Kumar Mangalam Birla, chairman of Aditya Birla Group says banks will be more cautious in lending and the balance sheets of companies will matter more than before.
Mumbai: Kumar Mangalam Birla, the 51-year-old chairman of Aditya Birla Group, expects the Indian economy to grow between 7% and 8% over the next few years, because of a slew of reforms such as implementation of goods and services tax, demonetization and the Insolvency and Bankruptcy Code.
“I think we’re seeing improved levels of governance in corporate India and the government. We’re truly integrating with the world economy. I think there’s a definite deep cut that’s happened and IBC is a deep reform…,” Birla said in an interview.
He said banks will be more cautious in lending and the balance sheets of companies will matter more than before.
Such reforms and their effects have given Birla confidence to pursue aggressive growth for his group, as witnessed in his aggressive pursuits in the cement business and the latest acquisition of Aleris, which will make Hindalco Industries Ltd the world’s second-largest aluminium producer. Edited excerpts from an interview:
It’s been 8-9 months since talks started. But there was a lull in between… What happened?
Birla: You broke the story even before talks had started. That was crystal-gazing by you. You had the numbers down very accurately, almost to the last decimals (when you broke the story), it’s surprising you got that. It creates problems for us when you break the story, especially since we are a listed company. It affects the deal-making process, it raises the price. Sometimes other listed companies back off for a while also.
Satish Pai, managing director, Hindalco: There was nothing unusual. These types of deals take a while and we were patient that we don’t overpay. And obviously your leaking the news doesn’t help us. This makes the seller think we’re desperate.
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Can you give the rationale behind this acquisition?
Birla: It’s basically about size and scale and it’s been Hindalco’s intent for a long time to move towards higher value-added product mix. This is in keeping with that. It gives us new customers in auto, in aerospace—a marque segment, strong presence in US, Europe and China, which is very important for us. It takes forward the agenda that has been articulated for Hindalco. Today, Novelis is a very solid business.
Was there at any point that you had to personally step into acquisition talks? Do you agree with the valuation?
Birla: At some point, yes. I think it’s required and expected. Our acquisitions are about value-creation.
It was a very coveted asset and a lot of other players were in the fray. Do you think you paid a premium?
Steve Fisher, CEO, Novelis: It was a coveted asset because they have made investments of $900 million which were not yet reflected in earnings. That’s why there was 7.2 multiple on Ebitda, (which) is very attractive valuation. Our balance sheet and broader synergy perspective gave Novelis an edge. Most others were only interested in the US’s Lewisport asset while we were also interested in getting into aerospace and China, which is going to be our biggest synergy. I think we have a much better perspective than just trying to get into the US auto market. We’re the only supplier in three major production regions for auto—US, Europe and Asia. We have announced expansions in North America and Asia, and we see 14% compounded growth rate in demand for aluminium vs other materials for auto.
We have noticed heightened activities in capacity creation in the cement business…
Birla: Cement demand is going to be driven by infrastructure spend by the government and affordable housing push by the government, so we’re seeing a lot of rural demand. One is clearly seeing double-digit growth here again after a long time. We have grown cement organically. We took over Jaypee, that’s 22 million tonnes. We bid for Binani. Aleris is a similar story in metals for us.
In the last few years, businesses have been disrupted including one where you operate (telecom), clean-up of banks have happened. The companies are forced to become financially prudent. In this backdrop, how do you look at the Indian economy?
Birla: We’re expecting the economy to grow at 7-8% in the next few years. That’s why we’re bullish on metals and cement. I think we’re seeing improved levels of governance in corporate India and the government. We’re truly integrating with the world economy. I think there’s a definite deep cut that’s happened and IBC is a deep reform, much more than GST and demonetization. No government is going to reverse this.
Is being de-leveraged the new normal for Indian companies?
Birla: We have always been very prudent in being leveraged. I think banks are going to be more conscious in terms of who they lend to, they’ll be more picky. Health of balance sheet and earnings is going to matter much more.
What is your outlook on the rupee?
Birla: It’s tough to say. I think it will be range-bound in the next few months. We take a very conservative view on exchange rates. We’re completely hedged on our debt.
In telecom, you are going to need another round of capex for investing in 5G. Do you think you’ll face challenges in raising money?
Birla: No, I think we have a very large base, 400 million subscribers is not something to scoff at. As and when fund-raising is required, it’ll happen. There are no plans in bringing in more promoter funding just now. It is a very exciting journey ahead of us with Idea-Vodafone… Actual work has started now.
This year also marks 10 years of the Novelis acquisition, what are the learnings?
Our takeover of Novelis was very well planned. It didn’t happen on the spur of the moment. Lots of people within Hindalco had looked at it from different perspectives. So it’s been a great buy and a much more multi-national company than Hindalco. It’s been a great learning. And it’s got great talent and great technology. We’ve enjoyed having them as part of the Aditya Birla family. Novelis has worked very hard to create value. Strong balance sheet and it is the leader in every market it is in. It’s a very valuable company and it needs to be reflected in Hindalco stock.