Business India
April 3, 2011
Birla is aiming to become a $65 billion group by 2015 with aggressive moves in domestic and international markets
Soft-spoken and extremely polite, Kumar Mangalam Birla, chairman, Aditya Birla group, is not the archetypal industrialist – certainly not the one portrayed in the Hindi films he loves to watch. The quiet demeanour, giving the impression of being at peace with himself and the world, does not give any indication of the raging fire in his belly and the insatiable hunger for growth.
After taking charge of the $2 billion empire at the age of 27, post the untimely death of his father Aditya Birla, KMB has worked smartly to grow it to $30 billion over the last 15 years – a feat rivalled by few.
Many would have been satisfied – but not KMB who has been emboldened to dream big and aim even higher. With the confidence gained over the last 15 years in growing the business, especially after successfully turning around Novelis, one of the group's biggest acquisitions till date, KMB has set an ambitious target of doubling the worth of his empire from $30 billion to $65 biIlion by 2015. He agrees that it is a challenging target. "It is an energising vision," says KMB. "The future is an expression of your dream."
Coming from a family of visionaries, he can dream big and set challenging targets and evolve strategies for attaining the same. Undoubtedly, the business environment in which KMB operates is vastly different from what was prevailing during the time of his father Aditya Birla, grandfather B.K. Birla and great grandfather, the legendary G.D. Birla. The group began its growth during the licence raj. Capital was scarce, the allocation of assets was done by the government and draconian acts like the MRTPC prevented companies from building size, even as the nation was in building mode. While manufacturing continues to remain the bedrock of the Aditya Birla group, KMB, a businessman of the new era who came after the dismantling of the licence raj, has tweaked the group's philosophy to take advantage of the new environment. Old economy assets are being balanced by new ones in the finance, retail and other service sectors.
| $30 bn and growing |
| Rs crore |
M-cap |
| Hindalco |
40,105 |
| UltraTech |
28,217 |
| Grasim |
21,832 |
| Idea Cellular |
20,094 |
| AB Nuvo |
8,826 |
| Aditya Birla Chem. |
304 |
| Aditya Birla Money |
144 |
| Overseas Business* |
15,750 |
| Total |
1,35,272 |
| * Marketcap of companies listed in India as on March 15, 2011. Overseas Business estimated, excluding Columbian Chemicals & Novelis |
In the early 1990s, Aditya Birla, in a conversation concerning the group's policy and the philosophy driving its growth, had explained why his group would not set up an FMCG company producing toothpaste or soap. He reasoned that the risks associated with creating brands were quite high, given fickle consumer preferences. It made more sense to set up companies in sensitive industries requiring huge investments, high entry barriers and assured demand, which would meet the requirements of a young, aspiring nation. It was this philosophy of the group, which had started off as a textile group, getting in diverse but unrelated segments: viscose staple fibre, aluminium, cement and chemicals.
Hindalco, Grasim and Indian Rayon (now Aditya Birla Nuvo) were the flag-bearers of the group that were chalking out a brave new world. In 2011, the same companies are still at the forefront of the group, with new ones like UltraTech Cement and Idea Cellular being added to the group.
Even as aluminium, cement, rayon and textiles continue to grow at a scorching pace, the group has built a strong presence in new sectors like telecom, insurance, financial services, lifestyle and retail. As against Graviera, which was the only brand in textiles earlier, investments have now been made to create strong brands like Allen Solly, Peter England and Louis Philippe in textiles, UltraTech in cement and several others across the spectrum. Consolidation of the fragmented cement capacities housed in different companies (a legacy of the licence raj) and the restructuring of the group's portfolio, as well as entry into new sectors like retail under KMB's leadership have all been well-documented and do not merit repetition. These are some of the more visible initiatives taken under his leadership. Recognising KMB's contribution in the competitive environment, Business India had selected him as the Businessman of the Year in 2003. At that time they wrote "With the destination clearly charted out, the resources by and large in place, guidelines clearly delineated, Birla is set to take the group places."
KMB has indeed transformed his group into a judicious blend of asset-heavy and asset-light sectors in the portfolio. His globalisation drive and emphasis on building global scale and size has seen several companies in the group taking leadership position in their sectors. UltraTech is the largest producer of cement, ahead of ACC. Hindalco is the largest aluminium producer in India and among the top 10 in the world. In viscose fibre Grasim along with the overseas entities are the largest producers in the world. And Idea Cellular telecom is already No 3 by subscribers in the GSM space. With the recent acquisition of Columbian Chemicals the group is also the biggest in the carbon black industry and insulators globally.
In other sectors like financial services and insurance, it also ranks amongst the top five in the country. And it is not just in India that the domination manifests - it is seen in the global arena too. With a 52 million tonne cement capacity, post the housing of all cement businesses in UltraTech Cement and the takeover of the UAE-based Star Cement, the group now ranks eighth amongst global companies in the cement sector.
Clearly, KMB has transformed the group to a new level. "He is clear-headed, balanced and has steely determination. I have been extremely impressed by his global forays. His father dreamt of going global having expanded the footprint of the group in South East Asia, at a time when no else had the vision. Kumar Mangalam has shaped this vision to new heights by his aggressive acquisitions overseas," says Harsh Goenka, a family friend, with the bond growing through the years.
Building scale
In a bid to scale up globally, in each of its main sectors, the group has been pursuing an aggressive M&A policy, with nearly 21 acquisitions made in the last 15 years. In the telecom space, for instance, the rise to the top has been largely through acquisitions. Established as a joint venture with AT&T in 1995, the Birlas joined hands with the Tatas (whose stake it subsequently bought out) and acquired RPG Cellular, Escotel and Spice Communications. Today, the company enjoys a market cap of nearly `21,000 crore, making it the fourth most valuable company in the group after Hindalco, UltraTech Cement and Grasim, followed by Aditya Birla Nuvo.
Novelis' takeover was a redefining moment for the group as it took over a company almost three times the size of Hindalco and successfully turned it around. Having one of the largest rolling capacities and with a blue chip client roster like Coke and Pepsi, the takeover was effected for $6 billion in the heydays of 2007, when many Indian companies were aggressively hunting for assets in the global markets. Once the US sub-prime crisis started, many feared that Novelis could be a millstone for the group. The price of Hindalco dropped to a low of `38 in March 2009. But KMB was not fazed. He was clear about the long-term value of Novelis. With global recovery and a renewal of contracts at better rates, Novelis has started making a positive contribution to the bottomline. With Hindalco also aggressively pursuing organic growth, it will move up in rank in the global market. The group recently took the pole position in carbon black, following the takeover of the US-based Columbian Chemicals. It is now capable of meeting 20 per cent of the global demand of this key intermediate raw material, largely used in the manufacture of tyres.
KMB has successfully transformed the group into a truly multi-national entity. It is, by design, pursuing a balanced model in so far as it is not dependent on any one country's development for its growth. Currently, only 40 per cent of its total income comes from India, while the balance comes from its overseas operations, as well as exports.
'We would like to dominate the industry we are operating in', has been Birla's mantra. "We are always open to looking opportunistically at inorganic growth options provided it passes the strategic and financial filters we have set for ourselves," says Ajay Srinivasan, chief executive officer of Aditya Birla Financial Services, part of Aditya Birla Nuvo. However, what is noteworthy about this growth is that it relates to quality - growth with a clear eye on profitability and sustainability. Secondly, this growth is clearly linked to the overall strategy of becoming a global player of significance in each of its sectors in a borderless market, even as it continues to expand its presence in the domestic market. Even then, Aditya Birla had a vision of becoming a multinational company and set up production bases in four countries. KMB has carried through his vision and established a presence in more than 25 countries across the globe.
"Kumar Mangalam has delivered. He has put in place a high-quality professional management team, which is empowered and stable and has delivered strong shareholder value," says Gunit Chadha, CEO, Deutsche Bank, India, adding that there is a clear segregation between management and ownership. Other bankers also readily agree. "KMB has done a wonderful job of creating world beaters, both in terms of scale and cost structures," says Rohit Chatterjee, MD, investment banking, J.P. Morgan. By general perception, this is the one group that bankers love to bank on.
Going forward
The strong bases are now firmly in place. The group is working on a focussed strategy to leverage the Indian advantage in building global leadership in their chosen business. "If one were to analyse the strategic initiatives of the group, it is evident that it seeks to build businesses of global scale and reach, without compromising Indian leadership and the advantage it enjoys in the chosen segments," says K.Balakrishnan, MD, Lazard Brothers, India. "Aluminium required access to technology and markets for downstream products, which explains Novelis (albeit a bit expensive but, in the medium to long-term, these incremental costs would not matter)," he adds. "Carbon black needed access to high-end technology, which explains Columbian. Cement is a local play and extremely well equipped. Its growth is in India and, with a 52 million tonnes per annum (mtpa) capacity, it is a bit of a gorilla anyway."
"The Birla group is a strong business house, ethical and following the best practices. KMB has been able to bring to it a clear strategic focus," says Motilal Oswal, founder, Motilal Oswal Financial Services group. "He has successfully managed to build a professional and empowered team run by passionate business heads. I think the group is clearly an Indian MNC, thinking and acting globally." Birla has a clear strategy to step on the growth accelerator. Clearly, he is counting on replicating his success formula, fine-tuned over the last 15 years, of building capacities of global scale across geographies, to achieve his aim of getting to the $65 billion mark. The factors that contributed most to the group's success are the "empowerment of employees, clarity of vision of where we are going and consistency in implementation, which ensures no last mile exhaustion," says KMB.
Empowering the team
"The transition to a professionals' driven group is in a sense a bloodless coup of sorts, which has transformed the group," says A.K. Khandelwal, former chairman, Bank of Baroda. "Today, he is perceived as an outstanding leader, strong-willed and humble."
KMB is depending on this group of professionals to drive growth in the group. While historically, the Birlas were not keen on entering the FMCG business, the admiration for the people manning them was always there. Quite a few of the key members - such as D. Bhattacharya, MD, Hindalco; Santrupt Misra, business head and director, Carbon Black; and Gautam Chainani, Aditya Birla Financial Services - are former Unilever men. Retiring key persons' positions have been filled with a younger set of professionals, bringing down the average age of the group from 56 in 1995 to 36 today.
In an erstwhile male bastion, women have been accorded significant importance. From a handful in the 1990s, women currently form 17 per cent of the total workforce across the group. With an emphasis on merit, people are being empowered to take decisions and team work is encouraged. While critics point out that there is an inner coterie, which has all the powers and sits on teams which take key decisions, Santrupt Misra, overall in charge of HR, scoffs at the idea. "Different teams are formed to examine different issues, including key decisions involving group companies. KMB is never influenced by any individuals. He tries to harmonise different views before arriving at a decision."
Some compare the style of Birla to the Tatas, Ambanis or Essar. KMB however, practises a somewhat unique style. He does not believe in controlling day-to-day operations, preferring to leave it to his empowered team of professionals. He does not travel frequently, unlike the Ruias or Ratan Tata. Monitoring is done through reports presented by his key executives. While Birla does believe in delegating, he takes a keen interest in allocation of capital – be it for new projects or for M&A transactions.
In case of new projects, monitoring cash generated by each asset currently, and the expected future streams, are thoroughly debated before a final decision is taken. In case of sectors like aluminium and cement, cash generated by the companies is being used to fund their own expansion and growth. As against the earlier practice, common in India, when 'white' capital was scarce, where cross-leveraging of group companies' balance sheets was done to fund entry into new business lines or takeovers, KMB has now housed all new businesses in Aditya Birla Nuvo, along with existing matured businesses. When the new businesses attain sufficient scale, they will be de-subsidiarised and spun off – as Idea was done recently – and allowed to raise funds on the strength of their own balance sheet.
De-risking strategies
The strategy of having a conglomerate double up as an incubator helps de-risk other group companies, in case one of the new capital-intensive ventures fail. Despite all the care taken, if one does eventually fail, only Aditya Birla Nuvo would be at risk – and not the other group companies. Insurance, broking, NBFC, AMC, private equity, etc, are thus housed as divisions of Aditya Birla Nuvo, along with the group's other businesses like Fashion and Lifestyle, and manufacturing divisions like carbon black, insulators, fertilisers, textiles and IT and ITES.
"Everyone has his own style of functioning," claims KMB. "Being hands-off does not mean dereliction of duty. I intervene where I feel I can make a meaningful contribution." He is rarely known to shout or have outbursts at work or otherwise. A trained chartered accountant, KMB has an eye for figures and can easily look through the clutter to arrive at a decision. Though he may be determined, he does not hesitate to change. "He has no ego. He is extremely humble and this aspect of humility comes across the group,' says Parag Parikh, a BSE broker and long-time Birla watcher.
Birla's acumen is well recognised. He holds several key positions on various regulatory and professional boards, including the RBI and SEBI, and also serves on the Prime Minister of India's Advisory Council on Trade and Industry. "KMB is one of India's most outstanding young business leaders. He has displayed remarkable vision to take the Birla group to new heights," says A.M. Naik, CMD, L&T.
While relationships with bankers and stakeholders had always been cordial, KMB is perceived by many who do not know him as reserved. And, he is trusting to a fault. Till it is proved beyond doubt otherwise, he will continue to believe in an employee, says Misra. It is this trust and respect for professionals, which influences KMB to rarely effect changes in the management of companies taken over. Like the Tatas, the group rarely imposes a new management team to replace the existing one, preferring to win their trust and confidence.
The style of management and the strategies adopted by KMB will be case studies at business schools in years to come. The fact remains that having grown 15 times in 15 years, Kumar's score card is very impressive. "KMB has kept the reputation of Birla intact and, if one were to rate all the inheritors of family businesses and their value-additions, KMB would emerge in the top quartile of the most successful ones," says Vimal Bhandari, country head, Aegon India.
The $65 billion target
Going forward, like in the earlier period, the group will be pursuing growth through both organic and inorganic means. Hindalco, along with Novelis, which currently accounts for 46 per cent of the group's turnover, will, in all probability, continue to retain its leadership position in the group, even in 2015. It is currently implementing major integrated projects, involving capital expenditure of `40,000 crore. These brownfield and greenfield expansions will increase aluminium production from the existing 550,000 tonnes to nearly 1.75 mtpa.
Capacities in downstream products are being expanded too. Hindalco also remains a big contributor to the bottomline. And will look at leveraging Novelis' relationships with its customers to expand Hindalco's presence in global markets; more so, as it will be building capacities in downstream segments too. A back-of-the-envelope calculation shows that the aluminium and copper businesses will contribute $24 billion even at current rates, by 2015.
UltraTech Cement, the next biggest contributor to turnover with a capacity of 52.5 mtpa, is also on a huge expansion drive. New capacities of 25 mtpa are being envisaged by 2015 at a capital outlay of $3 billion (Rs13,500 crore). The acquisition of ETA Star, which has a presence in the Gulf, Bangladesh and Pakistan, will be used to further expand the regional footprint in South Asia. Even on a conservative basis of Rs4,000 per tonne in 2015, cement would contribute $6.6 billion.
The recent acquisition of Columbian Chemicals will see carbon black scale up and provide an entry into key global markets, besides adding to its portfolio of products and getting into more specialised products. The carbon black business, which has a turnover of around $2 billion, could easily grow by at least 50 per cent to $3 billion by 2015.
Amongst other big businesses that will add to the target is telecom. This is one area which could see a huge leap, with further consolidation expected in this capital-intensive sector. It may not be surprising to see this sector also growing to the level of cement - contributing $6.6-7 billion. Insurance, currently housed in Aditya Birla Nuvo could, once it is spun off as a separate company, be another major contributor.
Retail is in an early phase. It would be premature to speculate on the future of the business. KMB is pragmatic and not in a hurry to invest huge sums across the business. He intends to build the business brick-by-brick, like he had done in the case of palm oil. Palm oil, (which it exited) like retail, is also a low-margin, high-volume business and requires huge investments in plantations to really see value-addition across the spectrum. The only difference in retail is that the hyper marts and retail stores of MORE can also be used to push some of the garments business and owned, branded products. When KMB set the new target for 2015, he had clearly assessed the global environment, where delayed recovery in several countries offers a golden opportunity for acquiring assets at discounted prices to their intrinsic values. However, KMB is categorical that they are not merely opportunistic and would acquire the assets only if they fit in their strategic goal plan. Strategy first and pricing later, he says.
As things stand, the group may not expand its presence in many new sectors (see interview). The group has plans to re-enter the power business. Earlier, it had a presence in the energy sector. The group had sold off its stake in MRPL, which is now an ONGC subsidiary. It had also divested its stake in Rosa Power to the Ambanis earlier. However, the huge investments it is making in setting up captive power plants for its integrated aluminium projects and the experience gained has probably made them reconsider the decision.
The second business that the group has already declared its intention to enter is banking, which, KMB feels, fits into the overall plan of Aditya Birla Financial Services. Corporate watchers, however, feel that, while the target is attainable, the company may have to focus more on the service sector which can be grown more rapidly. Currently, the group still has a bias towards the commodity business. The service sector - including telecom, insurance, banking, financial services and retail - holds a lot of promise, both in terms of rapid growth, as also sustained profitability. The challenge will be to ride both the sectors and take the group to new heights, by having a higher focus on conversion of commodities to special products, adding to both top line and bottomline growth.
KMB may also have to invest more time in addressing the concerns of investors, a constituency he can ill afford to ignore, given the huge capital investments required for his projects. After undertaking massive restructuring and cleaning up the cross-holdings of various companies, KMB is clear that he is not in favour of having a three-tier structure. Current government policies do not favour this practice. However, there is no problem in listing Novelis separately, once it starts generating good profits.
While one can argue that the $65 billion target may or may not be reached within the time frame, given the volatile situation prevailing in global markets, the debate would only be over the time period. No one doubts that the target envisaged for 2015 will be reached by 2016 or 2017, in a worst case scenario. And KMB is just 43. Once the target is attained, getting to the $100 billion mark will just be a matter of time. A decade down the line, it would be difficult to imagine that this $100 billion empire began as a group of $2 billion 25 years ago.
|
