12 February 2019 | The Economic TimesShare
Kumar Mangalam Birla, Chairman of the Aditya Birla Group, spoke to Baiju Kalesh and Vatsala Gaur on issues ranging from how the recently merged Vodafone Idea is tackling competition in the telecom sector and the Insolvency and Bankruptcy Code (IBC) to his views on the next government. Edited excerpts:
The industry is in a tough situation, but what is Vodafone Idea doing to combat the situation is more important. We know that the number of telecom operators has shrunk from 8-10 to three … therefore it has changed the dynamics in a way. But, having said that, we have created scale and size. There are 387 million subscribers (and) 40% of India’s mobile voice traffic. The promoters have invested Rs.2,57,000 crore and so it’s not an entity to be scoffed at. Will it withstand Jio is a different question, but the fact that it is underinvested is not true, because together the investment has been substantial.
In one quarter of its market, the two networks have been hooked up — which means the consumer gets more penetration of the markets, more coverage and you’re bringing both networks together so that the consumer experience goes up. And that’s done in Bengaluru, Karnataka (and) all of Madhya Pradesh, which is fairly quick considering that the consolidation has just happened. At this scale, nothing like this has been executed anywhere in the world. In the next 12-18 months, both networks will be hooked up completely and that’s addressing the basic question of consumer experience, which has taken a huge beating for all operators in the last few months and is likely to get only worse.
At this scale, nothing like this has been executed anywhere in the world. In the next 12-18 months, both networks will be hooked up completely and that’s addressing the basic question of consumer experience.
We had talked about synergy targets of $10 billion in NPV (net present value) terms and this quarter results already indicate Rs.3,500-crore annualised saving, which to my mind, given that it has just been three months, is huge. They are also saying that there will be Rs.8,500 crore savings rate in the third year of the merger, which is substantial. Bringing down the cost is obviously a very important part of the equation and that’s what is going to essentially push up your operating profit. A large part of your cost is network which is being combined. A large part of the savings is on the network front. In a very large complex merger, between companies that have fought in the market for 20 years, these are very big achievements. I hadn’t thought that the combined entity would become so productive so early, so I don’t hear any Idea versus Vodafone now in the last two months. It happened for the first two months but died down very quickly.
Vodafone Idea has also now come up with some schemes that are looking at a minimum commitment plan. They are saying that we want to weed out the non-paying or very low-paying subscribers which would release capacity to some extent but, more importantly, take the ARPU (average revenue per user) up, because in that base of non-paying or very low-paying — which is less than Rs.25 kind of customer — there has been a lot of churn … it’s the people that they wanted to churn out that have left the network — 35 million is the right kind of people who have left.
We are talking about a Rs.25,000-crore rights issue out of which Rs.18,500 crore comes from promoters and the balance by way of rights. At the current price level, that seems doable. Will it happen very easily? Obviously not. But there is an ongoing effort happening to ensure that the rights issue goes through. We are also selling non-core assets, whether it is towers or optic fibres, and that cash flow will come through.
Vodafone is completely committed. What we discussed at the Grasim board quite extensively and over a few board meetings — and so it’s not a promoter view only or not just a knee jerk kind of action — I think the view is that Grasim should not dilute its holding (in Vodafone Idea) at this point in time because prices are attractive, there is a definite plan in place and why should Grasim as a promoter, having been invested for more than 25 years at these prices, dilute its holding. Plus, there is the affordability issue as well. We don’t see as promoter, and also Grasim as a board and its independent directors, the rationale for not subscribing at this point in time: it doesn’t seem the right thing to do. And that is something that has been clearly communicated over the last few quarter of investor meets and so it’s not going to be a surprise. There has been a very transparent communication about this with investors and, second, I don’t think investors seem to have a problem.
I think the view is that Grasim should not dilute its holding at this point in time... There has been a very transparent communication about this with investors.
We believe it is good enough for the next three-four years. As a company, no one raises funds that will last you for the rest of your life. But if you have enough funding for the next three years, that is good enough for the current situation. So, you are not a pushover by any chance.
Our play is much more restricted as compared to Jio. We are not getting into content, we are not buying content providers, we are not getting into Direct-to-Home, so when you look at investments, you can’t really compare like-to-like because our play is much more pure mobility play. So, these are the things that one can do. The stock did well after the last quarter results and it will only get better with successive quarters. But if you ask me how you will compete with Jio, do you have as much cash flow to go in, obviously not. We’ll have to see how things pan out. We have a high level of confidence from an operations point of view, from the point of view of quality of network, customer experience, costs — all of these are aspects that we have a fairly good handle on. That’s something that is only going to get better.
It’s all in the future so I can’t crystal ball. But I think we are on the right path. The strategy that Vodafone Idea is going to follow is to collaborate with other parts of the ecosystem as opposed to owning every part of the ecosystem. Therefore, capital requirements come down and it is much more pure mobility play. We are not going to go and acquire, let’s say, Balaji, etc. That requires another big slug of capital. The issue is that none of this will come without incremental investment. And I am assuming that at some stage a return on investment is a criterion that they (Jio) will look at. On tariffs, no one knows and all predictions in the past have been proven wrong.
I think there is a huge block up of cash that has come on account of GST for the telecom sector, because there isn’t any way to offset that, and what else can the government do is help ease that burden for the industry. That’s a very legitimate way of releasing cash for the industry. And I’m sure that’s the case for Jio also.
I don’t think so. I think there are enough examples globally when there are three players in the market, they have survived it.
The good thing is that structurally the economy will grow at more than 7%... I don't think any government is going to go back on reform... I think the government has a role to play in taking that 7% to 9.5-10%.
Firstly, the IBC is a very deep reform. It is almost as deep a reform as GST or demonetisation.
It changes the fundamental character of Indian business. Who would have thought even three or five years ago that a promoter could actually lose his assets? I think a lot of promoters treated debt as equity and did not find the need to actually repay within a specified period. All that has changed now and obviously the banking system has gained tremendously. A lot of money locked in would now come into the system, and banks would look stronger. At the time when we went through Binani, it (IBC) was all still very new, and there were lots of tweaks that were needed to be done but that is true of any important legislation as the IBC. So, the role of different people in terms of the committee of creditors and the resolution professional was still evolving. The exact flow of the process was still evolving. The time it took was a little bearable, but the fact of the matter is that I don’t think a Binani would have been resolved if it wasn’t for the IBC. So, that’s a very brave reform carried out by the Modi government and you must give them credit for that.
I think it’s a robust enough law. It can cause delays, but I don’t think the system can be gamed. That’s my clear sense.
It does. There is this fear of losing your assets if you are not keeping your financial commitments which can only be good for the economy.
I think that was part of the regulation, right? And the whole idea was that if promoters can bid for the asset, the incentive for them not to get into an IBC situation would be much lower and takes away from the spirit of IBC. So, a promoter not being allowed to bid for his asset, in principle, on a broad level, I agree with that. It otherwise skews the pitch in a very odd way. There the chance of gaming the system is much more.
I don't think they (government) want to be adversarial to China in any way... which is perhaps an important part of the reason behind not protecting domestic industries... But it’s not about protecting, it’s about providing a level playing field.
The point is why did they not invest in their companies in the first place and why did they let them go to the IBC? That doesn’t hold water. I think Indian entrepreneurs are going to view debt from a very different perspective now and in general in terms of the financial health of the companies and governance standards being followed, the quality will go up tremendously.
I think the good thing is that structurally the economy will grow at more than 7%. So that is a sturdy situation to be in, irrespective of the kind of government that comes in, I don’t think any government is going to go back on the reform process. There is no government that won’t attempt to get people to come and manufacture in India. So, to that extent, it is an irreversible process that we are on now. Having said that, a coalition will have its own pulls and pressures and can never be the same as the situation as we have today. I think the government has a role to play in taking that 7% (growth) to 9.5-10%. Therefore, the shape and composition of the government is always important. We haven’t reached a point where politics and economics have been totally divorced from each other. Until that disconnect happens completely, the kind of government we have at the Centre will have an impact.
Yes, lot of it was through acquisitions but we have also grown organically, and we plan to continue to do that on the basis of what creates most value — acquisitions or brownfield or greenfield. The experience in acquiring and assimilating assets also has been quite outstanding in the case of UltraTech and we have got a playbook now on how you integrate acquired assets in the true sense — culturally as well as in terms of numbers — at the earliest. I would think our priority still remains in India in the case of cement. Having said that, if there is an opportunity overseas, we will look at it. India remains a high-growth market. There was 9% growth in FY18 and there is likely to be double-digit growth in FY19. There is a large government push on infrastructure and affordable housing, and if the economy has to keep growing at more than 7%, infrastructure must keep pace. You don’t have any other economy where cement growth is happening at the same pace. So, it becomes the most logical destination for further growth.
In copper, we have operated all through at full capacity. Availability and pricing of concentrates is very important in the copper business and the part of the copper business that we are in, we are pretty much a converter ... we wouldn’t want to be completely dependent on the market for purchase of concentrate. So, the availability and pricing is the important determinant of whether or not to grow. So, we are constantly scanning the environment for that. You also have the domestic market that, despite having a sufficient capacity both in the case of aluminium and copper, half of the market is catered to by Chinese imports which means that we then have to export and earn less on exports than we could by selling in the domestic market, which is a sorry state to be in because it doesn’t serve the purpose of Make in India. It’s not a competitive field and its sad to think that half the demand is met by Chinese manufacturers.
You have a large amount of imports coming in for copper as well which could well be avoided, especially in the case of aluminium. You have countries all over the world that are very quick to put anti-dumping duties and safeguard duties. We as a country have been very shy in doing that. The only exception that I can think is of steel. What’s important is to be a responsible member of the WTO which India is and a true global citizen that we are, but it is equally important to study how other countries do this because where it is legitimate to provide protection to your local industries, especially when it is important from the point of view of employment generation, manufacturing has a huge multiplier effect on employment for example.
The availability and allocation of natural resources now is obviously a much cleaner and transparent process through the mechanism of auctions. That is one feather in the cap of this government.
FTAs were signed in the previous regime and they are extremely harmful and need to be relooked at. Most of them are one-sided, don’t help Indian industry and again when Make in India is such a large theme, and creation of jobs has become a huge issue, why would you want to sign an FTA which hurts Indian industry?
I think the government understands the need for doing away with FTAs. This government is very cautious in terms of being a very responsible global player, so they don’t want to take an action that is seen as being out of line in any way. For example, I don’t think they want to be adversarial to China in any way at all, which is perhaps an important part of the reason behind not protecting domestic industries from China. But it’s not about protecting, it’s about providing a level playing field. So, the government’s general view is that it needs to be reviewed when it comes for revision and one hopes an objective view will prevail.