Behind KM Birla's contrarian move

Namrata Singh & Baiju Kalesh / TNN / Sep 18, 2005, 23:50 IST

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Kumar Mangalam Birla, 38, chairman of the India's third largest business conglomerate, merged a clutch of his companies.

Mumbai: Last week, Kumar Mangalam Birla, 38, chairman of the India's third largest business conglomerate, merged a clutch of his companies.
The move was hardly surprising, given that Birla had been spring cleaning his empire since he took over in 1996, merging, selling and consolidating businesses.
But, the latest move is significant. Unlike his earlier attempts to consolidate similar businesses to form mega companies, this time Birla has merged motley businesses like fertiliser, financial services, carbon black and fashion garments into a new entity called Birla Nuvo.
Birla says that his new company will be the springboard for the future growth of his empire. It is not difficult to see why.

Nuvo packs all the big businesses Birla ventured into after he took over as chairman of the group ��telecom, garments, BPO and software. Apart from Hindalco's copper and...
... aluminium and Grasim's cement businesses, Birla believes Nuvo will power growth of Rs 35,000-crore Aditya Birla group in future.
But here's the moot point: why is the young Birla so hopeful of squeezing growth and cash out of such a motley portfolio? What does he have up his sleeve?

For that, one needs to go back in time. Till the late 80's, the Aditya Birla group was just as big as the Tata Group or Reliance in size.
But now, the Tata group is over Rs 77,000 cr in size, while Reliance had grown to Rs 99,000 crore, before the brothers split.
Both invested significant money in both their core businesses and new ones to gain scale. Birla spent the same time re-arranging and streamlining his businesses.
Today, he appears to have been somewhat left behind. Now, it isn't as if Birla didn't have the Big Ideas. He was among the first few in the private sector to invest in the telecom industry.
He bought clothing brands like Arrow, Van Heusen with a view to set up a chain of apparel stores across the country, even before retailing became a buzz word.
Yet, many of his new businesses aren't still names to reckon with. Why was...
... Birla unable to capitalise on his ideas while competitors marched along?
Simply put, Birla's portfolio was arranged in such a way that he could not easily invest big money into his new businesses.
On the other hand, Amabnis used the flagship, RIL to fund Reliance Petroleum. Tata Sons funded its financial services and telecom businesses.
Birla took a decision of not diverting money from one business into other. Also, Birla's shareholding in group companies were small to allow for any dilution.
He held a large stake in Indo Gulf Fertiliser, a cash cow but it had little growth prospects due to government policies.
While, Birla had built his new businesses via Indian Rayon, which did not throw up the cash the new businesses needed, Indo-Gulf's cash could not be put to productive use.
In Nuvo, Birla has sought to solve this cash problem. By merging Indo-Gulf's fertiliser business in Nuvo, Birla will get an additional cash flow of over Rs 450 crore every year.
As Birla's insurance business grows, Nuvo will give Birla the flexibility to cover up for increased capital adequacy. Nuvo brings in more advantages.
Birla will hold 38% in the new company, 10% more than he held in Indian Rayon. Birla has chosen to give up the steady cash flow from his 58% stake in Indo Gulf.
Instead, he's banking on the fact that the value of his stake in Birla Nuvo is expected to be higher than the value of his individual stakes, after the merger takes effect.
With inputs from T Surendar

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