Myopia To Vision 2002

FOR Kumar Mangalam Birla, who took over the reins of the Rs 15,000 crore Aditya Vikram Birla group of companies in 1996-97, it has been a year of baptism by fire. Under his stewardship, most of the AV Birla group companies have announced one of their worst performances in recent history. Flagship Grasim Industries has declared a 17 per cent drop in profit after tax, Hindalco Industries' net profit is down by 2.7 per cent while Indo-Gulf Fertilisers has announced a 25 per cent reduced net profit. The sole survivor is Indian Rayon Industries with an 18 per cent rise in net profit.

KM has reason to be nervous. Long before results poured in, the stockmarket had almost given up on the group companies, once Sensex star performers. In '96, the Sensex declined by 1.3 per cent, while the market value of Grasim Industries plunged by over 22 per cent. The Indian Rayon scrip dipped by over 29 per cent, while Man-galore Refineries and Petrochemicals (MRPL), a new entrant in the AV Birla fold, eroded by over 31 per cent on the bourses. Hindalco managed a rise of over 9 per cent, but it was small consolation when NALCO's scrips rose by 50 per cent.

Industry veterans, however, are far from writing off the group. Nor do they blame KM for its reverses. He's already working on a restructure plan labelled Vision 2002 to take a second look at non-core business. Says a corporate observer unwilling to go on record: "Most of the damage was done by the predecessors. Unfortunately for KM, he's in the unenviable position of heading a group whose famed strengths are being perceived today as its greatest weaknesses."

Institutional investors in particular have shunned the group, although it still has substantial clout in the market. (A few months ago, it abruptly broke off all relations with Citibank.) Most FIIs have downgraded commodity-producing companies. And the recent unrelated diversifications have not helped matters. Explains one equity analyst: "While the Birlas exploited the licence regime to diversify in core sectors, in the current environment, diversification in unrelated fields is not wise. We prefer companies focusing on one or two products, not simply for the benefits of specialisation but also because it makes for greater transparency on the performance of each division."

He does have a point. Over the past few years, the AV Birla group has entered into areas as diverse as copper smelting, telecom,power and bagasse-based paper projects. These companies' balance-sheets don't permit analysts to assess the detailed contributions of each division. The companies operating overseas further cloud transparency within the group. According to broker sources, for some of the new projects, new companies will be floated with equity participation from existing ones. Such diversion of company resources will give little returns to existing shareholders. Also, those investing in the telecom project will get no return for at least seven years. Says an FII analyst: "Substantial value has been transferred from existing companies to new ones. The group has also started desubsidiarisation at prices that are not at all lucrative. "

Even its traditional businesses have turned suspect. Value-addition in commodities, the prices of which are subject to periodic swings, is limited. Production too is expensive. To maintain efficiency, it gets even more capital-intensive. And, the international commodity cycle has taken a downturn.

The steep 30 per cent fall in polyester staple fibre (PSF) prices over the last nine months has worsened prospects for viscose staple fibre (VSF). For the first time in two decades, PSF prices have gone below VSF prices, adversely affecting demand for the latter and upping working capital requirements. The situation is so bad that Grasim, India's largest VSF producer and second largest in the world, has been forced to offer discounts of Rs 4-6 per kg to large consumers. A rise in market preference for 60:40 polyester-viscose over the existing 50:50 ratio will further affect VSF volume growth in domestic markets. At such an inopportune time, Grasim has set up a 60,000-tonnes per annum (tpa) VSF plant.

Margins in the cement division have come under pressure due to anticipated surpluses in markets and rise in input costs. The sponge iron division, which had just recovered from a crippling fire in the previous fiscal year, failed to achieve total capacity utilisation for technological reasons. It needs almost Rs 100 crore to upgrade.

As for Hindalco, aluminium prices dropped over 60 per cent between January '95-October '96. Power breakdowns, rising costs and shutdown for technological upgradation added to the toll. Delay in urea decontrol upset the Indo-Gulf Fertilisers bottomline. Disruption in production due to a fire in the first quarter and a scheduled cut in natural gas supply during the year downgraded its capacity utilisation rate.

OBSERVERS also feel Indo-Gulf's divers-ification into copper with a 100,000-tpa copper smelter at Dahej in Gujarat increases its earnings risk. Apart from excess supply within the country, the difference between the domestic and international prices of copper will also affect the smelter's profitability. In a November 1996 Peregrine Report, analyst Anurag Mathur notes: "Indo-Gulf management estimates its copper smelting costs at Rs 11,000 per tonne of refined copper, as against our estimates of Rs 15,000 per tonne. We find it difficult to believe smelting costs can be lower than Rs 15,000 per tonne and our assumption is corroborated by the fact that Sterlite Industries, which is setting up a similar copper smelting capacity, expects its costs to be Rs 19,000 per tonne. This Rs 4,000 difference can be justified on the grounds that Indo-Gulf is setting up a new plant, while Sterlite has gone in for a second-hand one."

Indo-Gulf may also be facing a capital crunch. Almost all divisions have chalked out massive capital outlay plans that may stretch the group's resources. The market is particularly scared of dilution in earnings of companies which had announced plans to issue equity. Interest costs on short and long-term capital requirements have also increased.

The group has also finalised plans for fin-ancing Rs 8,300 crore worth of major projects in the next three years: the Rs 2,710-crore Bina Power Project in Madhya Pradesh undertaken through Birla Powergen; the Rs 3,690-crore Phase II MRPL expansion; and the Rs 1,900 crore Birla AT&T telecom project. Said KM: "Group companies will invest Rs 865 crore (as equity) over three years in ongoing projects. We believe equity is a more expensive option than long-term debt. In the near future, we aren't looking at tapping the capital market or GDRs."

On the anvil is also a complex web of demergers and remergers to restructure the group. In a meeting held with investors in February, they were assured there would be no dilution in holdings. Vision 2002, which will be ready within two months, will re-examine its non-core businesses. The plan will draw on obvious synergies within the group which has over 50 manufacturing units spread over India, south-east Asia, and Egypt. The corporate strategy cell is working on new investment proposals and evaluation of important global and national developments. "Unrelated diversifications such as steel, fibre glass, paper and pulp have been dropped," said KM last fortnight. Indo-Gulf's Rs 1,900-crore paper project has also been shelved.

While corporate executives are extremely hesitant to talk about the restructure, analysts believe it would make sense for the group to align common businesses and merge them into stand-alone units. Grasim has three cement units with aggregate installed capacity of 52 lakh tonnes, while Indian Rayon's combined installed capacity is 32 lakh tonnes. If these units are merged, it would create a cement unit which, with 84 lakh tonnes capacity, will be second only to ACC. The merged unit would have an estimated turnover of Rs 2,000 crore and a marketshare of over 10 percent. Similarly, the rayon yarn division of Indian Rayon, Grasim's VSF division and the textile and fabric businesses of these two companies could come together to form yet another man-made fibre giant. Synergies in the inorganic chemicals facilities of both these companies could be combined into yet another single unit.

All this has triggered speculation about the demergers and remergers of Birla's cement, yarn-related and chemicals businesses. Also of interest to the financial circles is the issue of cross holdings within the group. Grasim holds around 4.5 per cent equity in Indian Rayon after its recent sale of 22 lakh shares to Hindalco. Both Grasim and Indian Rayon hold large blocks of shares in other AV Birla group companies.

Computing exchange ratios, thrashing out compensation packages and executing Vision 2002 may yet test the mettle of the young, soft-spoken KM. Observers are secretly apprehensive of his capacity to lead a senior team of professionals. Says one: "He's definitely not Aditya Birla who had an amazing capacity to capitalise on the core strengths of his companies and lead a very senior team of professionals." But then, give him time. At the turn of the century, the challenges for KM are daunting. As of now, it's an even bet as to who wins: the babuji culture at Industry House or his Vision 2002.