"I am feeling less gloomy than I was even three months ago and I am hoping that initiatives like the CCI see the light of the day," says Kumar Mangalam Birla, chairman of the Aditya Birla Group.
The government has come out all guns blazing in its efforts to revive the economy. It has recently set up the cabinet committee for investments (CCI) which is looking at large projects, identifying the bottlenecks in each one of those and trying to resolve issues across ministries, he says. And if the CCI manages to clear the bottlenecks plaguing some of the largest projects in the country, it would be a huge positive, he adds.
The company has had a tough year and a half, but with initiatives like this, it would be able to see better times in the next two quarters, says KM Birla.
According to him, the group has about USD 3 billion worth of projects that are held up because of various clearances that are pending.
He feels once the project clearances start coming, it will be enough of an impetus for people to start investing again.
Below is the verbatim transcript of Kumar Mangalam Birla's interview on CNBC-TV18.
Q: Let me start by asking you what you make of the current macro environment in the country given all the trouble we have seen over the course of the last few years which you don’t really need me to elaborate on and given the fact that you yourself have been fairly bearish in your outlook for the last year, atleast in your public commentary?
A: We have had a tough year and a half. However, I see the first glimmer of hope. For example, I think that the government has recently setup the cabinet committee for investments (CCI) which is looking at large projects, identifying the bottlenecks in each one of those and trying to resolve issues across ministries. I think that is a great initiative and if that was to take off a lot of the bottlenecks facing some of the largest projects in the country would actually get cleared. I see that as a huge positive.
Q: You have projects waiting in line for clearance?
A: We have projects waiting inline.
Q: Which ones specifically?
A: We have our aluminum projects for example. However, I haven’t seen this sort of an initiative ever before and I think this is in many ways path breaking. So, I wouldn’t hesitate to say that it has been a very tough year and a half but with initiatives like this I think that we should start to see better times in the next two quarters that is my estimate. If things start to roll then I think it is just the positivity that starts to happen in a sort of a circular kind of a way.
I think that it wouldn’t take more than two quarters for us to actually feel the impact.
Q: When can we start seeing investments by large corporate groups like yours come back online because we have seen that go away in the last year and a half, two years may be even longer and that is the most worrying factor?
A: Once we see that the investments that are currently stuck come unstuck because of measures that the government is taking to help industry in a legitimate way by expediting clearances essentially I think that will be a huge confidence booster for industry and I think that if that was to come about that is enough of an impetus for people to want to invest again.
Q: So, you are not feeling as gloomy as you were may be a year ago?
A: I am feeling less gloomy than I was even three months ago and I am hoping that initiatives like the CCI see the light of the day.
Q: Given what we have seen on the rupee in the last couple of months, given the fact that our twin deficits continue to pose a fairly substantial problem to us given that the external global environment is very volatile and hence there is no investments certainty, would you hold on to this less gloomy outlook if things change externally as well?
A: This is a relative view. It is relative to what it was like three months ago. I think that we have got to start looking at some of the positive things that are happening around us. I think the fact that the government recognizes the issues and that is something to feel happy about. Like I said we need to look at some of the positive things that are happening and let us hope that they will start off a virtuous cycle.
Q: What more would you like to see happen despite the limitations of the fact that next year is an election year. What more would you like to see happen?
A: A stable rupee would definitely help.
Q: That is a tough one right. It is not entirely within the control of government or the Reserve Bank of India?
A: It isn't and I think that the fact that we are so integrated with the rest of the world is a reason for that and rightly so. So, I think that is still something that is on the wish list.
Q: What more would you like to see the government do keeping in mind what is within their control? For instance for those industrialists and business leaders like yours who are slightly more buoyed by this CCI initiative have felt a little bit let down by the Land Acquisition Bill because they feel that, that will pose a big hurdle in their ability to go ahead and invest in future projects given the scarcity of land and the difficulty in acquiring them. So, I am just trying to get a more holistic view saying if there are some good things happening there are some difficult things happening as well and keeping those in mind when do you see the investment cycle recover?
A: There are two arms to this. The first one is policy clarity. There are policy issues in terms of not having clarity on policies in several sectors like telecom, fertilisers, insurance so on and so forth. So, the first thing that one would like to see is clarity on policy in each of these sectors and more. The second is one would like to see implementation and the ability to execute projects. So, like I talked about our projects in Hindalco for example one would like to see clearances come through. We put up the plant on the basis of coal allocation that we had in hand and I would like to see coal coming to my factory gate. If that sustains for a period of time it would be a huge confidence booster.
Q: Have you worked out the numbers of let's say how much money the Aditya Birla Group has locked in projects that are stuck on ground for a variety of permission reasons and policy reasons. How much money you would have invested if the political environment, the policy environment had been more friendly and hence how much money you moved overseas to invest in other countries because those environments were just more appealing.
A: That is a very hypothetical question, I can't give you a precise number. To answer the first part of your question we have about USD 3 billion worth of projects that are held up because of various clearances that are pending.
Q: Of these USD 3 billion, you would have invested lets say only a small amount as yet. So, if these projects were unlocked or cleared we would see over USD 2 billion of investment coming just from your group? I am trying to get a sense of how much money has been kept away from the economy because of problems in terms of policy?
A: It is difficult to have specificity in a situation like this. I can't even start to give you broad number except that investments would have been higher than what we have made now for sure.
Q: What is your investment plan for India in the next 5 years because I know you typically tend to work on long-term planning. So, five years what have you earmarked for an India investment?
A: Our investment plans are about USD 10-12 billion in the next 5-7 years.
Q: How much of that is coming to India?
A: As of now what is on the drawing board about half of it will be for India.
Q: But much more could have come to India if the policy environment had been more friendly?
A: I think that is a fair statement to make.
Q: Where do you see the cement industry? Are we at the bottom of the down cycle or do you still see many more quarters of pain because you have timed your acquisition well you have bought in a down cycle at a fairly good price?
A: I think we have another year-and-a-half to two years of pain in cement. I see that the industry would have approximately an 8 percent rate of growth in the long-term and for us, it has always been about building businesses for the next 10-30 years. Therefore, this sort of down cycle for the next two years is in a sense an aberration.
We believe it is a good asset, it is well priced, it is a fair value it fits in with our overall scheme of things strategically which is why we have gone ahead with it.
Q: Why did it take almost two years to negotiate this transaction?
A: It is basically a negotiation right? When you do a due diligence there are so many issues that come to the fore and its negotiations around those, its negotiations around price.
Q: It took you less time to acquire Novelis
A: It has been about a year. Essentially it boils down to price. It also boils down to some of the conditions precedent to completing a transaction whether it is indemnities so on and so forth. I think these are all part of any transaction.
Q: Did you mention indemnities for any specific reason?
A: That are the kind of issues that transactions like these would involve in terms of negotiations.
Q: Did large part of the negotiation also focus on the fact that the cement unit that you are buying owes money to the parent company and you are trying to work out how you would discharge that liability because that amounts to Rs 1,650 crore in cash that you are paying.
A: I think just the total debt that will get transferred with the unit was a question that was debated for a while because that actually determines the total consideration that we would pay out by way of equity.
Q: Why did they settle with you because it seems that they had better offers in hand like 6-8 months ago, a year ago. The word on the street is that they had valuations going all the way up to USD 130, USD 140. So, I am just curious to know?
A: That question you will have to ask them.
Q: But since they are not here in front of me I am putting that question to you.
A: I have no idea what values they were offered and why they decided to go with us.
Q: Most of the last year was spent in negotiating down the price?
A: It is not that we were talking to them or talking to each other through the year. These discussion happen and break off and sort of start again.
Q: Your debt to equity ratio has gone up from 0.31 to 0.54 that is what your management team said in the presentation. At this level do you feel comfortable to be able to look at other fairly sizeable acquisitions as well in the market place and if you think a recovery is going to come here in a year and a half in the cement business are you looking at more consolidation opportunity in that next 12 to 24 months?
A: There are two parts to this- I will be happy to look at other acquisitions, but there is nothing really that we are looking and that’s interesting or that looks like it could actually materialise. However, in-principle we have got a very strong balance sheet. We have got strong cash flows happening and it is a good time for us to look at consolidating the cement industry.
Q: Are there geographical gaps that you need to pull because you made the point that you filled one with Gujarat right now, you had not willy-nilly over the last few years ever since you sold Digvijay Cements been able to put up considerable capacity in Gujarat which this acquisition will help you do, are there other geographical gaps that you want to fill?
A: It is not necessarily just about geographical gaps, it is also about growing in total volumes and therefore retaining your leadership position, so it is a combination of all of that.
Q: So you are not going to tell me specifically where you might be looking for acquisition?
A: We don’t have anything specific on the table just now.
Q: Do you see opportunities like other sellers coming to you and saying, given the down cycle, given how difficult the economy is right now, we would like to sell because you have seen for the last 10-15 years, lots of small players in this cement industry that keeps holding out for a better price?
A: I think that the sector has to see some more painful act to happen.
Q: You are buying in this asset limestone resources that could potentially support the doubling of capacity in Gujarat where you are buying this JP unit, what is the timeline for being able to do that?
A: The intent just now is to turnaround the unit. That is the first task at hand.
Q: Which you had put on a three-year timeline for?
A: We think that this acquisition will be acquitted by year three, which is fairly attractive for an acquisition of this size and I think that we will think about doubling the capacity only after that.
Q: You opted for this scheme route because it is easier to transfer limestone licenses, mining licenses etc through a scheme as opposed to a contractual slump sale, so if the JP unit was to have sold Gujarat business to you in a contractual slump sale, the transfer of mining licenses etc would have been more difficult than under a scheme, have I understood that correctly?
A: As you have heard, we have opted for a demerger as opposed to a slump sale and I think both have their pros and cons and we have done purchases through slump sales in the past, but I think this suited the requirements of both, the seller and the buyer.
A: I think that they had debt that they needed to offload which is one of their primary concerns.
Q: Do you want to go back to your shareholders to get approval to merge that Gujarat unit now with UltraTech under a scheme?
A: We do. We have got to go through permissions from Sebi, from the competition commission, from our own shareholder and creditors and the court.
Q: When do you expect to see transaction to complete?
A: We believe we have to take about 8-9 months for this scheme to be complete.
Q: Is there anything else in part of your cement portfolio that we should be talking about in terms of your expansion right now, otherwise I will move on to some of your other businesses including how long you are willing to wait for a banking license?
A: We have investments of about Rs 13,000 crore in the pipeline just now. This is essentially expanding 3-5 units, one is in Raipur, another one is in Karnataka, third is in Rajasthan and all of those with this acquisition put together should see a capacity of 70 million tonne by early 2016. So that is a next milestone.
Q: So you are on your way to that, is there more consolidation opportunities, you will participate, you have told me that and you expect another two years of pain in the cement business you believe that this bottoming out will only happen two years down the line, right?