No more confused signals from government, there is intent and consistency: Kumar Mangalam Birla
24th June, 2016
Devina Sengupta & Baiju Kalesh,
24 June 2016
Ease of doing business, where policy making at the Centre is concerned, that direction is very clear, said Kumar Mangalam Birla, chairman of the Aditya Birla Group, in an interview to ET's Devina Sengupta and Baiju Kalesh. "Focus is on letting business be, more and more. That is a big positive and that is what government at the Centre can do and is the biggest way government can support industries," said the 49-year-old chairman, who took the conglomerate from $2 billion to $41 billion in two decades and expanded businesses from 8 to 36 countries. Edited excerpts:
What is your take on the current economic situation?
I expect some sort of a revival to happen in the next few quarters. Internally, the big inflection point is going to come when the government steps up its investment in infrastructure. And I see the first signs of that primarily in roads and highways. By itself, it may not be a game changer, but a few more investments like that in housing, electrification put together will move the needle and I see the first signs of that happening.
The government seems to indicate that they have their ability to execute. First time in 25 years, we do not have a shortage of coal, which means Coal India has outperformed and this shows what good leadership can do. Inflation is under check, we are very focused on fiscal deficit. Transparency in allocation of natural resources will augur very well for our country. I feel pretty optimistic. A good monsoon will help, global factors falling in place matter a lot and lots need to be done by states as well. Leadership in states and what they do is always going to be important.
With better corporate results, is private capex going up?
I think it will be a while before private capex goes up. That is not the only sign of recovery happening. Most corporates have large debts on their books even now and it will be a while before they start to get those debts down to a reasonable level. Given the current environment where the Reserve Bank of India (RBI) and banks are coming down on NPAs (non-performing assets), it is the most unlikely time for most people to invest and do large capex. Also, given the fact that you have large overcapacities in several sectors, I do not think whether or not private investments in several sectors have started capex under the current situation.
I think pickup in government spend, pickup in demand and, therefore, capacity utilisation, revenues, cash profits of companies going up...that has to be the area of focus. It is putting right performance metrics and I do not think that performance metrics right now is for investment by the private sector. That will come much later, we will not see that happen for 18 months.
Are you seeing any changes on the ground in ease of doing business?
Ease of doing business, where policy making at the Centre is concerned, that direction is very clear. Focus is on letting business be, more and more. That is a big positive and that is what government at the Centre can do and is the biggest way government can support industries. I see a clear intent on that part and it is very consistent, there is no back and forth happening.
A lot of it depends if the action shifts to the states and you have many states that are more investor friendly, you have others now who want to catch up. Some do not have the wherewithal for the financials, some have not got their act together, but there is a much more healthy spirit of competition than before. The government is doing its part, intent is there and demonstrated clearly. No confused signals are going out from the government.
A section of the industry has said that the RBI has gone too far in attacking the bank NPAs.
I think it was a very good thing to have done. If you have a banking sector that gets into severe trouble because of lack of action, then that is catastrophic as we know from instances globally. So, this is being much more proactive. There have been problems that all of us have been aware of for a while and it is easiest to shove them under a carpet.
One can always have issues with the pace of it — should have been done over two years instead of one. But the moot point here is should the RBI have wished it away and I think they have looked at the problem in the face and been very decisive. Sometimes one needs to have decisive governance and bear the pain which is the consequence of that. Eventually, banks will emerge from it. It also sends a very strong signal about the culture of working.
Should interest rates have come down faster than they have?
I think there is a case to be made there. I think that this is something that could have probably happened, also questions about how much the banks will be willing in situations like that to write-off debt and bad assets. From a business person's point of view, there is a case to be made that interest rates could have been brought down a little earlier. Would they have substantially changed things in a macro sense? I do not think so. One quarter or two quarters earlier, I do not think they would have had a major impact other than the sentiment, which is short-lived.
The financial services sector is performing better. What are your plans?
We have a presence in far more sectors in the financial space. Some of them are fledgling but we have very definite plans for them. The concern area has been insurance and that is because we do not have a bank partner.
The fact is that it has become very expensive to acquire a bank partner but, if you compare us with others who do not have bank partners, then we have clearly outperformed.
The challenge with us is how does one increase the distribution and therefore, tie up with a bank partner that is large and credible enough. As open architecture becomes more and more acceptable to the banks, who will feel more and more comfortable distributing not just their own products but that of others, then that is the way ahead for us. So far we have been handicapped for not having a banking partner.
Would you be looking to unlock value at some stage?
That is the right thing to do, it is just that we are not pressed for time. So, timing could be determined by us as opposed to having our backs pressed to the wall. So, you have a monetisation event as given, and take it to the next level of growth.
You have a payments bank licence. What are your plans?
We hope to start in the middle of the next year. We are one of the few who are both a telecom service provider and a financial services provider, so synergy impact of both is quite substantial. I believe this makes it a far more attractive proposition for us than for lots of other people.
Will you participate in the consolidation in mutual funds and insurance?
We are clear leaders and there is opportunity in principle to consolidate. We are in an interesting phase where I see consolidation happening in many of our industries. Because of our strong footing in market, financial health, we are in a position where we can play the role of a consolidator. In mutual funds, if it gives us opportunity to grow in the equity part of the business, it is very attractive to us. Funds which have a large proportion of liquid assets will not be interesting to us, value proposition should be there.
What are the challenges facing the telecom business?
Jio (Reliance Jio Infocomm) will obviously create an upset for all of us. Having said that, Idea has grown consistently, it has constantly gained share quarter after quarter. Cash profits are very healthy and were about Rs 10,000 crore last year. Growth over 2014-15 has been very significant, it has a strong balance sheet.
The idea is to fill up the gaps where we have spectrum requirements. The sector will, however, see a lot of changes next year. When you have a new entrant with such deep pockets, then that is bound to happen.
Will Idea make any new acquisitions?
We are open for acquisitions that complete our requirement for, let us say, spectrum. I do not think there is a credible party to merge with. We must stay focused on operations and network growth.
But the stock market is not showing the same optimism?
It is good to know what the investors are thinking, take feedback and look at that while you are making a decision. But you can't be driven by what investors are saying, because then you might as well let them run the company.
Investors are often driven by sentiment and (it's) not always possible to have a complete view for an outsider. As management, we got to be focused on our management strengths and what areas we need to focus on. Our philosophy at Idea is to do the right things and the stock price will do the right things for you.
Aluminium has not received the same treatment as steel in terms of protection from cheaper Chinese imports.
Aluminium is an international story. Although the situation is nowhere as bad as it was with steel, there is a very clear case for protection from the Chinese. Why should you have large investments in the sector and then have markets met by Chinese producers?
There is a clear case of intervention required. And the speed of that intervention is important. Most advanced countries have been very prolific in taking up barriers, be it tariff or non-tariff barriers. Despite doing that they are compliant with the benchmarks of the IMF (International Monetary Fund), then why should not the same apply for India. Why should we need to be holier than thou? That is the moot question that one needs to address.
Do you think auctions of natural resources such as spectrum have permanently pushed up the cost of doing business in the country?
If you take a long enough view on coal prices, what happens when international prices go up? It is all very relative. Today, it seems expensive, but at that time, it seemed very reasonable. But there are global and dynamic forces at work. When you are buying resources, you are buying it for the next 25-30 years. So, you can't say over the length of the asset buy it is going to be expensive. Basically, we are saving 40 per cent of our requirement for Hindalco, so there is a natural hedge built on that.
Would it be right to say the group is in consolidation phase?
It is growing across financial services, Idea. Retail is growing and cement will grow once the economy picks up. But yes, we have come off on the back of a large capex programme. But, growth and consolidation are there. We keep consolidating and then growing. Growth spurts have to be there with consolidation.
Any plans for new businesses?
Within financial services, asset reconstruction is an interesting business. There are growth opportunities within existing business, one wants to completely flesh out and then move because that is the most natural way to grow. We will constantly scan the background, keep the gun powder ready but not start new businesses just for the novelty value of it.
What are your thoughts on valuations of ecommerce firms?
I think that now there will be interesting things happening in ecommerce business. That is my intuitive sense. Lots of people will see cash flows are getting turned off and, because of that, you will see consolidation in the ecommerce space. I sense the weaker players will either shut down or get bought out. From a business point of view, level of discounting will go down. So, if you stop getting funds, where will you discount from and some will have to shut shop.