Grasim is 'firepower' to grow financial svcs biz faster: Birla

The merger between AB Nuvo and Grasim will not only benefit both the companies, but will also create value for both sets of shareholders, says Kumar Mangalam Birla, Chairman of Aditya Birla Group. AB Nuvo today announced its plan to merge with Grasim, which will be followed by de-merger of its financial services business. The shareholders of Nuvo will get 30 shares of Grasim for every 100 shares. Risk management as well as quality of the book has been two crucial deciding factors for Nuvo for the deal. “Quality of the book is very strong, especially from NPA perspective,” he says. The plan is to list the financial services business by middle of next year, says Birla. The merged entity will own 57-58 percent in this financial services business.Birla considers Grasim as the “firepower to grow much faster” in the financial services segment, which could have been otherwise difficult in the current scenario. He also clarified that Idea has nothing to do with the deal. "There really is no need for Idea to bank on this new company for funding its own aspiration as that is a financially strong and distinct legal entity and has got its own plans," he says.  Below is the verbatim transcript of Kumar Mangalam Birla’s interview to Nisha Poddar and Kritika Saxena on CNBC-TV18.Kritika: Help us understand the value unlocking that this will create, that the mega multi phase merger that this will create for the financial services business and for the merged entity? A: The financial service business as part of the whole construct of this restructuring gets listed and we hope to list it sometime by middle of next year. So, that in itself is a huge value unlocking proposition for both the set of shareholders, of Grasim as well as Nuvo. Other than that you are creating a behemoth that actually is a play on the India growth story. So, if you believe in the India growth story, then this is a company that you would want to watch, you would want to invest in. You got a very interesting mix of businesses - some are throwing up cash, some that are fast growing, you got a very healthy mix of manufacturing and services in the basket. So, it is well thought through. We believe that it is going to create value for both sets of shareholders. If you look over the last few years as far as Nuvo goes, we have unlocked value by spinning off Carbon Black; we have unlocked value by spinning off fashion. So, this is very much in keeping with that theme, it is not really out of the blue. Nisha: This of course will have to because it is a related party transaction go through the majority of the minority shareholders and that approval is very essential for this entire restructuring to really go through. What would be your selling point and how will you really pacify the shareholders of Grasim who may not want an exposure in the telecom business?A: The selling point essentially has to be around value creation and we believe that we are creating value from both sets of shareholders. I think Grasim is also getting a stake in a very fast growing sector through very strong business like Aditya Birla Financial Services Group and I think that is something that the market really hasn’t factored in and I think that is a huge positive for Grasim. Nisha: Right now the way economics is panning out, these are challenging times for most of the big conglomerates in the country and we just saw that one of the large conglomerates just finished a merger process and it went on for about a year because the shareholders were not happy and the promoters had to sweeten the deal. In such a scenario, of course you haven’t reached out to the shareholders, we know from tomorrow on what really dialogue goes on but if there is more concern coming in from the Grasim shareholders, are you also open to the idea of probably sweetening or revisiting the deal at all? A: Not really, we are coming from a place of conviction where we believe like I said that this is value accretive for both sets of shareholders. The valuation has been done independently by two very reputed firms. We have also two firms that have done a fairness opinion on the valuation that has been done. So, I don’t believe that there is a case on that we would want to revisit what we have announced today. Kritka: One more important clarity that you gave in the press conference was the fact that there won’t be any added exposure to Idea but are you ruling out the possibility that it gives you a stronger case to be able to aid Idea, would this not be a benefit for Idea in a broader sense? A: I think that confusing this transaction with Idea is a misnomer. I don’t think that this transaction per se has anything to do with Idea. Just to put things in perspective, Idea has invested almost Rs 20,000 crore in the last 10 years with practically no fresh promoter funding. So, they have reached out to a private investor, they have reached out to a strategic investor, they have raised funding through issuing QIPs. So, there really is no need for Idea to bank on this new company for funding its own aspiration - that is a financially strong and distinct legal entity and has got its own plans. Nisha: Idea is one entity which may require cash and you will look forward to that not particularly from Grasim is what you are explaining but what about the insurance, the NBFC business? A: We clearly said that this entity will own about 57-58 percent of the financial services business. So, obviously this is a growth engine in terms of providing finance, providing funding for the financial services business. I mean that is something that we have said very upfront.Nisha: So from there the company will fund this particular business which is very fast growing? A: It is not the only reason for this transaction but it is an important reason for the construct of this whole restructuring package. Nisha: To give a stronger parentage for the fund infusion. In what form, have you thought about that, anything coming in to leverage the balance sheet of Grasim to help out the insurance, the NBFC? A: It is going to be a sum with Grasim new about having 57-58 percent holding so there is a very direct linkage it provides from the point of view of fungibility of funds. Kritika: As far as the financial business is concerned, this is of course creating a larger broader entity and you pointed out that you will look at expanding it rapidly, but do you not believe that the financial business was already doing very well from an independent business perspective? A: It is doing very well. However, I think that this like I said gives it the firepower to grow much stronger and much faster which is something that in the current structure, as it exists today, would have been a little more difficult. Kritika: How much more funding would you look at putting in to be able to expand the footprint? A: It is very difficult for me to give you a number because there are 12 lines of businesses within the financial services space. However, like I said, there are ambitious growth plans. We have a track record of almost 20 years in this space, we have a leadership position in several of these business verticals and therefore the ambition is to grow. Kritika: There is a question that you were asked in the press conference and I want to just highlight on that. At a later rate would it make sense to bring in a partner in terms of equity, in terms of even minority shareholding if it can add value to the business? A: Absolutely, if it adds value, we are very open to do that. There is no timeline, there is no sort of -- we are not in a cash crunch so we don’t necessarily have to do that today or tomorrow. However, if we get a good investor and it is also about the valuation, I think that would give us a chance to fuel further growth of the business. Nisha: Also rerate that particular business and value unlocking because the way the entire industry is going, the way insurance sector is seeing some of the benchmark M&A deals that have been done? A: The idea of getting in a partner would be to fuel growth even further. Nisha: So a partner yes, a minority equity stake to a sponsor? A: As a partner I mean it in a broader sense. So, we don’t have the need for a strategic partner. However, when I say partner I mean let us say a private equity investing in the holding company would be in my constructive partner. Kritika: As far as the financial services business concerned, there has been volatility across the board, from macro volatility, from concerns about independent policies what are the immediate challenges that you have put in place given the fact that you are looking at growing rapidly, what are the immediate challenges that you foresee and what are the levers that you have put in place to be able to reach the vision that you have been talking about? A: I think that boils down to risk management and huge focus by the operating team on the whole risk management part of this business. It has seen as being very core to growing this business. The quality of the book I had seen is very strong. If you just see the book from the perspective of the NPAs, I think it is abysmally small. So, you are right, quality of book, risk management, these are very important factors in this business.Kritika: There is volatility though in the business.A: In fact, for us it has been a one way street, we have grown year after year for last 5 years and we are hoping that’s how it would be in the foreseeable future.Nisha: What you have also created with here in Grasim, anyway it was a holding company of UltraTech large cement company and now it has become even larger holding company of 3 large businesses that is even adding telecom as well as NBFC. So that shareholders do not like much, so that’s also one of the concerns?A: Clearly, the shareholders were reacting to news that they saw this morning and yesterday, which was speculative and inaccurate. I think that when they see the real concept of this transaction, they have every reason to feel very happy about it.Kritika: In the broader sense what is the kind of growth multiple in terms of valuation that you can assure, I understand you can’t give number at this point, but what is the kind of growth multiple in terms of valuation that you can assure to shareholders as far as Grasim is concerned and as far as the financial business is concerned?A: I don’t think I can put out a number, I think it is a very difficult to do that. It would be unrealistic to do that.Kritika: But keeping in mind the kind of growth that you have been seeing, there is a growth multiple or there is a growth that you will foresee in the next 5 years time?A: Well, absolutely, the whole idea is to grow the business more aggressively.Nisha: The way the telecom sector is really changing very fast, there are so many different factors at play. What is your best game plan to really counter the kind of challenges that are there for Idea Cellular?A: Like I was been saying this really has nothing to do with telecom and Idea, so that’s a question that we should address at some other point in time.