Idea Cellular becomes Aditya Birla group's most valuable biz; overtakes its flagship commodity businesses

Satish John
ET Bureau
13 August 2013

Mumbai: About a decade ago, it was considered a minnow in the Aditya Birla group amongst giants such as Hindalco, Grasim and UltraTech.

Today, in a major shift, the $40-billion Aditya Birla group, with major exposure to smokestack businesses such as cement, aluminum and VSF, has just witnessed its relatively young telecom business - Idea Cellular - overtake its flagship commodity businesses to become the group's most-valuable company.

The market cap of the telecom business, spawned from scratch by Kumar Mangalam Birla in a regulatory unfriendly environment in India, has overtaken UltraTech, country's largest cement company.

Idea's shareholder valuation rose to 52,916 crore while UltraTech's was estimated at Rs 50,820 crore as on July 25, 2013. The gap between the two has widened since then to Rs 7,856 crore on Monday, in favour Idea Cellular.

"It is a portfolio lesson for all the conglomerate groups," said Rajeev Gupta of advisory firm Arpwood Capital. Gupta should know as he has tracked the group closely for more than a decade.

Rough Start
The shift in investor preferences towards value-added branded goods and owning resources saw the group buy brands such as Madura Garments, build value in cement by focussing on brand building even as it consolidated and expanded the aluminium and VSF businesses through global acquisitions and greenfield expansion.

"Value lies in branded goods &services and in resources. Too many Indian groups have a high proportion of capital in low-return commodity processing businesses and that needs to change," Gupta said.

Idea Cellular, earlier known as Birla AT&;T, has come a long way. It was an alliance with the Tata group, before the Tatas decided to align itself with CDMA technology. And after a mild skirmish, the Birlas paid what was at that time a king's ransom of Rs 4,400 crore to buy out the Tata stake.

It decided to romp alone in the telecom sector with a series of acquisitions which included the purchase of B K Modi's Spice Telecom.

Telecom is a new business which came in its own about six years ago. Kumar Mangalam Birla set it up from scratch, unlike other flagship businesses such as cement, viscose staple fibre, carbon black and aluminium which he inherited, but expanded rapidly through greenfield and aggressive acquisitions.

"Both telecom and cement are competitive sectors. In telecom, we have to be razor sharp," a former official from the Aditya Birla group said and added that the telecom sector is an "unforgiving" sector. Mistakes by management are punished in the market as customers and investors are ruthless in their verdict.

"The difference between who makes it and who doesn't is very large," he added.

"Idea Cellular coming from far behind in just about six to seven years in a sector which is at the receiving end of government policies is remarkable," the former official said who had a role in the group.
Another analyst who didn't want to be quoted said that in the summer of 2006, Idea was no where. It was half the size of Tatas and RCOM and one-fourth the size of Bharti. Maruti Suzuki Chairman R C Bhargava has a rare insight on the Aditya Birla Group. He sits on the board of Grasim Industries, UltraTech Cement and Idea as an independent director.

"He (Birla) puts time for all the businesses. Ultimately, it is the quality of the management," says Bhargava as he points at the quality of people at the helm at the businesses including Idea. The route towards profitability for Idea Cellular was long and arduous and it needed a lot of patience for the promoters to wait for the investments to pay off.

"Some of the promoters look at short term. There is greater degree of confidence, when promoters give the management the time and space to perform. He (Birla) is not like traditional businessmen who keep interfering," Bhargava added.

Focus on Bottom Line
"It takes time and patience to build a business. Idea has taken its time," Bhargava added.

According to another person, Birla takes risks after going through the pros and cons of the move. He focuses on the bottomline always and doesn't chase growth for the sake of market share. You won't find it happening in any of his businesses," the former executive who has worked with Birla closely said.

Initially, the telecom business was held jointly with the Tatas and AT&;T Wireless. Each held one-third of the equity, but soon AT&;T Wireless merged with Cingular Wireless in 2004, the foreign telecom giant decided to exit its 33% stake in the Indian entity. The stake was jointly acquired by Tatas and Birlas at 16.45% each.

The Tata group which had its own subsidiary, Tata Indicom, a CDMA-based mobile operator had a minor run-in with Birlas and the dual holding by the Tatas in two companies saw Idea's licence to operate in Mumbai getting delayed. Eventually, Tatas exited after some hard negotiations between the two conglomerates.

"You have to give credit to the Aditya Birla Group on operations excellence. It has rapidly become a hallmark of most of their companies," says Gupta. There are others who reason that telecom was a business fraught with risks but if it does well with an unlimited upside. "How much can you grow in traditional businesses?" the analyst asked.

But the commodity businesses of Aditya Birla are winners too.

After all, Aditya Birla Nuvo, the company with a fertiliser and financial services businesses under its helm owns 25.3%, Birla TMT Holdings own 8.6%, Hindalco Industries 6.9% and Grasim Industries own 5.2% in Idea.