While the takeover allows Kumar Birla to break into a new market, the price he has paid could still be too high.

By Roshni Jayakar

It was a deal that was cemented in watermelon juice. The Date: July 7, 1998. The Time: 11:30 a.m. The Venue: Industry House, the headquarters of the Rs 20,000-crore A.V. Birla Group. In the big boardroom on the sixth floor, S.K. Bangur, 64, and K.K. Bangur, 39, the Chairman and the Vice-Chairman, respectively, of the Rs 290-crore Shree Digvijay Cement (Digvijay Cement) sat tensely across from Mahesh Bagrodia, 60, the Executive President of the A.V. Birla Group. Also present were, inter alia, Adesh Gupta, Joint President, Birla Global Finance, B.R. Nahar, Executive President, Vikram Ispat, a division of the Rs 4,022-crore Grasim Industries (Grasim), and S.K. Saboo, Executive President, Grasim. Sans fanfare, the two Bangurs and Bagrodia quietly signed the papers that sold Digvijay Cement to Grasim. It was all over in 30 minutes.

Even though Kumar Mangalam Birla, the 31-year-old CEO of the group, wasn't physically present on the occasion, the conquest was clearly his. Coming as it did less than 3 months after he had annexed his first cement company, the Rs 17-crore Dharani Cements, Birla has, obviously, gone into overdrive to consolidate his position in an industry in the throes of a recession. "Small capacities will not be viable, and the next year will be a difficult one," points out Anil Singhvi, 35, the Treasurer of the Rs 979.17-crore Gujarat Ambuja Cements. So, the larger players are trying to establish pan-Indian presences through acquisitions rather than by setting up greenfield projects.

Agrees Birla himself: "This takeover consolidates our position as one of the largest, and most widely-spread, national cement players." With Digvijay Cement in the bag, the A.V. Birla Group [cement-manufacturing capacity: 10.65 million tonnes per annum (tpa)] stays the second-largest cement-manufacturer in the country although it must still share the spot with the Rs 5,676-crore Larsen & Toubro. Only the Rs 2,469-crore Associated Cement Companies now has a higher capacity of 11 million tpa. Still, did Birla get his strategy right by taking over Digvijay Cement at the price he paid for it?

Eventually, the Bangur-floated company will cost Grasim Rs 182.40 crore--including Rs 113 crore for the repayment of its liabilities. While this transaction immediately took Grasim's stake in the company to 42.41 per cent, that will go up to 62.41 per cent in September, 1998, when the group will have to make an open offer for an additional 20 per cent of Digvijay Cement's equity. Which will cost Birla at least another Rs 21.22 crore. In addition, although a year has gone by since Grasim signed a Memorandum of Understanding to acquire the company, a due diligence report in April, 1998, uncovered a number of undisclosed liabilities, making Digvijay Cement a rather expensive acquisition.

Moreover, the benefits of the takeover will accrue only if Birla can consolidate all his cement-manufacturing units, establishing a common national marketing network for them. That, in turn, will probably have to wait until he inherits from his grandfather, B.K. Birla, 79, the 6.50-million tpa of cement-making capacity of the companies in his group, like the Rs 1,991-crore Century Textiles, the Rs 607-crore Kesoram Industries, and the Rs 244-crore Mangalam Cement. In the absence of a time-table for implementing this grand design, Birla must have wanted Digvijay Cement for what it is too.

That's a coastal cement plant near Sikka in Jamnagar (Gujarat), which has the capacity to manufacture 1.10 million tpa of Portland cement and 0.15 million tpa of speciality cements as well as a captive jetty. A presence in Gujarat makes sense for Grasim--which only has units in Madhya Pradesh (Vikram Cement in Shambhupura and Grasim Cement in Raipur), and Rajasthan (Vikram Cement in Jawad)--since cement-consumption has been growing at the rate of 11 per cent in the last 2 years there compared to the national average of 9 per cent. Since Digvijay Cement has a 9.30 per cent share of the Gujarat market, that will take Grasim's marketshare to 15.50 per cent in the state.

Good for Grasim, whose cement margins have been falling over the last 2 years. In 1997-98, its realisations from cement fell by 15.60 per cent: from Rs 1,325 per tonne to Rs 1,118 per tonne in the previous year. Of course, Grasim will face stiff competition from companies in Gujarat, like Gujarat Ambuja Cements and l&t Cement. Warns T.V. Swaminathan, 52, the Senior General Manager (Operations) of the Rs 855-crore India Cements: "I don't know if the acquisition really makes strategic sense for Grasim because Gujarat is not the place to be in. There are a lot of aggressive competitors there."

By another yardstick, the price Grasim has paid for Digvijay Cement seems great if compared to the cost of setting up a similar greenfield venture. A BT calculation shows that the enterprise value of a greenfield 1.25-million tpa plant with a jetty would be between Rs 550 crore and Rs 575 crore. By contrast, Digvijay Cement's enterprise value is Rs 279.10 crore, which breaks up into Rs 106.10 crore (the value of the company's Rs 7.45-crore equity at Rs 142.39 per share); Rs 57 crore (Digvijay Cement's debts); Rs 60 crore (its planned capital expenditure on 12-mw generating sets for captive power and the deepening of the jetty); and Rs 56 crore (its sales-tax liability, to be paid in half-yearly instalments over the next 5 years).

Forget replacement value for the moment; look at Digvijay Cement's earnings potential instead. Says Vasant Srivastav, 29, Analyst, Credit Research & Investment Services of India: "Operationally, Digvijay Cement's wet-process plant (capacity: 4.15 lakh tpa) will not be as efficient as its dry-process plant (8 lakh tpa)." So, the fact is that Grasim has bought a 13-year-old dry-process plant and a wet-process plant set up in 1944, which have hardly over-performed. Even in 1995-96, a good year for the industry, Digvijay Cement's balance-sheet showed net profits of just Rs 2.50 crore.

Then again, Digvijay Cement's wage-bill of Rs 19.16 crore in 1996-97 (size of workforce: 1,600) sends eyebrows shooting up. A new cement plant with a capacity of 1.25 million tpa would have a wage bill of Rs 3-4 crore per annum. A more relevant comparison, however, is with the 6.50-million tpa Gujarat Ambuja Cement's plant, whose wage-bill is Rs 16 crore. "Manpower optimisation is a priority. In 5 years, we hope to prune the workforce at the Digvijay Cement plant to 850," admits Birla.

Perhaps it was Digvijay Cement's jetty that was the clincher for Birla, who argues that it can be used for the export of clinker and cement as well as the import of coal. With the modifications to the jetty likely to increase its dry bulk cargo-handling capacity from 1 million tpa to 2.30 million tpa, there could be savings in terms of the freight- and port-handling charges on Grasim's coal imports. Admits Dhawal Mehta, 28, Analyst, UTI Securities: "Having a captive jetty is a big advantage since it increases Grasim's ability to service different markets."

Perish, however, the tangential benefits of the takeover. Avers Birla himself: "We are working to see a total turnaround at the plant." Clearly, while Birla's second acquisition in 90 days may have consolidated the group's size in the cement business--which isn't everything--the synergies from them have yet to be cemented.

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