It was February 1996, and India was in the grip of the cricket World Cup fever. Two young men sat facing each other at the Industry House headquarters of the Aditya Birla Group at Churchgate in Mumbai, each trying to assess the other. The younger man was Kumar Mangalam Birla, 28, who was then trying to build his own team following the untimely death of his father Aditya Vikram Birla just four months earlier. The older of the two, Santrupt Misra, 30 at the time, was trying to figure out whether he should bet on Birla's vision, giving up a promising career at what was then Hindustan Lever. Birla was planning to break up his group into two, and wanted Misra to head one division's human resources, or HR, function.
Misra asked for time to think it over. When Birla called later, Misra told him: "You can have a team at the top, but cannot have a team as the top," quoting from the biography of a former Nestle chairman to decline the one half of a job. Misra got to head the entire group's HR.
Birla did not ultimately break up the group into two parts, but over the years he has tinkered with the business model, while growing the group about 20 times. He keeps restructuring and fine tuning, all the while monitoring the strategy closely.
MUST READ: Exclusive interview with with Kumar Mangalam Birla
In two hours of relaxed but focused conversations with BT, over tea, coffee and fizzy drinks, spread over two days, Birla explained his philosophy. "You cannot be in several industries where the play is essentially in value creation, not on strong cash flows," he said. (See One Has to Learn New Competencies). While value creation - the retail business, for example - can be monetised through a listing, cash flows are equally important.
Birla's obsession with models and strategy becomes clear when flagship Hindalco Industries' Managing Director Debu Bhattacharya explains how the February 2007 acquisition of Novelis, the world's leading producer of aluminium rolled products - based in the United States, and four times the size of Hindalco then - was aimed at de-risking the metals business. Or when Birla talks of his creation of Aditya Birla Nuvo in 2005 to put cash generating businesses with cash guzzlers under one roof.
When I go to B-Schools for hiring, students ask me if we have a lot of elderly people from Rajasthan working with us: Santrupt Misra
Birla has had a tough time selling this concept of an incubator and conglomerate combined within the group to investors, and accepts that many of his companies are undervalued. His focus on cash is perhaps a legacy of the legendary Parta system (see Not a Penny Less) that his forefathers, canny businessmen from Rajasthan who spread to Kolkata, Mumbai and other cities, used to track daily cash flows. He thinks Parta is a "timeless concept" that can be applied even 20 years hence.
We are continuously looking at infrastructure for opportunities. We have already made investments in renewable energy: Dev Bhattacharya
In 2010/11, the group clocked revenues of $35 billion with operating profits at $5.1 billion. But Birla had been almost written off in the early years, mostly because his style was so different from that of his late father. K.K. Maheshwari, today a director of Grasim Industries who also heads the viscose staple fibre business of the parent group, had worked closely with Aditya Vikram Birla as chief financial officer of Indian Rayon between 1985 and 1988. "Management style is often a function of the size and the state of a business group. Kumar Birla took over the group in rough circumstances and turned it into a global group. Aditya Birla would monitor the operations of the group companies and would be hands on. Kumar has institutionalised systems," he says.
Misra, the newcomer, witnessed at close quarters the attitudes towards Aditya Birla's son. "People admired his father and they found him different," Misra recalls about Birla's first years. "Anything new he tried to do was seen as a departure from the past. People also expected him to work at the same speed and with the same decision-making agility as his father. But having been given the role so suddenly, he needed time to make up his mind." Aditya Birla died unexpectedly in October 1995, aged 51.
|Acquisitions in the last 15 years|
Digvijay Cement Rs 200 cr approx
Indal Rs 1,008 cr
Madura Garments Rs 236 cr
Aditya Birla Minacs IT Services Rs 71 cr
Sun Life Insurance, Canada 74:26 JV
2003: METALS & MINING
Mount Gordon Copper Mines AUD21 mn (Australian dollar)
Indo Raya Kimia Acquired Methane Gas Plant
L&T Cement (Grasim raises stake in the company to 51%)
2005: PAPER PRODUCTS
St Anne-Nackawic Pulp $100 mn
2005: PACKAGED FOODS
Pan Century MYR 423 mn (Malaysian Ringgit)
VSF Plant, China Acquired Methane Gas Plant
|2006: DATA PROCESSING & OUTSOURCING|
TransWorks Information Services CAD 121.75 mn
Novelis $6 bn
Spice Communications Rs 2,180 cr + Rs 544 cr as non-compete fee
2009: FINANCIAL SERVICES
Apollo Sindhoori Capital Rs 200 cr
Star Cement (80% stake) $380 mn
Liaoning Birla Carbon Black Thai Carbon Black acquires remaining 11.46% stake
2010: OFFICE SERVICES & SUPPLIES
Bureau of Collection Recovery Terms Undisclosed
2011: OIL & GAS REFINING & MARKETING
Domsjo $363 mn
2011: COMMODITY CHEMICALS
Columbian Chemicals $875 mn
Kanoria Chemicals Rs 830 cr
Maheshwari adds: "Where they are very similar is in their ambition. Aditya Birla had written a letter to his grandfather stating that he wanted to do something very big. And if you see Kumar Birla, he is very focused on his stated philosophy - that he wants to be among the top three in most of the businesses he is in on a global basis. Their personalities are quite different... their drive and determination to be at the cutting edge and be the leaders is quite similar. It is more a question of style."
If we have to be long, we have to be long in alumina... If we are long on metal, again we would become captive to the alumina suppliers: Debu Bhattacharya
Misra feels Birla's ability to "carry and marry" both worlds helped him win the day. It was a group where outsiders would be appalled to see one manager touching another's feet. "The outsider would not know that such a duo would usually be uncle and nephew," says Misra, who saw nothing strange in such traditions being still prevalent at the workplace. Today, Misra has several courses that teach his Indian managers the proper use of tableware at sit-down dinners, and his western managers the basics of the Indian way of life.
"There might still be parts of the group where the chairman is referred to as 'babu'. It is a term of respect and affection," Misra says, pointing out that no one would object if a Chinese or a Japanese company had such a custom. "When I go to B-schools for hiring, students ask me if we have a lot of elderly people from Rajasthan working with us. In a Japanese company, no one would question if they have lots of Japanese or if people do not retire; it would be lauded as life-long employment," he says.
Some businesses generated a lot of cash but were not able to invest because of regulations: Rakesh Jain
The group did introduce a retirement policy, explaining it in detail and making sure that it was not sprung as a surprise, with those close to retirement getting a two-year grace period and some extra cash. Misra has heard stories of how senior employees would bring their nephews or sons to meet Ghanshyam Das Birla, Aditya Vikram's grandfather, when they completed their higher education, and usually the Birla patriarch would try and place the young man in one of his companies. The Aditya Birla Group still allows such appointments, but only if the candidates are well qualified, and after following processes that any modern company would have on relatives joining the same company.
Our focus is on larger participation... The current journey of 3G is an investment cycle: Himanshu Kapania
In the end, while he infused fresh blood into the group, Birla also retained many seniors such as Askaran Agarwala and Dwarka Das Rathi, who continued to lead group companies. "He inherited a great team, and was able to attract top professionals," says Brijesh Koshal, head of investment banking at Daiwa Capital, who has discussed transactions with the group several times and has friends working there.
One of the roles Birla created was that of people who would determine strategy. Birla says: "Very often people get so caught up in running the businesses that they have no time left for spotting opportunities."
I have gone through many transitions in the group... retail is possibly the toughest job in my career: Thomas Varghese
Dev Bhattacharya, who heads strategy today, started in the group much like Misra, but later in 1996. He had started his career at Tata Motors (Telco at the time), taught competitive advantage in Australia, produced TV serials such as Udaan and the Surf Lalitaji TV advertisement campaign, and also worked for the International Labour Organization. Dev was Birla's hire Number 5 - he was working at Bankers Trust in London at the time. "We would come from our office in Andheri and then spend a lot of time in the parking lots of Industry House, waiting for our meetings to begin," he says of his early days with the group. From strategy, Dev moved to HR and then other businesses, including two years in Canada running Aditya Birla Minacs Worldwide, the group's business process outsourcing firm, before coming back to India in 2008 as head of strategy. His job: scout for acquisitions.
Telecom, copper, branded apparel, BPO, retail, aerospace alloys, seeds and agrochemicals, solar power and wind power
Sea water magnesia, petroleum refining (Mangalore Refineries), synthetic and blended yarn textiles (Gwalior Rayon), spinning, industrial gases, medical gloves, files, refined palm oil, palmolein, glycerin, sponge iron
The group is looking at investment opportunities in Africa, South America, east Europe and Central Asia. "These are not focus areas for the existing businesses. So we do that at the strategic group. We are also looking at acquisitions in these areas," says Dev. Acquisitions will be guided by supply chain issues, product developments, size of target and geography of the region. With the group aiming to grow from $35 billion currently to $65 billion in five years, acquisitions or inorganic growth have to play a large role. Dev says organic growth will account for at least $20 billion of additional revenues, while the metals business, Hindalco-Novelis, will lead the inorganic growth and account for 40 per cent of revenues within five years.
Today, Hindalco-Novelis has revenues of $16 billion, or close to half the group's total. Hindalco's Managing Director, Debu Bhattacharya (his name is uncannily similar to that of the strategy head), had quit his fast-track job at Unilever in London to join Hindalco when he sensed that the Europeans were shunning risk.
The biggest risk Debu took at Hindalco Industries was the acquisition of Novelis, four times Hindalco's size then. "It is like Sensodyne and Colgate. You might make a better product, but can you earn the brand equity of a Colgate overnight," asks Debu. Hindalco had bought sick companies such as Pennar Aluminium in India and some bankrupt copper mines in Australia, and also Indian Aluminium, a unit of Canadian major Alcan (now Rio Tinto Alcan Canada) in 2000, in what was then India's largest cash deal, for Rs 1,008 crore.
These acquisitions had one goal: to make the high-risk aluminium business less vulnerable to price fluctuations on the London Metal Exchange. It was a balancing act between high-margin and volatile businesses like copper mines and bauxite operations, and low-margin and stable businesses such as downstream copper and downstream aluminium.
Novelis, the Colgate of the metals world, brought with it with stable markets, cash flows and technology. "It was outrageous. Novelis was four times our size and was not up for sale," says Debu. "When I went to Novelis with the proposal, they first thought I had come to seek some favours." Once the deal was done (See Novelis & Nalanda) Debu told the top executives of Novelis: "You are suffering from satisfactory underperformance." He nudged Novelis into shape, getting rid of regional fiefdoms and contracts that did not allow it to raise prices even when raw material became costlier.
Today, Novelis is at three million tonnes and plans to go up to four million tonnes. Alumina production will go up four times from the current capacity of 1.5 million tonnes to six million tonnes. Aluminium metal will go up from the current level of 0.6 million tonnes to 1.8 million tonnes. "So we will be long on alumina and play the merchant market, and over time as funding can support we will put up more aluminium plants using the same alumina," says Debu. "If we have to be long, we have to be long on alumina. If we are long on metal again we would become captive to the alumina suppliers."
In India, Hindalco has built excess capacity in alumina, more than its smelters can consume. So, aluminium price fluctuations do not hurt so much. (Aluminium prices are set on the London Metal Exchange, and a flight of capital from commodities in general can bring its price down without any relation to the fundamentals.) Hindalco does not start any new project without ensuring linkages to coal and bauxite mines, even though this has not gone down well with the markets.
Morgan Stanley downgraded Hindalco in early September, cutting its price target by half. Debu brushes aside such analyses. "...Today Hindalco is present in 13 countries and 46 locations... 61 per cent of its assets are outside India. The revenues are at $16 billion... 76 per cent of sales happen in foreign currency... People say I left a multinational to work here, but how is Hindalco not a multinational," he asks.
As Birla says: "Our projections fortunately turned out to be accurate and there was a steep jump in performance. At the end of the day, that's what matters. Financing is a lot about structuring and balance sheets and it has to be driven by a conviction that you are doing it for the right cause."
| Nalanda for Novelis|
The project to refinance the debt taken on to acquire Novelis, the Atlanta-based aluminium rolledproducts manufacturer, was called 'Nalanda'.
Hindalco Industries Managing Director Debu Bhattacharya claims the name was just something that caught his fancy. Was the refinancing fanciful too? It was bold, to say the least, and involved bringing to India some of the cash thrown up by Novelis in the United States once it turned profitable.
Novelis had taken a loan of $2.5 billion, and Hindalco had formed a special purpose vehicle which had a $1 billion loan. Debu says he had a unique problem when Novelis turned around. The company was creating a lot of cash but Hindalco was not allowed to touch it. "We had $9 billion worth of investments lined up in India, and were running short of funds. Novelis was throwing up cash, cash was piling up. This cash was not fungible," he explains.
| STEP 1|
Novelis raised $2.5 bn via senior unsecured notes: part due in 2017 and part in 2020. With this it bought back bonds worth $1.3 bn
Novelis replaced its $ 800 mn asset-based loan with an $800 mn loan for working capital
Novelis entered a new $1.5-bn secured-term loan
Novelis transferred $1.7 bn to Hindalco, adding $200 mn from its treasury. Hindalco was able to retire $1 bn of loan taken for Novelis buyout
Novelis's $2.5-billion loan was re-financed with senior unsecured notes or bonds. The conditions allowed Novelis to transfer the cash to Hindalco if its debt-to-operatingprofit ratio improved above a certain level. Hindalco had also taken a $1.5-billion term loan and $800 million for working capital of Novelis to replace an existing loan of $800 million. All loans had easier covenants allowing Novelis to transfer cash to Hindalco.
"We had to make sure that ... the brother who has more money must be able to transfer to the brother who needs more money," Debu explains. So, while the $2.5 billion taken on as senior unsecured notes was used to retire existing bonds, the $1.5 billion taken as a term loan along with another $200 million from the Novelis treasury was transferred to India as a dividend.
There are the businesses that Birla inherited and those that he started. But he wants every business to fit into his model: balance the cash cows against the value creators. Aditya Birla Nuvo is a microcosm of the group in that sense. It gets the cash-generating businesses such as insulators and fertilisers to fund the new ventures of the group - financial services, telecom and parts of the retail ventures. This experiment ran into serious trouble two years ago. Aditya Birla Nuvo had been formed by merging Indian Rayon, Indo Gulf Fertilisers and Birla Global Finance in 2005. In 2008/09, net profit shrank to half the previous year's level. On a consolidated basis, it reported a loss of Rs 625 crore.
Rakesh Jain, a former General Electric hand, had headed the Aditya Birla Group's carbon black business and was joint managing director of Aditya Birla Nuvo before taking over the reins in 2009. Jain went looking for synergies. The telecom, financial services and lifestyle retail businesses had separate teams for leasing retail space. Jain brought them together, giving the team huge bargaining power to drive down costs. Being also the group head for information technology, Jain ensured standardised systems across Aditya Birla Nuvo constituents.
Jain turned it around, and today the new businesses that are its subsidiaries account for almost 70 per cent of revenues. Net profit has increased by 10 to 15 per cent every quarter for the past 10 quarters. Idea Cellular, in which Aditya Birla Nuvo holds a 25 per cent stake and the group 46 per cent, is now the largest company in the fold by market capitalisation (Rs 32,400 crore) followed by UltraTech Cement (Rs 30,300 crore) and Hindalco (Rs 27,800 crore). There is also a bank on the drawing board. Today, the 10-year-old Birla Sun Life Insurance, a 74:26 venture with Canada's Sun Life, is among India's top six in terms of first premium income. It reported its first ever profit recently. "We will not require further capital," says Ajay Srinivasan, Chief Executive of financial services at the group.
Guzzlers today, stars tomorrow
Ajay Srinivasan, Chief Executive of Financial Services, Aditya Birla Group, and Business Head of Financial Services, Aditya Birla Nuvo
The real face of AV Birla Group may be in the making
Few people know that a large part of the Aditya Birla Group's retail presence is a personal investment by Kumar Mangalam Birla. The business, Aditya Birla Retail, already claims to be the second-largest food and grocery retail chain by number of stores and the third-largest by revenues.
Whenever Birla visits a store, he comes back and shares his experience with CEO Thomas Varghese. Food and grocery today account for almost 80 per cent of its sales, but Varghese wants to invest gradually in new formats. The aim is to turn profitable by March 2016.
Retail is a capital-intensive venture. "We will monetise it, or partly monetise it, at the right time," says Birla. Hint: induct a financial or a strategic retail partner. Competition is not something Birla is scared of. It is evident from his head-on approach in reaching for the top in telecom, retail and financial services. In financial services, Birla hired a global professional, Ajay Srinivasan, way back in 2007 to fill product gaps and scale up the life insurance and mutual fund ventures. A bank licence is the big missing link from the distribution perspective. It will also give access to low-cost funds. But the biggest challenge will be to make the venture a success in a new arena of smaller cities and towns. Birla says: "...I think we fit the bill completely. It fleshes out our financial services portfolio and we are very keen on having a bank."
In telecom, the challenge is to make a success of the ambitious 3G rollout. Himanshu Kapania, Idea Cellular's new Managing Director, created a flutter by slashing 3G tariffs almost by half recently. But how long can Birla keep funding the capital guzzling business? There are already stake sales rumours. If Birla can tide over challenges in telecom, retail and financial services, these businesses could change the face of the group in the next decade.
Birla is keen to add to his ensemble, and the next logical business is infrastructure. "There are always one or two businesses one would want to examine. And I think one of them clearly is infrastructure. Because again there's a huge need for infrastructure," he says. Dev, the strategy head, says the group is looking at everything in the sector, from power to ports to road building. "We are continuously looking at infrastructure for opportunities. We have already made an investment in renewable energy," he says.
However, Birla feels he has all the large pieces in place. All businesses will grow - almost on autopilot but with a dash of acquisitive fervour (the group has made almost 20 acquisitions in 16 years see Acquisitions in the Last 15 Years). And there is enough support for him if he wants to acquire.
"Tomorrow if he wants to raise a large amount of money for another acquisition, he will find bankers ready to take a bet on him," says Sanjay Sakhuja, Head, Corporate Finance at Ambit Capital. Sakhuja, who was with Citibank in the early 1990s, had worked with Aditya Birla at the time of the listing of the Grasim global depositary receipts in 1992. "I had met Kumar briefly in London with his father, but he was studying then and was not involved in the business at all," Sakhuja recollects.
Daiwa's Koshal says: "The way he fought for Indal with Anil Agarwal [of Vedanta] showed his competitive spirit." But Birla's style is not that of an overtly aggressive corporate chieftain. Himanshu Kapania, the managing director of Idea Cellular, who came back to the Birla fold after a stint with Reliance Communications, says Birla's soft nudge is often more effective than a "hard-push" - an obvious comparison with Reliance Communications' promoter Anil Ambani.
What does Birla demand of his companies and their managers? Jain of Aditya Birla Nuvo sums it up when he talks about Idea Cellular: "As long as you are the last man standing and are adding value to your customers, you would continue to grow."
|Not a penny less|
Kumar Mangalam Birla works "normal Bombay hours", except that he is also in office on Saturdays and half of Sundays. On each of those days, he would like to know how much cash came into his group and how much went out. Not turnover, not profit. Cash.
Of course, it will be a bit of a stretch for the chairman of a $35-billion group to actually count the cash, but that is the broad philosophy of the Parta system. A financial performance monitoring mechanism, it has been refined over generations of Marwari businessmen.
Among the Birlas, Ghanshyam Das Birla embraced it wholeheartedly. And his great grandson Kumar Mangalam swears by it. "It is a timeless concept and can be applied even 20 years from now," says Birla.
Many variations of Parta have evolved over the centuries. Lakshmi Mittal, another Marwari businessman who heads Arcelor Mittal, the world's largest steelmaker, reportedly tells his managers to follow Parta-style accounting every day. But, at the heart of all the different variations, the underlying principle remains the same: at the end of the day, there should be a net inflow of cash into the system. If there isn't, something somewhere needs fixing.
-Suveen K. Sinha
Last man standing? We had heard that term at Hindalco, when Debu explained how new projects were being created with low operating expenditure. Power is a major cost in producing aluminium and the company is keen to have its own source of coal. It also wants rights to mine bauxite and to set up its alumina operation at the pithead to save on logistics. "Once the capex (investments in plants and mines) is up and running, we can have the lowest-cost production process. In Hindalco we call it 'last man standing'. Even Mr Birla likes the term," Debu told BT.
It may mean different things in different industries - but clearly the group motto is to be the last man standing in every industry. And Birla is prepared to stand and wait, when that is what he has to do. The Mahan Aluminium project in Madhya Pradesh is ready to be commissioned, and yet the coal block at Singrauli allotted to it was designated a no-go area when Jairam Ramesh was the minister of environment and forests.
Essar and Hindalco were to have mined this block jointly. Birla says: "There is a Rs 10,000 crore plant, it is an aluminium smelter that we are ready to commission in a couple of months. But the coal that we were allocated has been classified as a no-go area." He says they had "completely complied with the spirit and letter of the law", but does not expect to get the coal until the issue is resolved.
"I can't use imported coal because Madhya Pradesh is a landlocked area. The ministry is going back on its commitment. So I hope the new minister will correct the situation. It is very disturbing," says Birla. Actually, it is rare to find him feeling disturbed. Birla is very different from, say, a Mukesh Ambani or even other Birlas. His grandfather, Basant Kumar Birla, still runs his own companies at 90. Kumar prefers to put the right people in the right places. Talent management is a priority for him and his leaders. He involves himself largely in strategy, fine-tuning the business model. He gives his people a long rope and his strategy adequate time to play out.
Birla says he looks forward to his work when he wakes up each day: "I am fascinated by it." And he works through the week, on Saturdays and even Sundays: "My work-life balance is completely messed up." He is actually showing the way to Indian businessmen in many ways: how to be an owner of a company and not want to actively manage it; how to be a serious and ambitious acquirer and yet focus on the big picture. Birla has, in fact, never directly run a business, unlike a Ratan Tata or some of the other Birlas. This is a new Birla, Version 2.0. Additional reporting by Anand Adhikari