Chief Strategy Officer, on why the group merged AB Novo with Grasim
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Coming close on the heels of the controversial merger of Cairn India with Vedanta, the restructuring exercise of the Aditya Birla Group had drawn a lot of flak initially. However, things seem bullish for the AB Group, with both Grasim Industries and Aditya Birla Nuvo Ltd (ABNL) closing in the green on Wednesday. In an interview with BusinessLine, Saurabh Agrawal, the group’s Chief Strategy Officer, said the deal is good for investors as Grasim is getting a business which can be grown akin to UltraTech, while ABNL shareholders get to participate in new businesses through Grasim.
Why the
restructuring now?
For seven years Grasim’s growth rate was very small in retail
investors’ perspective while that of financial services reached a scale where
we had to do something. Funding for ABNL — with interest in fast growing
businesses like payment bank, health and life insurance and housing finance —
was primarily coming from promoters. Now, with this business getting into a
significant growth path, the fund requirement is going up. Moreover, there has
been consolidation in the insurance and asset management business, where ABNL
has exposure. The NBFC business has built a book of ₹27,000-28,000 crore,
growing at a CAGR of 40 per cent for the past five years. If the NBFC business
grows at 30 per cent CAGR for the next three years, the lending book will be
₹70,000-80,000 crore. For this to happen we need to put in capital of
₹6,000-7,000 crore every year, even at a 6:1 debt-equity ratio. The raw
material for the NBFC business is money. We have to raise funds efficiently
since we do not accept deposit like banks.
ABNL could have
raised its own money...
Its current balance sheet is already leveraged three times the
Ebidta and does not have enough cash to take care of the financial needs.
Moreover, it needs to have stronger parentage, which is extremely important.
Today it enjoys a credit rating of AA plus and Grasim has AAA rating. A better
rating helps in lowering the cost of fund. With the new Grasim as promoter,
ABFS can get a better rating and raise money at 25-50 basis point lower. With a
book size of ₹80,000-90,000 crore in NBFC, and leveraging at ₹70,000-75,000
crore, it leads to a saving of ₹300-350 crore. With lower cost of borrowing we
would be able to deliver a better quality loan book. Our NPA is 0.6 per cent.
If we demerge financial services from ABNL and list it directly there would
have been a lot of discomfort with SEBI, RBI and IRDA as well.
Will the
promoters increase their holding in ABFS to pump in capital?
We are starting with 57 per cent shareholding so that we have
enough room for the financial services business to raise money. We are having
Grasim at the back end. In case the market options are not open Grasim can put
in the money. All these led us to give the financial services business the
parentage of Grasim and grow it like UltraTech. We want to nurture the
financial services business as another UltraTech. We had incubated a cement
business with VSF (viscose staple fibre) cash flow for seven-eight years.
That’s where the thought came from.
Just like
financial service, the strong parentage can also help Idea raise money?
That’s right. Since Idea has a well established business it
could raise money on its own. It is well capitalised right now. It generates about
₹2,500 crore of free cash flow every quarter. It is among the least leveraged
in the telecom industry.
It has a leverage of 3.3 times and has enough room to raise
funds. It has a lot of assets as well — a huge portfolio of towers worth
₹15,000-16,000 crore. Bharati has been monetising towers to raise money. Idea
has that option as well.
Will minority
shareholders be left high and dry with the promoters’ holding, along with that
of Grasim, going up to 64 per cent in Aditya Birla Financial Services post-restructuring?
Post restructuring, Grasim will own 57 per cent in ABFS and the
promoters will have 17 per cent. However, the promoters own only 39 per cent in
Grasim. So, the promoters will own only 39 per cent of 57 per cent of Grasim’s
holding in ABFS. On the other hand, currently the promoters directly own 58 per
cent in ABNL. Frankly, the promoters can control the financial services more
now with a 58 per cent stake in ABNL than after the merger.
Will Grasim
provide guarantee for loans taken by Idea?
Why should that happen? It is all a wrong perception being
perpetrated by vested interests. It was not there in the back of our minds when
we worked out this restructuring. We have not funded Idea in the last
seven-eight years. Just because RJio is launching people are putting two plus
two together and that is where we are getting coloured.
If you see, the ABNL stock price has gone up hugely because of
speculation. People thought the promoters are having a 58 per cent stake and it
is going to be significantly favourable. But the valuation was not done by us
but by independent valuers. So some people were caught on the wrong foot.
