'I think I am an entrepreneur'

Kumar Mangalam Birla is rapidly expanding his business. Last year, he acquired Novelis for an enterprise value of $ 6 billion, one of the largest overseas acquisitions by Indian companies. Simultaneously, he is betting big on retail, BPO and telecom.

When did the idea about the Novelis acquisition first come about and what was your first reaction?

In the first three months, we went from not taking it seriously to realising that there is some logic in this. We started of by thinking that it is outrageous. We didn���t articulate it, but yeah, that was the sense. When the proposal came, it���s not that we started actively acting on it on a day-to-day basis.

We just left it. Like I said, it was outrageous. Slowly, we got convinced that there is some logic to it and that we will have to look closely at the numbers and study the company, why it had not done well in the past and whether we could solve the problems. After those first three months, after reconciling to ourselves, at least after a desktop study, we spoke to the management, the board and said we are interested. And surprisingly, they said it���s not a bad idea. Then, we went through another 12-month process of due diligence.

Finance was a bottleneck, and so the finance team had to work with the strategy unit. But as the process went on and on, we became more confident of taking this on and turn it around. And I think the due diligence findings in terms of technology, in terms of quality, customer feedback and most importantly, in terms of the quality of the team and how we thought they would fit in to our culture in terms of attitude, was very positive. All of that reinforced our belief that this was a good asset.

Considering the scale and size, did you have a clear idea about the reasons? Was the strategic rationale nailed down?

At that moment, Hindalco was an aluminium and alumina player and we needed to scale up. Greenfield projects like Utkal Alumina and Aditya Aluminium give us a much stronger presence in the alumina and aluminium upstream, part of the business and value chain. What we also wanted was a very large presence in downstream products. I think for any commodity play, it is important that consistently you should look at going up the value chain and increasing the value-added products in your portfolio. The more you do that, the more insulated you get from the commodity cycle, that���s very clear.

We clearly had a plan. A very clear strategy that we need a much larger presence in the downstream sector with the largest segment being rolled products. So, we did Novelis on two or three counts. It is the world���s largest rolled products company across continents, except one where it���s No 2. It is No 1 in all its markets. Secondly, it has got state of the art technology. It would take us about two decades to get to that level. So that���s leapfrogging into technology, which is many years ahead. Also, its technology is many notches above that of the competition.

The last important thing was that it gave us proximity to customers, and downstream assets. In global play, you can���t have downstream assets in India and transport those to customers globally. Here, you have a company that has presence across the globe. The other thing was that Novelis was a kind of hedge to a player like Hindalco. A downstream play has lower margins and a much steadier cash flow. So what happens is that the LMEs are passed through. Lower margins, but a lot of steady income flow. Coupled with the fact that the scale of the assets is world class, it���s got great locations. And finally, I think, the final dimension was the quality of the team. We did a very thorough check on the team and came up with very positive results. There was great chemistry between our teams and their teams. That was important.

Are you comfortable with the price paid?

It will be a little difficult to compare, because they had given an equity swap as an option. So, it���s a little difficult to do a like-to-like comparison. We really didn���t do too much on that once we knew that we were the winning bidders. Because there was so much more to be done, that it was really irrelevant for us. As far as I remember, the bids were pretty non-comparable. We had an all cash, they had an equity swap.

Why did your relationship with Ratan Tata go sour?

Nothing has gone wrong between us. There was no personal mudslinging. I have tremendous respect for Mr Tata, who has great vision and has taken his group to places. Sometimes, partnerships face bumpy rides. In a partnership, my job is to do what is best for my organisation. I have no personal agenda (against Mr Tata).

You have transformed the group in the past 11 years. Whom did you learn or take inspiration from?

My family is my biggest source of inspiration. They are a very quiet supporter to whatever I do. They are happy if I am happy. I also learnt a lot from within my organisation. To tell you some names outside our organisation, I should mention Hemendra Kothari, Amit Chandra, Pratap Sharma and Robin Sharma. Reading is also another source of learning.

You have operations in different geographies and have companies of different sizes. Will you do some restructuring to create a large corporation to do businesses, such as viscose staple fibre or carbon black to enhance their focus?

That���s something I will do if it makes sense. We have talked about it internally, we will look at it if it adds value.

What made you look at retail as a business?

Basically, it took us about 18 to 20 months to think about the business and it was not just a sudden entry. We just thought that one, there is a clear customer need to start of with, and second, the fact that we have a huge equity as a brand across the country. If the brand is known, as our group is, it gives people more confidence in terms of pricing, quality, etc. But the fact is that there is a clear consumer need with the evolution of the economy and it is something that the country will require.

A lifestyle pattern has clearly evolved as the economy has spread its wings across the world, and at the end of the day, it also makes business sense. We would, of course, have three to five years of time taken to break even and start to show some sense of profitability, but there is strong cash flow after that and there is strong valuation and value creation to be done after that. Today, you know if you have to put up a plant, it takes you 2-3 years and you have to suffer initial losses for three years. That���s not something one is overly concerned about if things move as per plan. It���s almost like a start-up investment.

The power sector seems to be on a high. All players are trying to unlock value in the sector. Do you have any plans to move the power generation capacity of Hindalco into a separate entity and then unlock value?

No, we have no such plans. Power generation is an integral part of Hindalco. We can���t separate it from the company. We have moved from the power business for two reasons: We waited for long, but nothing happened and secondly, it���s a very regulated industry. We are not the best people to handle regulations. It is a very slow and involved process to get into the power industry. We took the decision (to go away from power) nearly two years ago. We pursued the plan for 12 years but nothing happened. The power purchase agreement did not happen; the agreement with Railways could not be stitched up. May be, things have improved a bit now. I am not sure.

So, what���s your plan on Bina Power?

We are putting it on hold. We would sell at the right price. A number of people have evinced interest, but we are not excited with the kind of value being offered.

The group has recently forayed into private equity space.

We want to be a full-fledged financial services provider. For this, we are getting into private equity, scaling up our asset management & insurance businesses and planning to set up a brokerage outfit. This business lost momentum a few years ago, but now we are back on track. On the asset management business, our focus is now to grow the quality of assets. Our funds are among the best performing ones. Investors are recognising this more and more. We have launched a slew of new funds. In fact, we added as many this year as we had up to now. Also, the distribution network is being expanded very rapidly in terms of the number of agents and branches, and the format of the branches is being changed. As a result, we see a lot more traction from within the trade.

The group is getting into the securities business, from which it withdrew some time ago. Isn���t it a flip-flop?

We are relooking at the business. It���s not a capital-intensive one. Since we are looking at fleshing out the financial services business in a massive way, it���s a good time to have a relook at the broking business as well.

Is there any problem with your relationship with Sun Life?

There is no misunderstanding or confusion between us. We are doing private equity on our own. The rest remains as it is.

A closer look at the insurance business suggests that it has become a drag on the profitability of Aditya Birla Nuvo (it runs the financial services business).

Yes, it has. But it is by design. It���s because if you have the ambition to scale up your business, you will have to expand faster. In that case, you losses are bound to mount. You may show profit on your balance sheet by not expanding so fast. But in our case, it is something that has been budgeted for. This business is like this inherently across the world. The higher losses incurred last quarter are pretty much by design. One good thing is that analysts understand this and they are happy because they know it indicates that we are growing in this sector. The bottomline will be positive in only the fifth or sixth year. We were aware of this from the beginning. For us, it will take another couple of years to return to profitability.

What about BPO?

We have Transworks here and Minacs ��� which has a presence in Canada and North America. Two months ago, Minacs opened a centre in the Philippines. They have clients who have understood value in shifting business from the Americas to emerging economies like India and the Philippines. There are not many examples of clients shifting from these markets, but there are examples of clients shifting incremental business to India and the Philippines. We have the best planned roster in our space and adding 2-3 of the Fortune 500 companies in every quarter. We opened three more centres in North America, one in the Philippines and one in Mumbai. A lot of repeat orders are coming from them. I think this business is growing well, and now we have to find ways to make it more profitable, and one way of making it is from offshoring. And that is happening. I think that is a wave we are riding on and will be even stronger from now. We have grown from the country���s 24th player to the third. Now we need to consolidate before we take on more. The internal ambition is not lacking.

We learnt that you are acquiring a carbon black company in Sri Lanka. Is it true?

We are open to acquisitions but nothing is on sight. We are building our Indian arm and expanding in Egypt, Thailand and China. We have moved from being the world���s sixth-largest to the fourth-largest carbon black player in terms of size. More importantly, we are the fastest growing and most profitable company in the world. We are now the third big force after Cabot and Eccousa. We have reorganised our marketing team. We have 2-3 customers, tyre companies who want us to build up capacities wherever they go. Over the last few years, we have become preferred suppliers to huge companies like Michelin and Bridgestone. Essentially, within a year we would double the capacity.

Are you acquiring a Chinese cement company?

No, we have a grinding unit there and don���t have plans to buy anything at this moment.

Will you help Century and Mangalam?

How?

You may join them?


No plans at all. My grandfather will be able to tell you.

You can help them by formulating joint marketing initiatives.

There is no need for it and they are separate legal entities. Cement is becoming more of a product rather than a commodity. They have got their own distribution network. It is not that either of us is a new player who wants to piggyback on the other. So there is no advantage in doing so. It is good to compete in the market.

Don���t have any acquisition strategy in retail?


We decided to go on our own. We bought Trinetra. But there are not many companies available here.

Copper?

Yes, we are looking for mines.

What size?

Roughly around 1 million tonne. Aditya Birla Minerals in Australia is doing very well. It has outperformed the industry by a wide margin.

Have you approached India

Cements?

No, we have not. We heard that India Cements was about to be taken over. So we inquired whether it was true.

Lots of entrepreneurs have made their mark in India Inc. But you come from an industrial family. You inherited business from your father but have also built it up over the years through your own initiative. How would you like to be remembered?

I think I am an entrepreneur. And the idea is to create entrepreneurs across the organisation. All are working in an entrepreneurial environment in the group although they don���t have capital investment. It is a matter of the management���s philosophy to encourage people to take decisions on their own. If you give them leeway to learn, make mistakes and empower them from the mistakes, then you are creating an entrepreneurial environment. It is a matter of how an organisation reacts when someone makes mistakes. If you get crucified, it���s unlikely that he would take risk again.

Does the group provide flexibility to its people to do something new? What happens if they fail?

We have such a large organisation that they can find jobs across the world. We have at least 50 senior managers who have relocated.

If someone of your senior team wants to be an entrepreneur, how would you take it?

We don���t have a scheme to finance him. But I would be happy if he does well.

Is it a risk-taking group?

When we acquired Indal, it was a risk. When we acquired L&T���s cement business, it was a risk. Novelis was to some extent a risk because of its large size of operations. The risk is not evident when greenfield expansion is happening. In the last four years, we have doubled our capacity in viscose staple fibre, carbon black and cement. So we would say we are a fairly high-risk taking organisation although we are not an extraordinary risk-taking one.

There is a perception that you have done costly acquisitions.

Go back and see the price we paid for the cement business of L&T or Indal or Novelis. The difference occurs if you look at the deals with a different time span. If you look at any buy with a two-year time frame, you may find it costly. But it may be an excellent buy if you look at it with a five-year perspective. The price we paid for L&T���s cement business will be earned by this year itself. We got more than eight times of what we paid for Digvijay Cement.

The critics question the valuation you paid for some other transactions like Madura.

I think the criticism is misplaced. The kind of offers I get for Madura are mind-boggling. People are quoting astronomical numbers for Madura.

You get offers for Madura?

We get offers all the time. We are not interested in selling. But the price we are being offered is many times our acquisition cost. May be, we overpaid at the time of the acquisition. But the idea then was to acquire the company and add value, which we did. Also, the idea was to get a platform.

Some of your businesses do not occupy the first two slots. What are you going to do with them?

I said either they should be among the first three or they should be very profitable. We are globally number four in the carbon black business. Earlier, our ranking was sixth. We are Asia���s No. 1 and the world���s No. 8 aluminium producer. So, all the companies are moving towards that direction. We can even be No. 3, but very profitable.

Financial services?

We have given financial services some time. It will take another three years.

Telecom?

The transformation of Idea in the last three years in terms of customers and area of coverage is very good. I am not sure whether Idea will be among the first three. But it will certainly be a preferred company to customers and a profitable player. So much is happening in the telecom sector. We have one or two players, such as Bharti, who are clearly ahead. It is difficult to catch up with Bharti. But there are other players who have their issues. They are not invincible. Also, we will see more consolidation in the telecom sector.

Are you hesitant in telecom?

No, I am realistic. It���s difficult to credibly say we will be among the top three, but we can say Idea will be a very profitable company.

How much time will you give telecom?

Another three years.

It is still a very regulated industry. Are you comfortable?

Yeah, I am comfortable because even after the high regulation, the sector has high potential for growth.

Do you think you will go to the market for retail?

Yes, I think we will go at some point in time. But we have to make sure that we have created critical mass in retail before going to the market. Just to give you a ballpark figure, it may happen in three years. We are very aggressive in terms of opening stores. It���s difficult, but an exciting business and I think the supply chain management is the issue.

Your tower venture may go to the market. Potentially, it could.