A.V. Birla Group's Chairman Kumar Mangalam Birla: Growing the legacy

It's been barely 24 hours since he lost out to Sterlite Industries' Anil Agarwal in the race to bag the government's stake in Hindustan Zinc but Kumar Mangalam Birla isn't showing any signs of disappointment as he glides into his exquisitely designed seventh floor office. Even though this is the second time success has eluded him in getting a piece of the action in the government's disinvestment programme. In February 2001, Birla had lost in his bid to take over the state-owned aluminium major Balco. Then too it was Agarwal to whom he'd lost.

But as he gets behind his desk, the 34-year-old Birla, who took charge after his father A.V. Birla's death in 1995, his demeanour is more like an investment banker's, his face inscrutable and calm. But getting some of the disinvestment action is important for Birla, given that his Rs 27,000-crore group's main play is in the business of commodities-where scale and volumes are of critical importance if markets have to be dominated and profitability ensured. Birla's commodity businesses include, besides non-ferrous metals like aluminium and copper, cement, fertilisers, VSF, sponge iron, carbon black, and insulators.

Soon the government will put on the block its stake in PSUs like Nalco, Hindustan Copper, Madras Fertiliser, and National Fertiliser, and Birla cannot afford not to make a play for some, if not all, of them.

For reasons that are quite obvious. Although Birla's recent forays have been in infotech (he forked out Rs 71 crore for PSI Data and went in for a strategic tie-up with the US-based Lawson Software), readymade branded clothing (in December 1999, he paid Rs 236 crore for Madura Garments), insurance (he put down Rs 82 crore for a 69 per cent stake in a JV with Sun Life of Canada) and telecom (where Birla-at&t-Tata runs cellular services in Madhya Pradesh, Chattisgarh, Gujarat, Mumbai, Maharashtra, Goa, Gujarat, Andhra Pradesh, Tamil Nadu, and Kerala), these are all small beer compared to the A.V. Birla group's commodity interests. Commodity businesses make up nearly 92 per cent of the group's total turnover of Rs 27,000 crore and generate 95 per cent of the group's Rs 1,400 crore profits. And, says Birla, that proportion's going to remain pretty much the same over the next five years. Birla believes that his 'old economy' businesses can co-exist with the 'new economy' businesses. ''We will for the large part remain in the commodities businesses where we have grown and demonstrated our ability. But, we also need to remain contemporary and, therefore, look at new growth areas,'' he says.

"There is no such thing as commodity--everything is knowledge-based. The challenge is to provide value." Saurabh Mishra Director (Cement & Telecom)

Old Economy Money Mill

Those who know him would tell you that Birla has a long-term perspective. Participating in the government disinvestments and getting a strategic stake in those companies for him is not a mindless chase but an acquisition only at the right price for creation of shareholder value. Birla's is an old economy money mill that runs its high-volume, low-margin commodity businesses efficiently enough to churn out impressive profits and create shareholder value. That has ensured that each of the group companies delivers superior performance so that earnings per share and return on capital employed-the two parameters determining increasing shareholder wealth-show continuous improvement.

With cash generation of the sort that Birla's businesses can manage, it isn't surprising that the Rs 766.5 crore that he spent on acquiring a strategic 10 per cent stake in L&T and the Rs 390 crore that he has invested in the new forays into infotech, insurance, and branded garments in the last three years came solely from internal accruals without recourse to fresh borrowings. Four of the key group companies-Grasim, Hindalco, Indo-Gulf and Indal-had a net worth of Rs 10,348 crore and cash flow from operations totting up to Rs 2,174 crore in 2000-01.

Still, for a group that plans to remain a dominant player in each of the identified commodities businesses, the biggest challenge is of scale. Increasing volumes and lowering cost of production, so as to better margins.

Says Birla: ''Growth in our key businesses has been characterised by consolidation, acquisitions, and restructuring.'' The latest acquisition was in November 2001, when Grasim bought a strategic stake in L&T. The result: Grasim along with L&T dominates the 112 million-tonne cement market with a capacity of 30 million tonnes.

But Birla's consolidation in the cement business began a couple of years ago, when the cement industry was battling a glut in the market and margins were under a squeeze. Says Amit Chandra, joint in-charge of investment banking, DSP Merrill Lynch: ''At a time when cement sector was bleeding, Birla started consolidating.'' First through the merger of Indian Rayon's cement division with Grasim in 1998 and later, using the cash flow from Grasim's fibre business for the acquisition of two cement plants, including Dharani Cements and Shree Digvijay Cement, and greenfield expansions in the profitable southern and northern markets. Along with organic and inorganic growth, the company went in for value creation through an improvement in cost-optimisation measures. Costs of power, fuel and freight that account for 63 per cent of the cost of production have been reduced substantially over the last three years. Adds M.C. Bagrodia, an A.V. Birla Group director: ''In the old days, it was easy to market whatever we produced. And with such apparently limitless demand there was always plenty of scope to put up new plants.'' Not any more.

Value From Commodities

Sure, Birla's businesses are skewed towards commodities but that hasn't stopped him from going up the value chain. Says Saurabh Misra, the director in charge of cement and telecom businesses and the former Deputy Chairman of ITC: ''There is no such thing as a commodity-everything is knowledge-based. The challenge is to provide value.'' Grasim has decided to focus on two national brands-Birla Plus and Birla Super-and strengthen the reach of regional brands like Vikram Cement and Rajshree Cement. The strategy has already paid back. Mishra talks of how in Bangalore, a bag of Birla Super commands a 15 per cent premium in the market.

Grasim set up capacities to manufacture higher value added ready-mix cement three years back, when demand was negligible. But the strategy helped: today, ready-mix accounts for 15 per cent of the market requirements. ''By 2009,'' says Misra, ''ready-mix is expected to grow to 70 per cent.'' A market that Grasim is well positioned to meet.

In aluminum, Birla's Hindalco acquired a 74.6 per cent stake in Indal in June 2000 at a cost of Rs 1,008 crore and invested Rs 1,800 crore in a brown-field expansion at Renukoot in Uttar Pradesh. These moves took Hindalco's marketshare in aluminum to 42 per cent in 2001 and the expansion is expected to propel growth over the next three years. Already Hindalco is the lowest cost producer in the world, with a cost of production of $839 per tonne, against Alcan's $1,153 or Pechiney's $1,148. Says A.K. Agarwala, Director, Hindalco: ''We will take advantage of low-cost metal and leverage our strong presence in downstream products segment to improve volumes of value-added products.''

"You need to constantly renew skill-sets to keep up with competition and the rapidly evolving environment." Debu Chattacharya Managing Director, Indo Gulf

In copper, Indo Gulf has achieved a record of sorts. From a zero marketshare in 1997, it today has more than 40 per cent. That's been possible because of better capacity utilisation (111 per cent in the third quarter of 2001-02) and low energy consumption.

Now, to further strengthen its dominant position in copper, Indo Gulf may bid for Hindustan Copper, which has a 55,000-tonne smelter, and an acquisition could increase Indo Gulf's capacity to over 2 lakh tonnes. Besides, HCL also owns all the mines in the country. No other domestic manufacturer mines copper in India and has to import requirements of copper concentrate.

As for fertilisers, which contribute 20 per cent of Indo Gulf's turnover, and a business affected by the government policy, the group sees distinct advantages in bidding for Madras Fertiliser Limited (MFL) and National Fertiliser (NFL). While NFL is the second-largest producer of urea in India, MFL has a capacity of 4.87 lakh tonne of urea and 8.4 lakh tonne of fertiliser complex NPK and could complement Indo Gulf's operations in the North. And it's not just about enhancing capacities. It's about a new dynamism. Says Debu Bhattacharya, Managing Director, Indo Gulf, who believes there are no mature businesses, only mature managers: ''Today, it doesn't matter what you're selling. You need to constantly acquire, hire or renew skill-sets to keep up with competition and the rapidly evolving environment.''

The New Businesses

Although Birla's sharp focus is quite evidently on the older businesses, the group has been making smaller investments in a clutch of new businesses that could become meaningful five to 10 years later. In some of these areas, the signs of success are evident already. Like Madura Garments, where since its acquisition of five brands the total marketshare in premium shirts has grown from 34 per cent to 36 per cent and in premium trousers from 24 per cent to 30 per cent. Says Santrupt Misra, Director, Birla Management Centre: ''The group has had a history of being successful in the businesses it did not know.'' Next on the cards: build mega brands. Says Vikram Rao, Group Executive President (Fabrics & Apparel Business), Grasim: ''We are taking brands and making them mega brands. We are also looking at retail focus to push the brands.'' In three years, Louis Philippe is expected to be a Rs 200-crore brand and Van Heusen a Rs 150-175 crore brand. Allen Solly, the lifestyle brand, is adding women's wear to become a Rs 200-crore brand, Sanfrisco is getting into jeans and denim wear this year to have a complete range.

The group's software venture, which began as a division of Grasim, has been hived off and renamed Birla Technologies. Last June, Indian Rayon acquired a 70.35 per cent stake in PSI Data, which is expected to provide a platform for tech ventures. Says Mukesh Patel, CEO and Head of software business, who joined the group in 2001 for formulating the group's software business strategies: ''We will continue to acquire new companies primarily through PSI Data, which will include start-ups in the US and UK.''

The group was one of the pioneering business houses to venture abroad and is now chalking out a blueprint for major overseas expansion, including in China, East Europe, and South Africa. The group has operations in 17 countries and at present 30 per cent of the group's Rs 27,000-crore turnover comes from overseas operations. It not only plans to expand its businesses such as carbon black and software, but also scout for new businesses. Sanjeev Aga, formerly the CEO of Birla-Tata-AT&T, has rejoined the group as Director (International Operations) with the group's think-tank Birla management Centre.

Although the group is serious about its new businesses, expect no shift from Birla's core focus: commodities. ''While we may get into two more new areas in the next five years and maybe get out of a few, given our theme of dominant market player in any businesses, in balance the group profile will not change and we will continue to be a commodities player.'' The stockmarkets seem to like that view. Grasim, Hindalco and Indo-Gulf have been quoting at Rs 279, Rs 770, and Rs 43 respectively. Says Investment analyst, Arun Kejriwal: ''While Hindalco, like HLL, is looked at as a defensive investment, Grasim is perceived as a market leader in cement.''

The true test of Birla's focus on old economy businesses will be to see how he is able to replicate the cement success story in copper, aluminium, and fertilisers. He may be the dominant player in the businesses at present, but Sterlite's capacity expansion plans in copper and aluminium could catapult that group to the status of India's largest non-ferrous metals player. In cement, the low-cost producer Gujarat Ambuja, together with acc, poses a clear challenge. Sterlite Group may have won the two rounds of disinvesment so far, but for Birla the game isn't over till the last round ends.