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Work the Levers

The foundation of our leverage strategy is to have an efficient capital structure suitable for our industry and to maintain a leadership position, says Kailash C. Birla, CFO of UltraTech Cement.

Kailash C. Birla        Last Updated: June 5, 2013  | 11:46 IST

The Aditya Birla Group is known for financial prudence. Leverage management at UltraTech is part of the core strategy without in any way compromising growth and business leadership. The foundation of our leverage strategy is to have an efficient capital structure suitable for our industry and to maintain a leadership position. We create efficiency by selective and strategic implementation of projects supported by thoughtful leverage.

Our chairman's philosophy of 'Last man standing, first man forward' is our DNA. So, we work in a way that renders our cost structure very efficient. Consequently, during the downtrend in the economy, we are the last man standing. When the growth cycle starts, our better leverage and cost efficiency enables us to be the first man forward.

We decide leverage based on capital structure, debt servicing and investor requirement, and then arrive at an optimum ratio. One of the cornerstones of our strategy is to maintain the top credit rating for both long-term and short-term debt to ensure that we attract the best proposals from lending agencies at fine pricing levels. Our leverage strategy is applicable not only to borrowings but encompasses treasury, working capital management, including inventory and receivable as well as project management.

Once we decide the quantum of borrowing, based on a number of factors, we opt between rupee or overseas borrowing or international bonds. While we evaluate foreign currency borrowing, we consider the fully hedged cost for decision making. This approach eliminates foreign-exchange losses as is the case with many Indian companies.


The numbers
#Revenue: Rs 19,236 crore, up 39%
#EBITDA: Rs 4,194 crore, up 56%
#Net Profit: Rs 2,403 crore, up 76%
#ROE: 20.5%
(Figures for 2011/12; Source: Annual Reports)

Highlights
#Projects worth Rs 12,000 crore that go live in 2013/14 have been funded through internal accruals and borrowing
#Total debt reduced from Rs 4,144 crore in 2010/11 to Rs 3,808 crore in 2011/12
#Acquired management control of ETA Star Cement in the Middle East in 2010

Let me drive home two examples of leverage management. First, on an acquisition: ETA Star Cement (Middle East) was acquired using a mix of internal accruals and debt. We have opted for higher leverage for acquiring ETA Star due to a significantly lower interest cost and existence of natural hedge. Debt was largely through international borrowing.  

Second, treasury management: We maintain appropriate treasury levels and earn competitive returns. Our treasury returns are among the best in the industry. Our treasury also helps us defer borrowing when interest rates are not in our target range.

As a result of such a strategy our average cost of long-term borrowings has been below 8.5 per cent while short-term borrowings have been at less than eight per cent. The company's debt-to-equity ratio on a consolidated basis is 0.48 while the ratio is 0.17 net of treasury.

Kailash C. Birla is CFO of UltraTech Cement. He has been adjudged the Best CFO in the category -  Remarkable Leverage Management (Large).

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