a point. But I don’t think that the economy will take a turn where because of the economy we will have to grow slow.
You sold little over 2 percent stake in Aditya Birla Capital to Premji Invests. Are you looking to bringing in more investors?
We are happy to divest up to 5 percent of a stake in AB Cap. We are not rushed for funds so we don’t have a time frame for that. And we are looking at a financial investor clearly. So that is the sort of ambit that we will operate within.
Birla Sun Life IPO?
Do you envisage listing your life insurance company separately?
Not in the foreseeable future. The business has done well, it’s troughed out, in fact grown at 30 percent in the last 18 months. I think the idea as of now is to grow organically.
So you are not in the market to look at Max Life Insurance or PNB MetLife? No inorganic
Never say never. The underlying criteria has to be value creation. If you think something has come up that creates huge value, then why not?
Interested In IDFC Bank - Shriram Type Consolidation?
You did not get a banking license, as did not many other corporate houses. How much did you have to adjust your ambition to that situation? Would you envisage any kind of consolidation over the next 5-10 years in this business on the lines of what’s being attempted by Shriram-IDFC Bank?
It was disappointing when we didn’t get the license, that’s something that we hoped for a very long time. But that’s in the past, and I don’t think that option is open to us. But we have taken the NBFC route and we have done very well as evidenced by the listing price. I don’t think we are looking at doing some sort of transaction like the one you spoke about unless RBI guidelines are changed to say that we can get control.
Metals Business: Eyeing Acquisitions?
We have had good news from the metals side of things.Commodity prices have been higher. Across the board, metal companies have been benefitting. A quick outlook on where you expect this to go?
Aluminium seems like a very positive story. Seems like Chinese capacity is shutting down because of environmental reasons, and that’s what driving prices up, or so it seems. And if I go by the analysts in the sector forecast, that seems to be a trend that will continue, so that I think is very positive for the metal sector now.
Are you looking at any acquisitions in the space?
Hindalco, Novelis will always look at opportunities to grow, but nothing specific as of now.
Is this a good time to look at acquiring aluminum assets?
Both Novelis and Hindalco are well placed in terms of the leverage ratios, cash flows etc. But the mandate for Hindalco is to d-lever further. So there is no question of looking at an acquisition. Novelis, as of now has no plans. Having said that, if there is an opportunity that creates value, I wouldn’t rule that out completely.
In cement, is most of your inorganic work done now?
A couple of months ago, we finish the acquisition of Jaypee Cements, which has taken the capacity up to beyond 90 million tonnes. For a while we are done with that. The focus now has to be, and is already, getting a return out of that investment, getting them up to speed. It’s a new market that we have entered, which has been the whole purpose of that transaction. Getting the brand out into the market and getting market share, I think that’s the focus.
The last question that I had was on retail and a possible return to entertainment? There was some talk that you at the promoter level might look at reviving your interest in the entertainment business?
We are looking at reviving Applause that we have shut down several years ago. But the focus this time will be on digital content. So obviously, content providers are, in a sense, the part of the value chain that creates the maximum value. And that’s the idea. To be in a space that is fast growing, where consumption is going to grow exponentially.
