AB Nuvo says yet to decide on way to raise cash

12th May, 2009

12 May 2009

We have enough cash to fund our immediate growth strategies in high growth businesses like life insurance, says Mr. Sushil Agarwal, Chief Financial Officer, Aditya Birla Nuvo
Aditya Birla Nuvo, the diversified arm of the Kumar Mangalam Birla-led group, is ready to go it full-throttle. The company, which straddles commodity businesses such as carbon black and electrical insulators and 'growth' businesses such as telecom and IT, posted a net loss of Rs.431 crore in the year ended March, on a consolidated basis - its first in a decade. However, a new management team has taken over from this month, and the focus is on steering the ship back into profitability. Sushil Agarwal, chief financial officer, talked to Sreejiraj Eluvangal of DNA Money on the company's strategy and efforts. Excerpts:

AB Nuvo spent around Rs.500 crore, more than its net loss of Rs.431 crore, on servicing debt of Rs.4,500 crore last year. What alternatives are you looking at for infusing long-term capital? There is talk you are planning a Rs.1,500 crore equity issue...
We are engaged in a continuous exercise to consider all funding options available like rights issue, preferential allotment, QIP (qualified institutional placement), etc. Besides, we may also unlock value for AB Nuvo and its shareholders in future by listing a few of these growth businesses after they attain the required size.

We have enough cash to fund our immediate growth strategies in high growth businesses like life insurance. We believe that the current debt equity ratio of 1:1.1 is reasonable. At the same time, the management is also exploring various options to raise the financial resources for fuelling its future growth plans.

At this stage it's difficult to specify the mode, timing and quantum of fund infusion. We have not decided how to raise the money. We need to consider the pros and cons of all the options available, keeping in mind the interest of all the stakeholders.

But shareholders are concerned about the high cost of borrowing, not the least because you would also need more capital to invest in your life insurance business...
AB Nuvo was one of the initial entrants in financial services business after liberalisation and has demonstrated its leadership in both of these businesses. It's our conscious decision to continue with the strategy of strengthening market share in both qualitative and quantitative sense, even if it comes with a higher cost to meet competition in the high growth phase, as is the case with most of the sunrise businesses. The costs incurred to grow these businesses are inevitable, considering their highly competitive nature and is in line with the industry trend. Future rewards of capturing the growth momentum in a sunrise sector outweigh higher costs incurred in the initial time period.

There are reports that AB Nuvo may try to raise some money by exiting non-core businesses like its Rs.425 crore insulator business...
We're a large diversified conglomerate and investment bankers keep meeting us with their suggestions. Our decision to enter and exit any business is mainly based on the future potential and the group's strengths to emerge as a leader in that business.

As of now, we are optimistic about the insulators business, considering the immense potential in the power sector. It is evident from the recent capacity addition by 10,000 tonnes and our plan to further expand the capacity by 4,000 tonnes in the running year.

What's the update on your telecom business? The profits have not kept pace with revenue growth...
Idea has expanded its network capacity to four times in the last two years and this has resulted in higher depreciation, amortisation and interest costs. This, coupled with absorbing the losses of the new launches of Mumbai and Bihar, has lowered its profitability.

However, we expect that Idea will launch its services in the remaining circles by December this year. We are also expecting cash inflows from our new partners, Telekom Malaysia and Providence (equity partners) will help finance the speedy rollout and participation in 3G auction.

Are your so-called value businesses facing stagnation? The carbon black business has not been doing well of late...
As a large diversified conglomerate, it's natural to witness different growth rates in various businesses. For example, we are expanding capacities in carbon black and insulators businesses considering the high growth rates expected in the power and auto sectors. Fertilisers business sees its future growth coming from the scalable agri-input business model. Rayon and textiles businesses are in a mature phase, but we operate in niche markets and hence our focus is on improving profitability.

When are the remaining growth businesses, such as IT and BPO, likely to generate cash for ABNL?
Telecom business is already generating cash and is self-sufficient in fuelling its growth plans. Idea delivered a robust performance in FY2009 with revenues crossing Rs.10,000 crore, Ebitda (earnings before interest, tax, depreciation and amortisation) of Rs.3,050 crore and PAT (profit after tax) of Rs.901 crore. Similarly, we are optimistic about breakeven of our life insurance venture in the near future.

Generally, growth businesses have longer gestation periods, but in mature phase, they generate lots of cash not only to sustain their own growth but to fuel growth of other emerging businesses.