Davos WEF 2022 | Kumar Mangalam Birla On Plans For Financial Services Business
Aditya Birla Capital is trying to better understand the needs of its customers, says Kumar Mangalam Birla.
Aditya Birla Group Chairman Kumar Mangalam Birla said while the conglomerate's financial services business has performed well, it is struggling to capture market capitalisation.
Aditya Birla Capital has performed "fairly well" with regards to "profitability in terms of growth numbers, but in terms of market cap, I think it has lagged," Birla told BQ Prime's Menaka Doshi on the sidelines of the World Economic Forum 2022 in Davos, Switzerland.
Without elaborating on the "fixes" to solve the issue, Birla said tha they essentially focus on "growing faster and building scale faster".
The financial services arm of the Birla group, he said, is also trying to better understand the needs of its customers. "I think we have got a lot happening in the next few years with services."
Birla also hinted that the group is looking to enter new businesses in the digital space like fintech.
"Digital in the lending space, or digital in the health space, could be some very interesting opportunities. In the case of health, it also makes social impact. So, these resonates with us very well," Birla noted adding that it is still in the "pipeline" and they are still looking "at different options."
Watch the full conversation here:
Edited excerpts from the interview:
How do you see the global economy and the Indian economy?
KM Birla: The global economy has been impacted very badly first by Covid and then by the war. If I remember right, IMF had forecast growth of 5.5% for 2022, which is now down to 3.8% globally. Europe is in a bad shape. Growth forecasts for the advanced European economies are down by 1%, the emerging ones are down by 1.5%.
Some European economies may just not grow, I mean actually contract in the next few quarters. So, obviously, not a good time you are seeing. If I remember (correctly), nine central banks in the last four weeks have increased rates. The increase by the Fed has been the highest in the last 20 years.
You are seeing energy prices go up, commodity prices go up, inflation go up, metals, sort of all driven by the fact that Ukraine and Russia are at war and there seems to be no end in sight.
I didn't know frankly that Ukraine is such a huge exporter of food to the rest of Europe. I didn't know that Russia and Ukraine together constitute such a large part of the wheat trade globally. So, obviously, it's dire, trying times.
India stands out just now because we are by far the fastest growing economy. We don't have any structural issues. I think inflation is at 7%, the government seems to have moved quickly and taken steps to contain the inflation.
You have got to see what they are doing in the context of where the world is today. Of all the people I met in Davos in the last few days, I don't think anyone has spoken anything that's negative about India. Everyone's happy to invest in one form or the other. Of course, it helps that other countries are out of favour for one reason or the other. So, I think it could well be our time in the sun.
It is also for many of your businesses their time in the sun right now, given where commodity prices are. What is your medium to long term view on where we are, in what Goldman Sachs has repeatedly called a ‘supercycle’, and whether we are in the middle of it or at the peak of it?
KM Birla: I wish I knew.
But you have been through enough cycles to now be able to gauge how long these last?
KM Birla: Commodities are always a cyclical play. You make money when the cycle is up, and otherwise you work to be the last man standing, which is true for all of our businesses.
You just have had these interest rate hikes in the last four or five weeks. One has to see the impact of that. Obviously, it will affect commodity prices. So, there's a huge macroeconomic layer to it, which one has to really see how it plays out. It’s very difficult to take a call on commodity prices in the medium to long run. I don't know if anyone can do that because there's just so much of flux happening just now.
You have aggressive investment plans, like in aluminum, for a variety of reasons and not just an upcycled reason. I think the world is moving towards larger uses of that metal. But you have an over $2 billion investment plan there and for a variety of your different businesses?
KM Birla: I think that's to do with the time horizon of our investment. Obviously, we are looking at 10-15 years when you are building a new industry or growing in an existing industry.
We are actually looking at multidecadal sectoral trends. When we make an investment. therefore to some extent what's happening on the top is a little bit like froth. Not that it doesn't matter. But if it's something that fundamentally alters the economics of the business, then surely, it is very important.
But, I think business need to look beyond that. If you want to really build businesses for the long run, which are fundamentally strong and competitive globally, then I'd say you have got to take longer term calls.
I don't think that anything here is going to fundamentally alter the attractiveness of borrowing into or increasing your investments in a particular commodity. I could be wrong. But who thought that metal prices would go up so much? Who thought that there would be a war that would last for this long? We thought that it would be 10 days and it'll be over.
Who thought that 75% of the provinces, in terms of their contribution to China's GDP, would be shut for so long? It’s an incredible 300% rise in the Global Freight Index, so it has thrown business out of gear.
But you have safety nets you have got to build for yourself. And like I said, it's about taking a longer-term view of business. Of course, there's always disruptions. We have seen it in the past.
This is perhaps much more significant than anything we have seen, at least in the last two decades. So, I mean one can go into a freeze mode and say ‘we'll wait and watch’.
The fact that we hardly have any debt in our businesses helps us. It gives us that much more firepower and that much more headroom to grow.
We are really not impacted by interest rates going up because the debt we carry on our books is sort of manageable. As a group, our debt to Ebitda today is less than 1, which is very strong.
So, I guess it's more about taking a longer-term bet, but very difficult to say how it actually moves. I don't think there's anyone who can make a prediction or a forecast, especially not now in the middle of so many moving parts.
But it does help solidify certain investment plans that you would have been making, and then when you come to a point where consumption has changed dramatically, your pricing has changed dramatically, that sort of sharpens the focus. So where are you putting most of your growth bets right now?
KM Birla: We are looking at investing in aluminum, cement, in financial services and in fashion retail. It's almost across the board.
We are also looking at some new businesses. Digital would be an important one. We are still studying it, trying to understand if we should go into it or not. Can we actually compete and win? What's the best form to get into it for us? There's lots in the pipeline.
Given the fact that we're in a position where we've gotten deleveraged faster than we had anticipated, unless I grow I am not utilising my equity, so to speak, sufficiently enough.
So, what is the current investment plan towards growth?
KM Birla: It’s about $7 billion for India. It's about $3 billion for overseas–a large part of that is for Novelis. We have just announced a $2.5 billion rolling capacity greenfield in Alabama. So there's lots of action.
Of that $7 billion in India, roughly what's the allocation, Mr. Birla?
KM Birla: So, it will be across. It will be in cement, it will be in aluminum, it will also be in chemicals and specialty chemicals. We have already poured it into real estate, which is interesting. Paint seems to be a natural foray for us. There are other plans in the pipeline. It will basically be spread across these businesses. But it's across our existing businesses. I think we have headroom for a lot more for which we have come up with plans for growth.
Those plans would be adjacent businesses to the existing ones, or you might be even considering completely new ones?
KM Birla: Adjacency should always have first priority. Otherwise, we are always open to new businesses.
Within the area of new energy, because that is the hot area right now, and many entrepreneurs across the world are moving away from traditional businesses and investing in this, have you found any compelling investment opportunities there?
KM Birla: We haven't yet but that is a very interesting sector. It makes sense from so many points of view. We are looking at it, nothing concrete yet. But I think there is something that is very much up our street.
In terms of new energy, do you mean hydrogen?
KM Birla: Hydrogen, in terms of just the full play on environment, sustainability, ESG. All our businesses have been very committed to sustainability and CO2 emissions norms coming down. It's been sort of an ethos. So, in that sense, it lends itself to being invested in.
When you said digital, what did you mean by that?
KM Birla: I am talking of a digital play like fintech.
Okay, it could be fintech as well?
KM Birla: I'm not sure yet, but why not?
Or social media, like Elon Musk wanted to buy Twitter. Are you interested in Twitter?
KM Birla: It is sold already, and I couldn't afford it.
It's not yet sold, it’s still in the process. Who knows if the deal goes through or not?
KM Birla: But, I think there is space for one or two new businesses.
That's what I mean, so as dramatically different as social media or something?
KM Birla: That would be too bold and courageous. I don't think I have that kind of courage. But I mean something where we can play to win, where there is a right to win.
Do you mean e-commerce because that would be a natural extension of some of your retail businesses?
KM Birla: Our fashion retail businesses are there. We are looking at D2C. I'm talking about, for example, digital in the lending space or digital in the health space. There could be some very interesting opportunities. In the case of health, it also makes a social impact. So, it resonates with us very well. But these are all in the pipeline and we are just on the drawing board and looking at different options.
In your expansion and growth plans, where does financial services fit in? I'm not sure if that business has performed to the extent that you would have liked it to?
KM Birla: It's performed well. In terms of performance, it depends on what dimension–in terms of profitability, in terms of growth numbers, it’s done fairly well. But in terms of market cap, I think it has lagged. We are very ambitious about financial services. I think we have got a couple of fixes. We have also understood better what our investors are looking for. I think we have got a lot happening in the next few years with services.
Could you elaborate on the fixes?
KM Birla: Inappropriate for me to talk about it at this point in time, but just essentially about growing faster and building scale faster. That would be the theme that I would look at.
You are the country's largest cement manufacturer. You had the opportunity to become dramatically larger with the potential purchase of Holcim, which was the second largest player. I do know and it was obvious that there would be complexities to that kind of transaction. How do you look at the fact that it has now gone to a different Indian entrepreneur because there are many implications of how the competitive landscape changes hereon?
KM Birla: I don't know what the implications can be. Frankly, the fact that these are existing assets on the ground, these are not new capacities being created, so to that extent it remains unchanged. I don't know why a new player would behave irrationally, especially after paying the kind of price that he has. I don't see how it will change comparative dynamics in a sort of significant way.
I can tell you the way that analysts are looking at it, that traditionally or conventionally, MNCs have not been very aggressive when it comes to growth in foreign countries like India, and that was the case with Holcim. But now that it's an Indian entrepreneur, the growth push would be much harder, in terms of additional capacities, I don't just mean by price, but I also mean by market share and otherwise.
KM Birla: I think we are sort of entrenched in the business in a very positive way. We have been in the business for several decades now. We are very entrenched with the channels that form the ecosystem of the business. And we have our own growth plans. We have a large market share, our brand commands a premium, is loved by consumers, and we have our own plans that we intend to go ahead with, as we would have even otherwise. It's always good to have competition. We have been used to competition.
Why were you not able to close this deal? Was it just competition complexities?
KM Birla: I don’t think this deal makes sense for us financially. I think we have better options of growth.
Are you saying the deal has been done at too rich a price for you?
KM Birla: Yes, price is in the eyes of the beholder. For us, I don't think we could have created value as much as we can in other options that we're looking at.
Those other options would be greenfield expansion?
KM Birla: Greenfield, brownfield. We have been in the business like I said, so we have growth plans that we have been working on, on a continuous basis.
Will this spur you to more aggressively look at inorganic acquisitions in the cement space? There are mid-sized companies that you might be able to buy with fewer competition complexities. Given that the expectation is that here's an Indian entrepreneur taking over the second largest cement company in the country and will bring aggression to the marketplace, will that spur you?
KM Birla: If you look back at the growth, we have taken some big and aggressive bets. It's all about value creation. I don't think that we are going to start bidding for assets much more aggressively only because there's a new entrepreneur in the sector. That's not how it works for us. It must create value, and value creation is basically at the end of the day what matters. I don't think that we start bidding for assets completely irrationally only because there's a new entrepreneur. It just doesn't work like that.
I just thought that maybe that could be one more compelling factor.
KM Birla: At the end of the day, we are happy to pay, we have paid full price in several instances where we bought assets. But it was because we believed that we could create value out of those assets. So, at the end of the day, that’s the litmus test.
Do you foresee demand and pricing to remain robust enough for you to consider an inorganic strategy at all, or will it largely be greenfield?
KM Birla: We have grown through greenfield, brownfield and acquisitions–not just in cement, in other businesses as well. So, it's about value creation, and if you believe in the India story, if you believe in the India infrastructure story…
Prices will keep going up and down, that's never been a great deciding factor for making an acquisition or not making an acquisition. It's a more overarching theme. Growth in the cement industry is something that we are very keen on. The route would have to be the one that creates the maximum value.
The one business that has struggled fairly publicly has been telecom. Have you put most of your troubles behind you? Have you gotten a final response from the government on the equity allocation?
KM Birla: I think it's in the works. The most important thing to do now is to tie up funding, for which discussions are happening with investors around the world. Not the easiest to happen because the company was in trouble as we all know.
Therefore, it takes some time to get people to start feeling confident about a business like that again, which has been kind of in dire straits. I think the operational performance seems to improve quarter on quarter.
The government package is a huge help for the entire sector. It's also a vote of confidence that the government has sort of signalled in the sector. So, I do think the worst is behind us.
You will have to bring promoter equity, additional amounts significant enough to draw more investment from other investors, because that has been one key thing that's been missing for the last two years?
KM Birla: I think a lot has changed since then. Like I said, operational performance is much better. The government package is a huge investment incentive for financial or a strategic player. So, I do think that we are on the cusp of some good things happening there.
Two years ago, it seemed like you had almost given up on the business. You are feeling encouraged now about this and to remain invested?
KM Birla: We never really had given up, but we didn't want to invest in a business unless we were convinced that there would be a return to that investment, at least a fair amount of return to the investment.
There seems to be a turnaround now in the sector. Of course, we still have our problems because the company deteriorated in many ways as we know, and it takes some time to pull it back. That is a fact.
So you intend to remain invested in Vodafone?
KM Birla: Absolutely.
Once you stabilise the business, you might feel telecom is not necessarily the best addition to your portfolio. The industry has changed dramatically from the time you first invested in it.
KM Birla: So, no views on that just now. I think that as of now we are very committed. The intent is to find a financial partner or a strategic partner to come and invest in the company.
Tariffs have stabilised and therefore, you are seeing improvement in operational performance. But your churn rates are still fairly high at Vodafone Idea.
KM Birla: I'm just saying that there's an improvement and that's how you come out of a problem, right? You sort of see a quarter-by-quarter, month-by-month, year-on-year performance improvement. I see that happening as a trend.
I just wonder if this is a bit of a chicken-and-egg situation, because investors are saying that till the promoter and the government doesn't sort of invest, or the government equity doesn't get finalised, we won't invest. Each one is waiting for the other to move a piece.
KM Birla: It just requires some more patience. We will have to see how things pan out. I am very positive about it, but it's one of those situations where you can't make things happen. You just have to wait. You know that things will work out well. I can’t set a timeline to it because there are so many other people and agencies involved.
Your newest business call is paints. You have just doubled down on it, both in terms of capacity and capital. What are you hoping to build out? You have said before that this is a natural extension of your presence in a variety of adjacent fields like chemicals.
KM Birla: Chemicals, there is paint, there is white cement. I mean there is cement and white cement.
Cement and white cement would help from a distribution point of view, and chemicals would help from an input point of view?
KM Birla: We aim to be a very strong second player in the next five years.
So does JSW, already there's Nerolac. There are many new players in paints in the last 4-5 years, and 2-3 very strong existing players.
KM Birla: Having known that, that's our intent. We have every reason to believe that we will be a very strong second in the next five years in the business.
In your assessment, what will it take to become that strong second? Will it mean large capacities and large capital investments?
KM Birla: Capacities are a given. You are talking about innovation, you are talking about distribution, technology, all of that put together.
How much are you hoping to be able to invest over the next 2-5 years in this business?
KM Birla: Grasim has talked about an investment of Rs 10,000 crore.
That's just for the plant and the facility?
KM Birla: That includes the entire investment, for the next five years.
Are there other new businesses besides this? You spoke of digital and new energy.
KM Birla: Nothing else that I can talk about just now. But I am sure there are things that will happen. Like I said, we have a huge headroom for growth. And in a sense, we don't have an option but to look for new growth avenues.
You don't have an option?
KM Birla: So, when you have that much headroom on the balance sheet, if you're not growing, you are not utilising your equity well enough.
You can double down on some of your existing businesses?
KM Birla: That, of course, is the first priority.
Even in retail, you have stayed within a confined limit. You haven't really built out the business. The scale at which some of your conventional businesses run at, retail has come nowhere close to that, financial services have come nowhere close to that.
KM Birla: I am talking about companies where the growth options potentially are far more than what you can do in the current business. Let's not jump into the area of diversification. I am just saying that the positive side to it is that we have huge headroom for growth. We have got to find avenues to grow that are interesting and give us the kind of return that we normally look for.