Aditya Birla Fin Services demerger likely by second half of FY18, says group CFO

The demerger of Aditya Birla Financial Services is expected by the second half of current fiscal, said Aditya Birla Group Chief Financial Officer Sushil Agarwal. The group also has a very flexible approach to partnerships for financial services and will keep all options open, he said.

Earlier this week, the shareholders of Grasim, ABNL and Aditya Birla Financial Services approved the merger of AB Nuvo Limited and Grasim Industries that will c;reate a firm with USD 9 billion in combined revenue.

This would be followed by the demerger of the new entity's financial service business as directed by the National Company Law Tribunal. The financial services company, to be called Aditya Birla Financial Services Ltd, is planned to be listed by May or June.

When asked about the date of the merger between the two, Agarwal said it will be completed in a few months.

The Aditya Birla Group is also in the process of merging its telecom business, Idea Cellular, with Vodafone India. Aditya Birla Nuvo is the promoter shareholder of Idea with 23.25 percent stake, while Grasim is one of the co-promoters with 4.75 percent stake.

Below is the transcript of the interview.

Prashant: What did you tell the shareholders, what inducement did you really give them for them to vote overwhelmingly in favour of the deal?
Srinivasan: Sushil is the one who led that entire transaction. He is better placed to answer it. Really what we did was explain the rationale of the transaction, why it made sense and why it is a good thing for shareholders and that is what you saw ultimately in the result.

Prashant: Did you promise them a better dividend policy, was any inducement required really?
Agarwal: In some form when we kind of announced this transaction it was little misunderstood. Possibly we also did not do a good job of communicating our rationale properly. So, we reached 2 out to the people, we reached out to most of the investors and kind of gave a rationale reason as to why this makes sense from a long term point of view. I think shareholders did understand our point of view. In the process we also kind of did few things which eventually kind of takes care of investors safety from a returns perspective. So, we did dividend policy announcement, there was a increase in FII limit in Grasim. Now it goes upto 49 percent, we did a split of the shares, all these corporate actions also in some form helped creating better liquidity, better participation from the shareholders.

Latha: Ultimately it was the cash in Grasim which investors like very much. Clearly you did annunciate a dividend policy which gave them comfort but for the longer term what is the plan in terms of using the cash which it has? A lot f your businesses – Idea, Ultratech Cement all of them need money for expansion and the money is with Grasim. So, how do you plan to use that?
Agarwal: Grasim or as AB group I would say that we are normally very careful in our capital allocation policies. Where we believe there is growth and there is a long term sustainability of the returns from our shareholders point of view or better returns I think we put our money there. In the revised Grasim we will have a such a large company like financial services which has been growing very rapidly and I think in that business if we put in more money, I think it will only enhance the shareholders value. So, money will be put in where there is a need and which actually kind of c;reates a long term sustainable returns for the shareholders.

Prashant: What is the timeline for the merger? By when will we see this financial services entity listed separately?
Agarwal: There are two pieces from a timeline point of view. One is, the completion of merger of Nuvo into Grasim and that should happen in maybe another few months timeframe and it will take another couple of more months before the financial services company gets listed. So, I would say second half or second quarter of current financial year is the timeline what we have in mind.

Latha: For the merger to be completed?
Agarwal: Complete merger as well as the listing of financial services.

Prashant: Second quarter of FY18?
Agarwal: That is right.

Latha: Before the demerger will there be another strategic partner or any stake sale in the financial services unit?
Agarwal: We will keep that as flexibility. In the scheme at least it was provided for and depending on what makes larger sense from a long term point of view, I think that is the flexibility which we have. So, we really haven’t taken any specific decision on that.

Latha: The most lucrative business in India today is NBFC or financial services. Aren’t you all already looking for strategic partners?
Srinivasan: At the moment at least the shareholders have been funding the growth of the business from the time we set it up. We have never had a problem with the shareholders and hopefully we have given them adequate returns for them to continue to support us. So, like Sushil said I think we will keep our options open. If it makes sense from a valuation and a value perspective from a shareholder perspective, we will look at it. There is a provision in the scheme that allows for it, we haven’t decided yet whether we are going to call on that or not.

Latha: So, it is not confirm that you will have a partner before you list?
Srinivasan: No, not necessary.

Prashant: Where will the growth capital come from for the NBFC because it is growing very fast? In the past you have sold stake in the life insurance entity, at group level you have raised debt, where is the capital going to come from for the NBFC?
Srinivasan: So far the capital has been coming from our shareholders. Under Grasim we have access to the large pools of cash that Sushil has already referred to. So, we have a much stronger parent today to actually draw cash from, should we want to do that. So, there is an ability to fund the growth of the business even within our existing structure without having to go outside.

Latha: Could be more rights and stuff like that to raise capital?
Srinivasan: If we go down that path yes but we want to keep the options open so that we do what is best ultimately from a business and a shareholder perspective. So, we want to keep all the options available. However clearly we have access to parent with large pools of capital.

Prashant: For the NBFC business it is mostly wholesale focus, right? The asset side.
Srinivasan: Our asset side has increasingly become, we have been reducing ticket size continually over a period of time. So, we did start out much more wholesale but as we go forward I think you will see much more retailisation of the NBFC.

Prashant: That is going to happen?
Srinivasan: That is already in chain, it has already happened.

Prashant: What about the liability side?
Srinivasan: Liabilities side is largely wholesale. Even there we have diversified considerably because we want to make sure we have access to adequate pools of capital not just single pool of capital. So, we are diversifying across different pools, whether it is mutual funds, insurance, pension, banks, we are getting a broad pool.

Prashant: The interest in the stock markets is for retail consumer oriented NBFCs. Do you plan to get into that in a big way?
Srinivasan: We don’t want a strategy to be driven by market because we have been in the market long enough to see these flavours of the month come and go. We want to build a long term sustainable business. I think there will be a number of planks to that and there will be a consumer plank to that, we don’t know exactly which bit of the piece we will choose to expand in but there will be some element of that.

Latha: What about housing finance? Looks like that is the government’s mantra or ploy to turn the economy. Will you look at your housing finance as a separate unit, separate listing?
Srinivasan: We already have it as a separate unit because it comes under separate regulator, it is a separate entity. It has grown very rapidly, it has had a very good start. We have been in it for about a year and a bit and we have had a very good run. I agree with you I think it is a focus area and if you just look at India and the ownership of dwellings, obviously there is a long road to go in that business. So, we see that as being one big play, that is much more retail again if you look at it that way. It is again a consumer event at the end of the day. So, we see continued growth in the housing finance company.

Latha: You will look to list it? Look at the kind of valuations CanFin, PNB all of them are jumping every day.
Srinivasan: If you look at our structure, we have a non-operating holding company and we have a number of operating businesses underneath it. From time to time these different businesses will look attractive, will have different cycles over a period of time. We will have to take a call over a period of time whether it makes sense to list any of these separately or not. At this point in time we are very clear it is going to be the holding company that gets through this whole process. The holding company is what will get listed.

Prashant: So, everything else will be essentially a part of it? There is no spinning out of that holding company? No plans at last right now.
Srinivasan: That’s right.

Latha: Why not? Isn’t it great to monetise it? After all holding company will be at a discount. Why not monetise?
Srinivasan: We are getting to a stage where we are first getting this thing listed. We have a holding company that will get listed, it has got a host of underlying businesses. This itself in my view is quite different and quite unique in the market just given the breadth of offerings that are underneath. We will take a call as time goes by to see what needs to be done.

Agarwal: If it is valuable then why should we monetise. If it is valuable we should be keeping it.

Latha: Why not speak about that – holding company discount. Grasim – if you do the math, the sum of the parts is probably Rs 70000 crore and then the market cap is probably Rs 50000 crore. Of course it has got corrected from the time the merger was announced. Would you want to correct that, do some buyback or something just to prop up the value of what is a valuable asset but it is trading at a discount?
Agarwal: Couple of points there, one, we have to be in right business, leadership business, we have to run those business in a cost efficient manner and market reaction is something which is beyond us. However having said that we are clearly kind of respecting from holding company discount point of view as a bit of a myth as there is no specific scientific answer to this theory.

Clearly I think all those corporate actions which I talked about earlier hopefully should help reducing the holding company discount. If operating company does well, I am sure holding company discount will be lesser.

Prashant: I think there are so much questions about M&;A because you guys have one of the best M&;A teams. You have led a lot of these transactions – the Idea-Vodafone transaction came out of nowhere for many people. So, people are expecting more of that – value creation really.
Agarwal: We did lots of corporate action and we respect from the shareholders perspective that it should advocatedly get reflected in the stock price. I am sure over a period of time whatever actions which we are taking should reflect in the stock price.

Prashant: The financial services business has three pieces, one is life insurance, NBFC, asset management. The wholesale loans that you make to, the NBFC has very low NPA levels. Asset quality is absolutely fine but if you look at banks which are in the same business and the segments that they lend to have elevated levels of NPLs in the same segment that you lend in. Should we be concerned going forward there could be issues here, how do you think about that essentially? What are you doing differently?
Srinivasan: We think about it as having robust credit processes that meet our requirements. We have been in this now long enough, we have been through a few cycles. This is a business that has had some aging and we believe we have got a credit process that kind of delivers the results that we are looking for. So, like you said our growth in NPA is 0.7 percent our net NPA is like 0.3 percent. So, these are good numbers even by NBFC standards not just by banking standards.

Latha: What is an even better number is AB Money stock price. AB Money has risen a 130 percent in the last 13 weeks, what is happening?
Srinivasan: AB Money is our stock broking, commodity broking business so I can’t comment on what is happening in the market per se.

Latha: It coincided with Idea getting the payments bank licence. So, is there in any way AB Money will access the customers of Idea, be able to communicate with them, should we look at any synergies over there?
Srinivasan: I think the payment bank will really provide access to all our financial services businesses to the customers that we will get access to and those tend to be a fairly large base because it will have access to a large base of the Idea Cellular subscriber base. So, as a part of the financial services group that too will have access to a much larger customer base, that is the plan. Those plans are currently underway, really nothing formulated as of now.

Latha: You will have some answer to what is happening that got the market so excited about AB Money?
Srinivasan: I really don’t know what gets the market going. We run the business at the end of the day.

Latha: When we last spoke you were speaking about analytics and a whole host of things you all are doing in all your verticals. Have they come to fruition that you are able to cross sell your products, better use customers of all your businesses?
Srinivasan: Absolutely, cross sell is clearly one of the big planks of our strategy going forward because given the range of businesses we have and the fact that we see most of our products are actually complementary from a customer perspective, great opportunity for us to deepen relationships by cross selling. So, we are running analytics on that. We are actually running analytics across a wide range of areas. So, we do analytics on lapsation in insurance, why do policies lapse and therefore what can we do to improve the lapse experience. We are doing a number of things in different areas and customer cross selling is obviously one area.

Latha: Does that help control NPLs because you know your customer better?
Srinivasan: It is more because of our credit process I think. We have a very robust credit process.

Prashant: On the life insurance side, what is your strategy really, how will you grow without a bank assurance partner?
Srinivasan: A number of things that are happening there that are changing. One, there is open architecture that has come into play in life insurance. So, we are expecting to see more and more banks bringing in more partners. The IRDA has allowed now 3 life, 3 general and 3 health partners into any bank that chooses to do so. So, we think as that opens up we will get access to more banking partners. Our existing business that will continue to grow. Over a period of time you will see digital as well becoming a large piece of each of the financial services businesses.

Prashant: So, you are saying without a banking partner you are okay or at some point you will have to look at sort of maybe consolidating the market in some way?
Srinivasan: I think there are many other sources of growth that are available. If you get open architecture hopefully you will get access to some large bank partners as well that give you access to bank distribution.

Latha: Bank licence is out isn’t it going by the on tap rule?
Srinivasan: Yes it clearly looks like it as of now.

Latha: You all have done a lot of reordering but cement is still a little distributed in several places – Century Textiles for instance, Kesoram for instance and even textiles, it is with Grasim, Fashions, will you still look at reorganising so that you have neater verticals?
Agarwal: There is no clear answer to these issues. I think if you see the history over a period of time, last 15-20 years, I think as and when we are getting opportunity we are trying to kind of streamline some of these things. There was always a big question which you people always used to ask – cross-holding, even in this transaction also I think Grasim used to own AB Nuvo and I am not sure if many of you are aware, we cancelled those shares. So, we kind of cleaned up those cross-holdings. So, that is a process which we are on and over a period of time as and when we are getting opportunities we are trying to kind of resolve some of these issues.

Latha: Clean-up is one bit but also synergies isn’t it? If all your textile units were in one place, is that an end game that you are working towards?
Agarwal: In this transaction we had similar businesses between the two companies. Grasim had VSF which is backward integration from pulp side, we had VFI in Nuvo and that also needs pulp and we had chemical businesses sitting in both the places, textile sitting in both the places, so we in some form are trying to kind of consolidate the businesses together. There was common ownership between the two companies, we actually consolidated those ownership be it Idea ownership, Hindalco ownership or ABFRL which is our fashion retail company. So, there are multiple ownership which were sitting at both the places and we kind of consolidated all of them.

Latha: Will Hindalco ever come under Grasim since you are making Grasim this big holding company?
Agarwal: Let group also own a few things.

Latha: Grasim also has money and Hindalco would be perhaps the future area where you will want to expand. The money will be useful, for both sides it is a win win? That is not what you are thinking?
Agarwal: No not at all. Currently our cash use is very much, there are various businesses which we have, they are all growth businesses and those growth businesses does need capital and we can put that cash for better use.

Prashant: To come back to the financial services space, tell us the size of each of these businesses now and how would you, if you were to value this entity, how would you go about doing it?
Srinivasan: I will talk about our December numbers, since our March numbers are not yet public. December we were about Rs 2,30,000 crore in terms of assets under management (AUM) and I am adding the AUM of our asset management company and our life insurance company. Our lending book was about Rs 33,000 crore in our NBFC, I am adding housing finance and our NBFC. Revenue would have been about Rs 7,000 crore. Profit would have been about Rs 900 crore as of December. So, we have a broad range of products and services. Each one looking to build scale in the business in which we operate. So, as far as valuation is concerned when you have a business like this it is going to be a sum of the parts, valuation. And that the market will put a number to, it is very difficult for us to figure out what that is going to be.

Prashant: Which gets us back to what the question Latha was putting to you which is, is there a thought to kind of realise value by giving away a small part of the business to a strategic investor to realise that before it hits the market. Any thinking on those lines?
Agarwal: As I said, if thinking would not have been there, we would not have put in as part of a scheme. So, there is a provision in the scheme to do some dilution if there is a need and Ajay and me, we already talked about that is a flexibility which we are keeping depending upon what is good for our business from a long-term point of view, that decision will be taken.

Latha: If your deadline was second quarter of FY18, you still have five months. So, it is still on the table. You could get a partner.
Agarwal: Yes, of course.

Prashant: Analysts are putting the value of the financial services piece between Rs 20,000-25,000 crore. Without going into numbers, would I be correct somewhere in the ballpark?
Srinivasan: There are market comparables for everything. You do not need us to tell you what this is going to be. You look at each of businesses.

Prashant: But you believe that significant value will be realised by taking this out?
Srinivasan: That is one of the reasons for this whole transaction because we felt that the value was not getting fully recognised in the structure in which it was. So, value unlocking is one of the reasons for this entire structure. And the access to large pools of capital that Grasim has, that is really what the transaction has been able to achieve amongst other things.

Latha: Reorganisation of business. Cement, it has done so well. You are market leaders with UltraTech Cement. Would you not want to get the Century Textiles piece also together with the UltraTech piece?
Agarwal: Can we have this discussion later?

Latha: It is there in your vision plan?
Agarwal: Century currently is being owned by the current Chairman's grandfather. That is a completely different organisation, different set up, so I do not think it would be appropriate for to even get into this discussion.

Q: At least in textiles you can? AB Nuvo Fashion is also textiles and Grasim also has textile units.
Agarwal: AB Fashion is clearly part of textile in larger sense. It is more retail and we felt it that having separate company for the benefit of the shareholder was larger sense and which is what we did. It is completely brand and that kind of business which has a lesser connectivity with what we have as a textile in Grasim and Nuvo.

Q: So there is not any plan to further merge the two?
Agarwal: No.