Each day is a new learning experience

ET Now
18 March, 2011

Mr. Kumar Mangalam Birla, Chairman, The Aditya Birla Group, holds several key positions on various regulatory and professional boards. A chartered accountant, Mr. Birla earned an MBA from London Business School, where he is also an Honorary Fellow. He is a Director of the Central Board of Directors of the Reserve Bank of India and Chairman of the Staff Sub-Committee of the Central Board of the Reserve Bank of India. He serves on the Prime Minister of India's Advisory Council on Trade and Industry. He has authored the nation's First Report on Corporate Governance. On the academic front, Mr. Birla is the Chancellor of BITS, Pilani, Hyderabad, Goa and Dubai. He is a Director of the G. D. Birla Medical Research and Education foundation. He is on the Asian Regional Advisory Board of London Business School. He has been inducted on The Economic Times Corporate Advisory Board.

Speaking with R Sridharan of ET Now, Kumar Mangalam Birla says, "We will use the creeping acquisition route to increase promoter holdings across our companies."

You have set an ambitious target of doubling group's revenue to US$65bn by 2015. To your mind how realistic is that?
We were a US$7bn group 5 years ago, today we are at US$30bn and I am of the conviction that the quality of your future actually depends on the quality of your imagination today. So yes it is a stretched target but it is backed by concrete numbers, by plans, both organic and inorganic and of course there is a stretch built into it which is the challenging part of it. But I am very confident that we would be able to achieve the US$65bn number.

How does this breakup among your different businesses?
I think that the mix would remain more or less the same, so very broadly speaking, I think manufacturing would be about 70% of the portfolio. The balance would be the service businesses, of course on a much larger base. So in absolute terms, it would be much larger. But I do not see that mix changing very much from what it is today.

So acquisitions will have to be a very a large part for this strategy. What are the geographies where we will see the Birla group pushing ahead in the years ahead?
In the last 15 years, we had a presence all through in South-East Asia, and because of some of the large acquisitions were in the last couple of years. We are pretty much across the globe now. Half of our turn-over of US$30bn comes from outside of India, so I think the new geographies depend very much on the businesses that are making acquisitions. Acquisitive growth is going to be a very important part of the growth story going forward. I think there are several very interesting economies, there is Latin America, Brazil, there is South-East Asia, Indonesia, parts of Africa. So I think several new emerging geographies that are very interesting. Recently, we are also into east Europe, have a very large presence in North America. So I think we are pretty much across the globe and very comfortable operating in different cultural environments.

How do you look at the global growth scenario? If you look at the world you have the developed economies which are still in some sort of pain, we do not see growth coming back in a hurry whereas if you look at Asian economies like India and China we are pretty much talking about at least an 8% growth in these regions. So as a conglomerate which is probably more diversified than other Indian groups, how are you hedging your bets for growth?
About 50% of our revenue comes from outside of India and that is pretty scattered, the biggest piece of that of course is North America, but other than that it is spread across South-East Asia, Brazil, Egypt, Australia, Canada. So I think that the internationalisation of the businesses is in itself a de-risking strategy.

And if you are to achieve a US$65bn revenue target by 2015, how much of investment will you have to make in different businesses?
I think, it is difficult to put a number to it in terms of mix. I think half of the investment would be outside of the country and the other half in India. The balance between overseas and India will also remain more or less the same.

What sort of organic growth will we witness in your core companies, Hindalco, Grasim, AB Nuvo and also Idea?
I think each of the companies have a very clearly charted out plan which are in the public domain. So for example, Hindalco will triple its capacity built over the last 50 years in the next 3 years. Idea is growing at a very fast pace, it will grow at about 20% this year as compared to an industry growth of about 10%. Nuvo I think has two very large components to it, there is Idea and there is financial services. In financial services, we have more than quadrupled our assets under management in the last 3 years. So I think that each of the businesses has some very specific and well thought through and well chartered growth plan that we will see playing out in the next couple of years.

A lot of people were skeptical when you went ahead and acquired Novelis for almost US$6bn. Now of course it is a phenomenal turnaround story. So what would you say is that one important lesson that you learnt about global acquisitions from the Novelis example?
I think it is consistency. The fact that you really need to win over the confidence of the team that comes along with the acquisition, you need to make them feel and genuinely believe that everything that you are doing is with the agenda of creating value for the company that has been acquired. I think it is important for there be an amalgamation of cultures I think it is unrealistic and unfair to expect people in the acquired company to completely assimilate with our culture, I think there has to be a good blend of both. And I think it is about for example cutting down expenses, productivity maximisation, branding, shutting down uneconomic plants shifting plants to lets say in our case India, leveraging on their huge technology, so on and so forth. So I think it is a pretty multi-pronged approach that we have taken in the case of Novelis.

And Novelis has also proved to be a terrific acquisition simply because of the money it has already paid back to Hindalco, US$1.7bn in dividends. Now going ahead do you expect this dividend payment to be sustained or do you actually see it accelerating in the years ahead?
We raised US$4bn of equity in December last year of which US$1.7 billion came to Hindalco as a debt, which is half the investment that we had made in terms of equity investment in Novelis three and a half years ago. Novelis is turning out cash and Hindalco needs that cash. That is been one of the major objectives of this re-financing that we have just done.

Any plans to list Novelis in the foreign markets?
Novelis has a very strong upgrading cash-flows, I think that they can pretty much meet their growth plans with their own internal approvals. So there is no need to go and tap the equity market so I do not see that happening.

Ultratech is expanding capacity, you are adding another 10 million, does it mean that Ultratech's earning will continue to remain under pressure or are there ways in which you can protect its margin and expand capacity at the same time?
The plan actually is to add 25mn tons in the next 5 years of which 9mn tons have been articulated in terms of specific investments in Karnataka and east India. Again, I think we are working off a very strong balance sheet. We have virtually no debt on that balance sheet and the bulk of this investment would come from internal approvals and debt, given that we have huge headroom to take on debt on Ultratech's balance sheet. So I think that given the fact that all of these investments would obviously be value whilst you could see a little bit of blip for a while, for a year or two, we are talking about a much larger company going forward so you have the largest cement player today only growing in size and increasing it is market share. I think that is a very compelling story.

As a group you are already probably among the seventh or eighth globally in terms of your cement and I know that you are not happy with being number seven or eight, you want to be at least among the top three. So do we see or can we expect some big bang acquisitions in cement from the group going ahead and if yes then which parts of the world would you want to acquire?
There is nothing in the table today, but having said that I think that it is a sector which will see consolidation globally in the next 4-5 years, I think that most cement majors around the globe have very high levels of debt on their balance sheets. How the consolidation game would play out is very difficult for me to predict but having said that growth through acquisition is something that we are very familiar with, comfortable with and we would look at any opportunity from a value creation perspective.

But would you make another bold bet like you did in the case of Novelis by acquiring company which was much larger than Hindalco? Do you see that happening in cement as well?
Novelis has boosted our confidence in a way and I think that if we have, theoretically speaking a similar opportunity in the cement sector I do not see why we would not look at it.

You also have holding companies and markets are not particularly fond of holding companies; in fact, AV Nuvo is at a steep discount to it is inherent value. So why do you have two holding companies? What is the need for it and what is your plan going ahead with these holding companies?
I do not see Grasim as a holding company because it has a large operating business. In the case of Nuvo it is a semi-holding company, the fact remains that it is incubated to very large businesses in the last 10 years which is telecom and financial services and these are businesses which have very long gestation period, both of these are only now starting to become value accretive because that is the nature of the industries both these businesses are in. I think that you see a lot of value coming through, in terms of valuation of Nuvo in the next year-2 years. I think it is grossly undervalued today. Valuations have improved somewhat on the back of very strong performance in last 3-4 quarters, but I still believe that there a huge headroom for revaluation of the Nuvo stock.

So what would you say is an appropriate price?
Would not want to mention a specific number except to say that it is grossly undervalued and I think that anyone who does an analysis of Nuvo in terms of its investments, its earnings I think would very clearly discover that.

But as a promoter what would you rather do? Own a smaller pie of a more valuable company or own largest stake in company that is probably less valuable?
That is an interesting question, I think it would have to be on a case by case basis. Depends on the industry, depends on how important it is to be a dominant player in that industry while dominance is a theme that runs across in our businesses in terms of a business philosophy. But it really depends on the sector and specific opportunities that we are talking about.

Mr Birla, you have always maintained that you want your companies to be among the top three in any industry. So on that perspective, how do you look at financial services, retail and even BPO?
I think again that is a very important issue, when we say top three we are either top three in our existing businesses today, or the more important thing is that for the businesses that we are not in the top three today we need to have visibility on how we will get to be in the top three in the foreseeable future, lets say in the next 5 years. So we have what it takes to come into a top three position and I believe that for all of these three businesses we have very clearly chalked out plan. I think we have it in terms of talent, the financial resources and the track record to be in the top three in these businesses in the next 5 years.

Now the new acquisition norms allow promoters increase their stake by 5% every year. Do you have any plans of increasing your stake in group companies?
Yes, we have said that very explicitly in the past that we will use the creeping acquisition route to increase promoter holdings across our companies.

And on your priority lists which are companies you would want to begin with first?
I think in terms of priority it is important for all the companies, but I think first on the priority list is Grasim.

There are also constant rumors that you will at some point exit telecom?
Idea is a very, very strong franchise, it is moved from being a complete non entity three years ago to be a very strong player. It is in the top three in terms of mobile telephony. Like I said it has grown at the rate of 20% this year as compared to 10% for the industry as a whole. We have a very healthy customer base, of high RQ customers. So I do not see the rationale for us to exit. I know that these rumors keep coming in and out but that is completely untrue.

But how do you look at this whole 2G spectrum allocations, the subsequent scams which have come to light and Idea Spice itself has embroiled in a controversy with DoT? First of all your reaction to this 2G spectrum allocation, the scam and the way it is developing?
I think that like we all know the 2G scam has been a very unfortunate incident. I want to very quickly on the heels of that add that the Idea issue has nothing to do with the scam. We clearly are not a part of this scam. I think that is an issue of overlapping licenses on account of the Spice buyout and which is a more technical issue. Very clearly our issue is very different from what you are calling the scam issue. But I think that very clearly the Idea growth story is a very strong one going forward, I think the 2G fracas has been a very unfortunate one but I think that we need to, as an industry move forward with doing the things that are required to make this a more healthy industry now.

The new telecom policy talks about getting telecom companies to pay market prices for any megahertz that they have more than 6.2, what is your view on that?
I do not think that it is entirely warranted but having said that I think the more important thing in terms of policy is now to focus on the M&;A guidelines because that potentially can be a game changing policy for the industry.

Would you want to acquire or maybe bring in a strategic investor in Idea?
We clearly have no plans to bring in a strategic investor because like I said, no rationale, no reason for us to bring is a strategic investor. Idea is doing very well going across its markets. In terms of acquisitions I do not see the logic to do that again but I think that easing of the M&;A norms will c;reate a more consolidated and a healthier telecom sector.

How do expect this fight with the DOT on the Idea Spice merger. How do you expect to end, what will be the resolution to this fight?
I think that we need a clear direction from the DoT. We have been writing to them since the time of the merger asking for clarity on what they want us to do and we are very open to any option that they recommend, if they want us to surrender license, we are very happy to surrender that.

So what are your expectations from 3G? Do you think it is going to be a game changer for the industry or it is just another service and may not significantly turn around the fortunes of the industry?
I think there was a debate about would 3G actually be something that could be game changing and I think we have all come around with a view as an industry that it is something that could potentially move the needle. It is a service that can give an edge to Idea over competition and I think that the investment that we have made has been very cautiously thought through and I think that we are pretty confident of a very successful launch sometime at the end of march and that would be another inflation point in the growth story of idea.

When you look at the 2G controversy, do you think that maybe corporate rivalry has probably hit a new low in this country?
Corporate rivalry is something that is prevalent in the corporate world globally so I do not think that it is anything special about India and I think that it is a regulatory environment in the telecom sector that is essentially to be blamed for all the chaos that ensued.

But we are likely to see such problems with any natural resource that is finite and where the government is essentially the arbitrator on who shall get those resources, for example mines, iron or coal or even energy.
I do not think so. I think it depends on the process of allocation. I think if it is a transparent process we should not have problems of the kind we had with the 2G. For example 3G was a very transparent and a very professionally managed process and no big issues there in terms of who got allotted what. So I think it really depends on how transparent and well articulated in advance the process is.

But I worry that governance probably in this country is not up to the mark and there is no transparency as such in a lot of key decision making. Does it worry you as an Indian businessman, as an industry leader?
Very clearly we have a governance issue at hand as a country, that I think is very apparent. And I think the country has to work together to resolve this issue so it is civic society, government, all sections of society I think have to really make their contributions to making the governance of the country much stronger. I think that one hopes that through all of these crises what will come out, in terms of the silver lining will be a stronger governance and more transparent governance for India.

But would you want to continue investing even if lets say the environment outside of India is much more conducive to investments?
I think that investments should flow to geographies where you c;reate the maximum value. So it depends from business to business, I do not have a view that we must invest in India, this given the spread of our business. I think several of them will require very large investments outside of India, so I do not think geography I really that much of a concern.

Mr Birla how do you look at your own evolution since you took over the group, how would you say you are a different person than you were when you took over?
I think hopefully I have learnt a lot. But it is been a very interesting experience and I feel that I learn everyday form all the people that I work with. I am very privileged to have some very smart people, very independent minded people with me and each day is a new day and a new learning experience.

And who would you say your role models are, cutting across India and other markets?
I have great admiration for Jack Welch and he in some sense has been a role model for me, I think that the other one is Laxmi Mittal as an individual and as a businessman, he is someone who is an extremely inspirational leader.