In a mega restructuring exercise, the BK Birla group is giving finishing touches to a plan under which group’s cement units will be bought under Aditya Birla group’s cement major Ultratech, tyre and paper divisions will be sold off and textile division will be merged with Aditya Birla Nuvo. The group will retain its real estate spread across the country including a 40 acre prime plot in Central Mumbai. The group will also see a top level change with Kumar Mangalam Birla, currently chairman of Aditya Birla group, taking over as the chairman from his grandfather BK Birla.
A source close to the development said while the cement units of Century Textiles, Kesoram Industries and Mangalam Cement is likely to be merged with Ultratech in an all-stock deal, the textile division of Century will be merged with Aditya Birla Nuvo. Century Textiles is also looking for a buyer for its paper division and has initiated talks with cigarette major, ITC. ITC today denied any talks to buy out the paper divison to the stock exchanges today.
Bankers said the merger of all cement assets under Ultratech will make it a formidable player in the cement industry and take its capacity to the 100-million tonne mark - taking into account Ultratech's own expansion plan.
According to Credit Suisse, the BK Birla and Aditya Birla group have cement companies spread across India and in four key companies which includes Ultratech’s 72 million tonnes capacity, Century Textiles’ 12.8 mt capacity in West and Central India, Kesoram’s 7.25 mt capacity in South and Western India and finally a 3.25 mt capacity at Mangalam Cement in the North.
“In our view, consolidation should be value-accretive as Ultratech could improve profitability of BK Birla cement assets by 50%. The Competition Commission of India (CCI) approval may be needed for reorganisation of output in Maharashtra, Karnataka, and MP,” said Credit Suisse in a note dated April 14. Axis Capital is advising the Birlas on the restructuring plan.
Apart from value creation, the new management wants to bring more focus to the BK Birla group companies which had diversified into many unrelated fields which are making loss-making. The cement capacities of the four companies is not is not giving any synergy benefits to each other, say group insiders.
Kesoram tyres divison on sale
The Rs 5,080-crore revenue Kesoram Industries is making losses for the past 10 quarters and this has resulted in its equity base becoming almost negative. In the quarter ending December 2014, Kesoram made a loss of Rs 244 crore on sales of Rs 1,214 crore. The loss in FY 2014 was Rs 515 crore on sales of Rs 5,081 crore. Kesoram’s loss was mainly due to weak profitability at the tyre business, declining rubber prices, high finance costs and weak demand from the commercial vehicle industry. Century is also in the same boat and made losses in the December quarter.
In fact, both Kesoram and Century have already gone through one round of capital infusion from the promoters. In June 2013, the Birlas increased their stake from 27.1% to 48% now in Kesoram by infusing fresh capital. As on September 2014 results, its equity stood at Rs 18.2 crore and is close to becoming negative and analysts say Kesoram would require another round of fresh capital infusion. In Century, the Birlas invested via preferential offer and increased his stake to almost 50% now.
Nudged by the Birlas, the Kesoram board has now appointed a committee of directors to sell its tyre division. Many Indian companies have shown interest in the tyre division in North India and a decision is expected soon on the sale.
For Kesoram, the cement segment was the key driver of profitability in Fiscal 14 and was generating returns on capital employed of 10% and accounting for over 95% of company-level earnings before interest and tax (EBIT). Its cement profitability in FY14 was Rs 550 a tonne and is in line with mid-caps and below the large-cap average. Similarly, Century is selling cement at a discount to Ultratech and with the brand change, it will be able to get a premium pricing.
Cost savings
The BK Birla group companies are set for a transition which will be almost similar to a change witnessed by the Aditya Birla group when it was taken over by a young Kumar Birla after his father’s untimely death. The group companies will be asked to work on synergies with each other and consolidate operations. In cement business alone, the overall synergies benefits of consolidation of Century, Kesoram and Mangalam with Ultratech is estimated at Rs 300-350 a tonne. A large part of this synergy will be driven by higher realisation as brand transitions to Ultratech, lower freight costs, and savings in fixed costs.
Elaborating, analysts say typically, mid-cap players sell at a price gap of about Rs 15 for a 50 kg cement bag or a 3-4% discount to the large caps. The same is true for pricing difference on average between Ultratech and each of Century, Kesoram and Mangalam. Post consolidation, analysts expect Ultratech to transition individual brands to the Ultratech brand, which should help increase the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne of the acquired assets by Rs 200-215 per tonne.
There will be cost synergies also and savings of about Rs75-100 per tonne. Take for example, Mangalam's plant is based in Rajasthan but only 40% of the output is sold in Rajasthan and 40% is sold in Delhi and NCR region and rest in Madhya Pradesh. Given that Ultratech has a much stronger presence in Delhi and NCR, the freight costs can be rationalised for the combined entity, said Credit Suisse analyst Anubhav Agarwal and Badrinath Srinivsan.
“Both the plants of Kesoram are servicing Maharashtra (Sedam servicing West and Central and 1.5 mt Ramagundam plant servicing East Maharashtra) and in our view, it can be more economically serviced through Ultratech's plants. Likewise, the eastern part of Andhra Pradesh (or Seemandhra) can be more efficiently serviced through Kesoram's plants,” the analysts said.
Besides, the freight cost for Century can be reduced, mainly for West and North shipments where output of Maihar unit of Century in MP focuses more on MP and UP and the rest of the areas can be more efficiently serviced by Ultratech. Similarly a large part of Manikgarh units is aimed towards Mumbai and Pune market and the same can be more economically serviced by Ultratech.
The recast will be a win-win deal for all including the shareholders of all the four cement companies and for the companies to emerge as a formidable player to take on competition from Holcim-Lafarge combine in India.
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