Global financial firm Citi hosted Kumar Mangalam Birla, Chairman of Aditya Birla Group (ABG) for a fireside chat at Citi’s Pan-Asia Conference in which Birla shared his views on topics including the capex cycle, growth outlook, capital allocation, etc.
ABG is a multinational group with a significant presence in various sectors such as metals, materials, financials, telecom, retail, textiles, etc. Recently, the group announced plans to venture into the paints segment through Grasim Industries.
Citi said it has a buy rating on three ABG stocks - UltraTech Cement, Hindalco and Grasim Industries.
Here are the 7 key highlights of the chat:
1. Outlook on India and capex cycle: Birla believes that India is on the cusp of multidecadal strong growth.
Capex had started to pick up prior to the second wave of COVID-19. The second wave is an episodic setback but the medium or long-term outlook remains strong.
Some fiscal support to MSMEs and rural will help. PLI scheme is very interesting and will have a multiplier effect.
2. ABG in five years: ABG continues to focus on growth, scale and consolidation across businesses. Strong cash flows and low leverage are the key group priorities across businesses, and they aim to keep net debt/EBITDA less than 2.5 times. ABG will likely foray into one new business in addition to paints in the medium term.
3. Group's capex outlook: Between the two waves of COVID-19, ABG has announced a capex of $2.5 billion.
UltraTech (ULTC) has announced about 20mt addition of capacity ($1bn) – capacity to reach nearly 135mt. Hindalco is in the process of doubling downstream capacity in five years. Novelis completed Aleris’ acquisition. Grasim announced foray into paints – Rs 5,000 crore to be spent over three years. ABG is bullish on the fashion/retail space and has made small acquisitions in the recent past.
4. Capital allocation and acquisition strategy: Deleveraging and different facets of growth (particularly value addition) are key. ABG has raised dividends, while each group company has its own policy, the general aim is to return 25-45 percent of profits.
Both Hindalco/ULTC have paid dividends 3 times higher year-on-year (YoY). The overarching principle for M&A has been shareholder value creation.
Within that framework, the focus is on:
1) Market share expansion – ULTC’s strategy is to grow across markets;
2) Complementary businesses – Novelis did not have aerospace & building/construction in their portfolio; now acquired via Aleris;
3) Raw material security – VSF business acquired pulp assets in Canada.
The group’s track record of acquisitions is exemplary; about 50 percent growth has come via the inorganic route.
5. On Grasim Holdco discount, cross-holdings: Birla argued that the Holdco discount on Grasim should narrow given:
a) Strong standalone businesses – VSF (largest in India, second largest globally) and chemicals (getting pivoted to specialty chemicals);
b) ULTC and Aditya Birla Capital are two large subsidiaries – both do not need any funding from Grasim;
c) Capital allocation policies focus on dividends, exiting non-core businesses like fertilizers and entering new strong businesses such as paints. No new cross-holdings have been created in the last 25 years and the existing cross-holdings entail tax/legal implications if unwound.
6. Paints: Entry into paints gives access to an attractive B2C business (industry revenues at about $6 billion and 25 percent of the market is unorganised). Further, a common distribution platform with ULTC’s white cement business brings about familiarity and direct connect with paint buyers.7. ESG:
ESG is the focus area across the group. ULTC has committed to reducing carbon intensity by 27 percent by 2032E versus 2017, AB Fashion has achieved zero waste, Hindalco is in the S&P gold class in the Sustainability Year Book 2021, Novelis is focused on recycling.