Corporate: Sidharth Birla's Renunciation Gamble

RESTRUCTURING
Sidharth Birla's shrink-strategy

The heir-apparent has decided to exit six of the group's eight existing businesses.

By Suveen K. Sinha

India's business families have discovered a word they had hitherto ignored in the English language. The word is abjurement, and having discovered it, several of them are acting on it. That explains why Sidharth Birla, 43, the scion of the Rs 3,000-crore S.K. Birla Group, believes it is his foremost priority to finalise a deal to sell off the 26 per cent promoters' stake he holds in VXL Landis & Gyr (to Siemens, which already owns a 74 per cent stake in the company). Ironically, the electric meter-manufacturer was the first company set up by his 65-year-old father, Sudershan Kumar, way back in 1962.

The sell-off, if the young Birla has his way, will mark only the beginning of the second chapter in the S.K. Birla Group's post-lib existence. For, after having spent the last two years restructuring the eight companies that constitute his domain, Sidharth Birla has taken a conscious decision to downsize his empire and, possibly, exit, or reduce the promoters' stake in six non-core businesses. Confirms Birla, who repeatedly quoted his father during an exclusive interview with BT: ''We have had to take some emotionally-difficult decisions. But we have given ourselves outside of two years to get out of these non-core areas after tracking their performance and watching the markets they operate in.'' Once Sidharth Birla-who recently quit the boards of six of his companies in an effort to induct professionalism and transparency-does that, the group's size is expected to shrink to a mere Rs 450 crore.

Focus on core areas

In the new scheme of things, the group's focus will be on turning around the performance of its ailing flagship, Birla VXL. The company hived off its soda-ash unit to a group company, Saurashtra Chemicals, in 1999, and now operates exclusively in the textiles sector. And in the two years to go before his family gets out of its non-core businesses, like Mysore Cements, Cimmco Birla, and VXL Engineers, Birla will also, undoubtedly, try to improve their performance. It isn't just lemons Birla plans to sell: his group will also exit from the profitable Sidharth Soya.

Tough tasks indeed. But Birla's hand may well have been forced. Fact: disinvestment is the best way out for a group grappling with underperforming companies, huge losses, and a staggering debt-burden. The immediate agenda for the S.K. Birla Group includes weaving a new future for its flagship, dealing with the current consolidation in cement that will make Mysore Cement non-competitive, and exiting non-core areas such as soda ash (Saurashtra Chemicals), soyabean extraction (Sidharth Soya), and wagon-manufacturing (Cimmco Birla). It is likely that the group will use the money raised to extricate some of its companies from the financial mess in which they find themselves. Agrees the spokesperson of a financial institution: ''We would like to see the cash accruals being used by the group's core businesses, especially to retire their debt.''

So would Sidharth Birla. In 1998-99 (period ending June 30), Birla VXL managed to reduce its debt by 40 per cent (to Rs 266 crore) after hiving off the company's soda ash unit to group-company Saurashtra Chemicals. The company has increased its woollen textiles capacity from nine million metres a year to 14 million metres a year. This will be accompanied by a simultaneous increase in spinning capacity (already up 300 per cent to 36,000 spindles at an investment of Rs 200 crore).

Mere volumes, however, will not guarantee success. That's because Birla VXL's two main brands-OCM and Digjam, which together command a 30 per cent share in the Rs 1,600-crore worsted woollens market-will need to compete with global brands like Reid & Taylor (S. Kumars) and J. Hampstead (Siyarams). Not surprisingly, Sidharth Birla now wants his two front-line brands to stop competing against each other, and consolidate their distribution networks. Hitherto, separate divisions in Birla VXL had handled these two key brands. Next stop? Ready-to-wear garments, a segment that shows a greater growth potential than textiles.

Exit from non-core businesses

For Sidharth Birla, the decision to shrink his empire has not come too late. For instance, the shake-out in the cement sector (which is still on) has seen as many as nine sell-outs in the last two years. Explains Ashish Guha, 42, coo, Lazard India: ''The viable capacity in the (cement) sector is around eight million tonnes per annum. It's time for the smaller players to sell since it will be difficult (for them) to get a good price once the consolidation is over in the next three years.'' With an annual capacity of around 2.80 million tonnes (spread over three units), Mysore Cements' valuation could be around Rs 1,000 crore, or $80 per tonne. It could be worth even more if the cement industry keeps up with the scorching 15 per cent growth rate it exhibited in 1999-2000. This, after an annual growth of just 7 per cent over the previous five years.

However, Sidharth Birla's other disinvestments-except that of Sidharth Soya-are not expected to result in huge inflows because of their current financials (See Grappling With Heavy Odds) and languishing share prices. A sampling: the share price of Cimmco Birla has oscillated between Rs 4 and Rs 15 in the past 12 months; and the Saurashtra Chemicals' scrip is not even actively traded on any of the stock exchanges. That explains Sidharth Birla's continuing obsession with improving the ability of these companies to add shareholder value. He elaborates: ''businesses cannot be run the way they were in the past. We are not happy with the performance of most of our companies. And when the performance-levels are low, the desire to change is enhanced.'' His solution is to induct more professionals into these companies and introduce a new corporate governance code as per the recommendations of Andersen Consulting. The first step in this direction was his decision to step down from the board of six group companies, and appoint professional CEOs.

Given his unemotional bid to restructure the group, Birla might have a fair chance to make a success of it. An additional factor in his favour is the fact that he is the undisputed heir to his father's empire (his sister died a few years ago). Sudershan Birla, too, has decided to back his son's turnaround plans to the hilt. The only snag could come in the form of distress sale of some of the group's non-core businesses, which Sidharth Birla desperately wants to avoid. The million dollar question? Are Sidharth Birla's efforts too little, too late?

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