Unlocking value

Presentation on the Aditya Birla Group by Mr. Kumar Mangalam Birla, Group Chairman, at the DSP Merrill Lynch Investor Conference, Goa, 9 February, 2004.

Ladies and gentlemen... welcome to the presentation on the Aditya Birla Group.

In this important gathering, I would like to share some of the contours of our value journey and the exciting potential for transformation of our group companies into global sized, globally competitive operations, with the ultimate objective of creating value for all our shareholders.

The Aditya Birla Group: a snapshot

Before I embark on the core part of my presentation, let me introduce the Group to those few who are new to India.

We are amongst the three largest industrial groups in India. Through decades of operational excellence, we have built leadership across sectors such as cement, viscose staple fibre, metals, fertilisers, insulators and carbon black. While we stand tall in the traditional businesses, we have also built leadership in emerging growth sectors like garments, asset management and more recently in insurance and BPO. Our global accomplishments in these sectors are outlined in the slide. As a Group, we are a US$ 5.5bn conglomerate and we enjoy the trust of over 700,000 shareholders. We are driven by values and anchored by over 70,000 employees committed to the cause of creating shareholder value.

Operations across continents

It might interest you to note that our Group enjoys the distinction of being the pioneer in the globalisation efforts in India. We have manufacturing operations in 8 countries across Asia and enjoy leadership position even in these market economies.

For example, in VSF, we are the global leaders with a 24% global market share. Our operations span across India, Thailand, Indonesia and Canada. In carbon black, we have successful operations in India, Thailand, Egypt and now in China.

Similarly, in the non-ferrous metals, we have been a key player in Asia with a strong presence across the value chain. We have forayed into Australia through the acquisition of Mt. Gordon and Nifty Mines last year. Likewise, in chemicals, we have successful operations across South East Asia.

It is even more important to note that the Group''s operations in the market economies of South East Asia have been highly successful. In fact, they have come unscathed and demonstrated strong resilience even during the economic crisis of 1997. It is this experience that boosts our confidence of sustaining superior value creation even in the globalising Indian environment.

Our value creation framework

Against this background, I would like to outline our value creation framework wherein we have aligned organisational interests with that of stakeholders. This framework stretches across companies towards our aim to build global sized, globally competitive businesses.

The Group''s vision is to be a premium conglomerate with a clear focus at the corporate level. Our mission is to deliver sustained superior value to our shareholders at all times.

Towards this end, we have a well defined framework that rests on four principles:

• Focus on people
• Institutionalise processes and systems required for any modern multinational fast growing corporation
• A strong customer orientation
• Build strategies to ensure sustainable competitive advantages in all our businesses

Let me explain on the details now.

Core strength — nurtured over the decades

As a Group, over the decades, we have built up an inventory of core strengths. I would maintain that our key strengths are the intellectual and emotional commitment of our people, operational excellence, razor sharp focus on costs and efficiencies, streamlined systems and processes, unmatched financial prudence and superior governance standards. To top it all, the principles of trusteeship that we follow in our decisions. These are the key strengths that we bring to the table.

People-ise: providing us the cutting edge

I believe, our most important asset, one that is not reflected in our financial statements, is our people. Over the last few years, our focus as regards people has been to build competencies and a meritocracy. We have taken several initiatives in this regard and I shall dwell only on a few here.

We are contemporising the talent pool through lateral inductions across all levels. Several of our business heads and senior managers are now drawn from multinationals and other corporates in India and abroad. We have established a Group Management Trainee Scheme that helps us recruit entry level managers from reputed business schools and academic institutions.

Simultaneous to talent acquisition, we have focused on development of people and building capabilities. Towards better role clarity and career management, we have undertaken a job evaluation study by Hewitt Associates and their recommendations are under implementation across the Group.

Towards actualising people development needs, we have invested resources in creating a management centre par excellence, named "Gyanodaya". Over 2000 senior managers have been trained at Gyanodaya during the last 4 years. Along-side, we have fostered the concept of mentorship, where our senior managers become performance coaches and role models for the leaders of tomorrow.

Thirdly, we have institutionalised the process of Organisational Health Survey, which is a well regarded tool globally of tracking employee satisfaction.

Finally, we have laid equal emphasis on getting our people focused more towards common organisational objectives. We have put in processes that link rewards to performance and encourage excellence, both at the individual and at the team level.

The most obvious outcome of our efforts on the people front is the significant enhancement of our brand as an employer. This provides us better access to some of the best minds and talents in the country while also winning accolades.

You may note that the Group has been ranked amongst the Top-20 employers in India by Hewitt Associates and Business Today as well as by Grow Talent and Business World in their independent studies last year. At the same time, our overseas units have been named amongst the best employers in Asia, Thailand and Indonesia during the last two years.

Our intention is to be known as a people sensitive, achievement focused, development oriented organisation.

Institutionalise: adoption of best practices — VBM

Let me move on to the second pillar viz., institutionalisation. Even as people management would unleash creativity, the need to institutionalise and c;reate a system, needs to be underscored. We have institutionalised several processes during the last five years, but let me dwell on only a s;elect few here, starting with the Value Based Management system.

We adopted the Value Based Management process in the Group. Our intention has been to c;reate awareness of the cost of capital, make operating managers better relate to shareholder aspirations and link rewards more directly to business performance.

The journey so far has been encouraging. We have adopted EVA (Economic Value Added) as the measurement metric in our value management process. The value based management process is a six pronged approach as outlined here and is under implementation by Stern Stewart &; Co.

I should say that the new VBM system fundamentally impacts how we value our businesses, how we set strategic targets for business managers to realise the value, how we review our businesses and compensate our managers. Importantly, all the future capital allocation decisions will be based on the value creation criteria. We are confident that the process will further align interests of all stakeholders towards the common objective of value creation.

Institutionalise: adoption of best practices — WCM

Secondly, we have adopted a system that we call "World Class Manufacturing (WCM)" in all our units. WCM encourages manufacturing excellence by integrating several contemporary initiatives like Total Productivity Management (TPM), Total Quality Management (TQM), Business Process Restructuring (BPR), Six Sigma, International Quality Rating Systems (IQRS) and several global best practices in the area of manufacturing.

These initiatives have helped us enhance our focus on quality and costs, put our businesses on the global map of achievers and won for us several accolades in recent years.

Institutionalise: adoption of best practices — corporate governance

As a Group, we are recognised for our governance practices and disclosure standards. Our boards constitute independent directors who are persons of eminence and bring objectivity to the decision making process and decisions are taken keeping in mind the best interests of all stakeholders. In recent years, we have concentrated our energies on further improving levels of transparency and disclosure as well as adoption of global accounting practices.

We take pride in the fact that our disclosure levels are internationally comparable. Our stakeholder communications provide deep insight into the business performance and strategies for the future. Our efforts have won us recognition from investors as well as the financial media in recent years.

Customerise — building a strong brand and moving closer

The third leg of our value creation strategy has been to customerise operations. We have come a long way in this regard — from the license raj, where whatever was produced could be sold, to an economy where production has to be attuned to the market needs.

In the first place, instead of being producers of commodities, we have sought to become solution providers for our customers. As a consequence, we have consciously focused on branding of our commodities and going up the value chain to come closer to the end customer.

Strategise — consistent theme in a dynamic environment

The fourth leg of our value creation framework concentrates on strategisation efforts. Through decades of operational excellence, we have built competencies that provide significant strength across businesses. However, the changing business dynamics demand new traits like size, scale and global competitiveness. Towards this end, we have adopted a three stage approach:

• Firstly, extract value from existing competencies through initiatives like portfolio restructuring and low-cost brownfield expansions.
• Secondly, achieve scale and size through acquisitions and
• Finally, invest in growth businesses of the future

Through concerted efforts and rigorous implementation of this framework, we have built some global sized, globally competitive businesses within the Group. I would like to elaborate with a few specific examples now.

Strategise — significant progress in recent years (cement)

Let me start with the cement business.

Towards building on existing competencies, we restructured the cement businesses of the Group by consolidating it under Grasim during 1998. This, in fact, triggered the consolidation process in the Indian Cement Industry.

While synergising operations, our thrust was also on sweating assets through de-bottlenecking and blended cements. These, coupled with smaller acquisitions helped us emerge as the third largest producer in India.

However, keeping in view of the exciting opportunities in the sector, we decided to build size and scale and thus pursued the acquisition of L&;T Cement. Its successful completion will catapult Grasim to the largest producer in India and the 7th largest in the World.

Strategise — significant progress in recent years (metals)

Likewise, in metals, we took concerted actions to transform Hindalco into a regional metals major. Having built on competencies through low cost brownfields, we embarked on an inorganic opportunity in Indal to augment our presence in the upstream and downstream segments of aluminium. Further, keeping in mind the changing face of the non-ferrous metals sector, both in India and globally, we chose to build size and scale while enhancing our competitiveness further.

We thus embarked on a landmark restructuring that brought the copper business into Hindalco during 2002. To enhance our competitive position further and capture a greater share of the copper value chain, we have forayed into copper mining. We believe this will help c;reate superior value in the future.

Strategise — significant progress in recent years (new businesses)

Our focus was not just restricted to the traditional businesses, but equally on building strength in emerging growth sectors. The acquisition of Madura Garments was the beginning and it has propelled us to the leadership position in the high growth branded garments sector. Our entry into the BPO segment is with a similar objective.

Result — focused companies with identified growth businesses

Through the concerted adoption of the value creation framework and relentless pursuit of clear strategies, we have now built companies that are better focused with clearly identified growth avenues.

Going forward, Grasim will remain focused on cement and VSF, Hindalco on metals and Indo Gulf on fertilisers. Indian Rayon will remain a conglomerate, but with a balanced portfolio of businesses in the manufacturing, brands and services sectors.

Result — superior shareholder returns across companies

What is more encouraging for us, is the recognition of our transformation efforts in the capital markets by investors like you. The growing appreciation is evident from the strong outperformance of the Group stocks, whose combined market capitalisation has appreciated by over 32% annually during the last five years against the Sensex returns of only 12% during this period.

Let me now demonstrate how we have effectively employed our value creation framework across the listed companies and c;reated some global sized, globally competitive operations within them.

Transformation of Grasim…

Grasim has been the biggest beneficiary of our renewed value focus, witnessing significant activity, both restructuring and acquisitions, during the last five years.

Towards building on existing competencies, in the VSF business, we embarked on a Greenfield expansion at Kharach in Gujarat. This, coupled with de-bottlenecking operations, catapulted Grasim as the largest VSF producer in the world, giving it a significant competitive advantage.

While doing so, we also embarked on several other initiatives towards enhancing focus on core businesses. These included the closure of the unviable pulp and fibre operations at Mavoor in Kerala, sale of fabric units in Gwalior, exit from non-core operations like trading and significant financial restructuring.

Towards enhancing focus on the cement business, apart from these restructuring efforts, we concentrated on de-bottlenecking and increasing the proportion of blended cements while also strengthening cost competitiveness through the setting up of captive power plants. Simultaneous focus was also on building brands and strengthening our market position. Finally, towards building size and scale in this promising sector, we have embarked on the acquisition of L&;T Cement that has transformed Grasim as a cement major.

...has helped unlock significant shareholder value

The process of transformation has led to an impressive rise in returns during the last five years. Grasim''s ROCE has moved up from 11% to 17% while ROE has risen even more strongly from 7% to 17% during this period.

We believe that the transformation process has contributed significantly towards unlocking of the shareholder value at Grasim. The stock has delivered an annualised return of 48% over the last five years, thereby outperforming the Sensex significantly.

Grasim going forward — a cement major

As highlighted earlier, Grasim is emerging as the largest producer in India. The Grasim-CemCo combine will be amongst top three producers in almost 80% of the cement consuming markets in India. This we believe will offer significant strength in our value journey going forward.

Grasim going forward — a strong play on India''s growth story

Importantly, the strong operating leverage and the leadership position make it a strong play on India''s growth potential. Given the likely strong growth in the economy and increasing thrust on infrastructure development, we see exciting opportunities in the cement sector. The likely demand-supply balance in the foreseeable future should help us improve returns from this business, which incidentally, is the largest business segment of the company.

Our focus will be on further strengthening of our market position and sustaining leadership by leveraging the combined strengths of Grasim and CemCo. We will leverage our brands and distribution assets optimally towards this end. Our cost competitiveness will be further enhanced by the possible synergies with CemCo. The continuing strong cash flow from the VSF business will add further strength.

We thus remain confident of delivering superior returns on a sustained basis even in the future.

Transformation of Hindalco

Moving to Hindalco, as discussed, we have strategically strengthened the aluminium business through brownfield expansions and the Indal acquisition. While these helped us achieve leadership across the value chain domestically, we do realise the need to achieve size and scale in the global context.

Likewise, in copper, we are building size and competitiveness through a low cost brownfield expansion, which will be commissioned soon. The planned further expansions will transform Birla Copper, our copper smelter, as one of the largest custom copper smelters in the world.

Simultaneously, towards further enhancing competitiveness and tapping the value chain optimally, we have ventured into the copper mining arena recently. This we believe will help us sustain superior returns even in the future.

Significant value enhancement since restructuring

As in the case of Grasim, our transformation efforts in Hindalco have helped us unlock significant value for shareholders. The stock has appreciated by over 78% since the restructuring of the metals businesses in July 2002. Even more important is the fact that the company has delivered an annual return of over 26% over the last five years, against a Sensex return of only 12%.

Hindalco — leveraging regional growth potential

Going forward, we see exciting growth prospects for Hindalco. In aluminium, we see opportunities both in the domestic and the regional markets. Led by China, Asia is the fastest growing aluminium market in the world. Notwithstanding capacity increases, Asia will remain a deficit zone in the foreseeable future. This provides opportunity for Hindalco, both in metal and alumina. Meanwhile, we see an equally exciting long term outlook for the Indian markets, given its low per capita consumption and improving outlook for the end use sectors, like power, automobiles and construction.

A similar opportunity e;xists even in copper, where India is uniquely positioned due to its proximity to the high growth markets of Asia. The agrarian nature of the Indian economy provides scope for adding value to by-products, the disposal of which is usually a significant drag on copper smelting operations elsewhere in the world.

Hindalco is uniquely positioned to capitalise on the emerging opportunities, both in aluminium and copper. The company''s globally competitive cost structure, sustainable strategic advantages and growing export presence will provide strength. The ongoing strategic initiatives will further reinforce our ability to capitalise on the emerging opportunities while sustaining superior returns.

Indian Rayon: emphasis on growth avenues

Indian Rayon, too, has been a beneficiary of our restructuring efforts and has witnessed significant activity during the last five years.

Subsequent to the restructuring of the cement business, we focused on furthering our competitiveness in the existing businesses of VFY, carbon black and insulators. This was achieved through a combination of low cost brownfield expansions, quality and brand orientation and through the setting up of joint ventures with global majors towards unlocking value potential. Exit from value destructive businesses was integral to this strategy.

While these helped us strengthen cash flows from traditional businesses, they offered limited growth prospects. Given this constraint and the need to invest in growth businesses of the future, we pursued new opportunities. The acquisition of Madura Garments, entry into the newly opened insurance sector and the recent foray into the software and BPO sectors were the results of these initiatives.

While propelling growth, these strategic moves helped in achieving a balanced portfolio. Even more importantly, they have transformed Indian Rayon giving it leadership position in promising growth sectors of the future.

Indian Rayon: delivering strong return to shareholders

Apart from building a growth portfolio, the transformation efforts led to a marked improvement in the financial performance of the company, as can be seen from the chart here.

Improving returns and the benefits of transformation efforts, characterised by the changed growth outlook and leadership position in emerging new growth sectors have helped in unlocking significant value for our shareholders.

The value of Indian Rayon has appreciated by nearly 900% since the beginning of the restructuring process in 1998. In other words, the stock has delivered an annual return of 36% in the last five years and over 134% during the last year. This, we see, as an appreciation of our value creation efforts by our shareholders.

Indian Rayon: creating a strong growth platform for the future

Through restructuring and portfolio management efforts, as discussed, we have c;reated a strong platform for growth in Indian Rayon. The traditional manufacturing businesses will continue to deliver value, but growth will likely be fuelled by the performance of the new businesses.

The garments business is poised for significant growth in the future. The removal of quota restrictions will provide new opportunities. Madura Garments is poised to benefit significantly given its brand equity, enviable market strength and growing focus on costs.

The insurance business is likely to be another growth driver for Indian Rayon. Within a short span of time, the business has built leadership position in the high potential life insurance market in India. Today, we are the second largest private insurance company in terms of the number of policies and the leader in terms of the per policy premium income. We are confident of success in this venture, which will contribute significantly towards the creation of superior value for Indian Rayon shareholders in the future.

Indo Gulf: restructuring helped unlock significant value

Indo Gulf enjoys a leadership position in the nitrogenous fertiliser sector, with its strong brand, ''Shaktiman'' Urea. Benefiting from the restructuring efforts, Indo Gulf has emerged as a focused fertiliser entity. Its shareholders have benefited from the re-rating of its copper earnings at Hindalco and also gained from the impressive returns generated by the new fertiliser stock.

Indo Gulf is one of the most efficient and amongst the lowest cost producers of urea in the country. This strength of operations and the cash rich balance sheet, place it in a unique position towards capturing value creating opportunities in the sector.

We see attractive long term potential given the agrarian nature of our economy and growing demand for food grains and farm nutrients. However, short term prospects are marred by regulatory uncertainties and feed stock issues. Any favourable change in these will throw up significant growth opportunities for us. In the interim, we will leverage the strategic strengths of its location, costs, brand equity and distribution network to extract maximum value from this business.

Widespread recognition of our efforts so far…

Ladies and gentlemen, I have shared the Group''s value creation framework and how we have employed it successfully across companies towards transforming them as global sized, globally competitive operations, while delivering superior returns simultaneously. Our significant efforts have been commended by the capital markets and the financial media positively in recent years.

While we are happy with the progress so far, we are cognisant of the fact that the journey has just begun. We remain committed to the creation of superior shareholder value across all our companies in the future and push forward to some exciting times as our Group faces up to the challenges of the future.

I do hope that you will stay invested with us on what promises to be an interesting voyage.

Thank You