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GROWTH THROUGH MERGERS & AQUISITIONS

February, 2018

  • What are your views on the current macro-economic outlook?

The economy is gaining momentum. It is evident from the latest GDP and GFCF (gross fixed capital) print for the Q2FY18. In my opinion, the capex cycle could witness a revival after a few quarters with the participation from private sector. The Government has taken necessary steps like NPA resolution, bank recapitalization, push towards affordable housing for boosting economic growth. The rising oil prices is of a concern as it would create inflationary pressure in the economy and also widen the trade deficit (to remain within a range).

  • The government has taken several steps towards improving ease of doing business in India. Do you think we will see more foreign investments coming?

In last twelve months, there are multiple policy initiatives taken by the Government which would improve the ease of doing business in India. The GST Implementation has been a transformational step and has infused a positive confidence in the minds of Foreign investors. Foreign players are willing to participate in the India Growth story as they think the current government believes in fast tracking of the reforms and creating long term solutions.

  • The GDP data for Q2 has shown a bounce-back from the lows in Q1. What is your assessment of the growth in next 2 quarters of FY 18?

The GDP growth bounced back to 6.3%in Q2FY18 higher than 5.7% in Q1FY18 as a result of pick up in manufacturing activity. The economy seems to have shrugged off the impact of demonetization and GST, the two bold moves taken by the current Government. The manufacturing sector grew by 7% (Q2FY18) highest in the last three quarters and we expect a continuation of it in the following quarters.

  • Aditya Birla Group has been in news of late on M&As: merger of Grasim and Aditya Birla Nuvo and Idea Cellular & Vodafone India. What is the group’s M&A strategy?

All our M&A transactions have been driven by a combination of factors: (i) strengthening market leadership, (ii) achieving scale, (iii) deriving synergies, (iv) backward or forward integration, (v) expansion of market size or geographical presence, (vi) acquiring technical know-how etc. All the M&A’s we have concluded in the history of Aditya Birla Group would fall in one or multiple buckets. However, the underlying principle remains embedded in our DNA – long term value creation for all the stakeholders through sustainable and profitable growth with a focus on cash flows and leverage discipline.

  • As part of your inorganic growth strategy, are you looking to acquire assets under current bankruptcy process being supervised by National Company Law Tribunal? If so, which sectors could the group look at?

The Group companies may evaluate specific assets within respective sectors they operate in, on a case to case basis. We are also setting up an Asset Reconstruction Company within our Financial Services business, where we will look at sectors beyond our existing businesses.

  • How do you imagine Grasim’s transformation after Grasim-AB Nuvo Merger?

We see this merger as a transformation of Grasim from a manufacturing giant in cement and viscose, to a proxy of India Growth story. One can take exposure to multiple sectors, which will drive future economic growth of India, through a single net debt free balance sheet.

  • Infra - India’s largest cement manufacturer

  • Digital India - India’s largest cellular operator (post Idea-Vodafone merger)

  • Savings & investment – India’s leading financial services player

  • Manufacturing – India’s largest Viscose & Chlor-Alkali player

Maintaining our industry leadership position, growing consumer facing and high growth manufacturing businesses with unrelenting focus on cost and asset sweating, will remain high on the merged Company’s agenda.

  • Are we going to see more such deals from Aditya Birla Group in the near future?

  • As is evident, consolidation of cement business under Ultratech, chemical business under Grasim, branded apparel business under Aditya Birla Fashion & Retail, and merger of AB Nuvo with Grasim followed by listing of financial services business; have all unlocked shareholders’ value.

  • The Group’s M&A strategy has been to tap both organic and inorganic opportunities to grow larger and strengthen market positioning and unlock value for shareholders.

  • Keeping these objectives at the very core, the Group will keep on evaluating such opportunities.

  • What are your capital expenditure plans for next 12-24 months? What sources of funding do you plan to consider?

We have already announced capex plans for Viscose, Cement and Chemicals business, the funding plan would depend on the actual leverage position of the individual companies, we generally consider a Debt: Equity ratio of 70:30 for funding a project.

  • Aditya Birla Group has proliferated borrowing from the debt capital market. How are you keeping the mix between debt capital market and bank financing?

We borrow at most competitive rates for all our group companies, the choice of borrowing from debt capital markets or loan markets is dependent on the cost of debt, flexibility, view on interest rate and covenants attached with borrowings. We are not agnostic to any debt instrument. It should match our requirement.                             

  • When large borrower framework of the Reserve Bank of India comes in, what impact do you see from it?

We do not expect the larger borrower framework to create a major issue for the corporates. I believe this framework will create a more robust debt capital market as we would be participating by borrowing from the market.

  • With Moody’s improving India’s rating, do you see offshore borrowing an important driver of large source of funding?

The rating revision by Moody’s is definitely a positive news for the corporates borrowing from the overseas market as it would increase appetite for Indian corporate paper result in finer pricing.  

  • What are the capital requirements of the financial services business over say next five years? Does the group have plans to tap equity capital markets for financial services business or will it prefer strategic / PE investors?

Aditya Birla Capital had a grand listing in early September of this year. One of the best known Private Equity player (Premji Invest) has invested in our company. We will definitely require capital as our core businesses are growing. However, suggesting a number would be difficult as we expect newer opportunities to emerge in the market.

Opinions expressed in the article are the author’s own.

 

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