BK Birla group plans mega recast

Cement units said to be brought under UltraTech Cement; paper, tyre arms may be sold

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The BK Birla group is giving finishing touches to a plan to bring its cement companies under UltraTech Cement, sell the tyre and paper divisions and merge its textile division with Aditya Birla Nuvo.

The group will retain its real estate across the country, including a 40-acre plot in central Mumbai. Kumar Mangalam Birla, chairman of the Aditya Birla group, will take over as chairman from his grandfather, B K Birla.

A source said the cement units of Century Textiles, Kesoram Industries and Mangalam Cement were likely to be merged with UltraTech in an all-stock deal, and the textile division of Century would be merged with Aditya Birla Nuvo. Century is looking for a buyer for its paper division and has started talks with ITC.

ITC in a message to the stock exchanges on Wednesday denied any talks to buy the paper division.

Bankers said the merger would make UltraTech a formidable firm in the cement sector.

Axis Capital is advising the Birlas on the restructuring. An Aditya Birla spokesperson declined to comment on the restructuring plan.

The BK Birla and Aditya Birla groups control cement businesses  of UltraTech, Century Textiles, Kesoram, and Mangalam Cement.

“UltraTech could improve profitability of BK Birla’s cement assets by 50 per cent. Approval by the fair trade watchdog Competition Commission of India may be needed in Maharashtra, Karnataka, and Madhya Pradesh,” Credit Suisse said in a note on April 14.

Apart from value, the new management wants to bring focus to the BK Birla group companies that had diversified into unrelated fields. Kesoram has made losses for 10 quarters. In the quarter ending December 2014, Kesoram made a loss of Rs 244 crore on sales of Rs 1,214 crore. The loss in 2013-14 was Rs 515 crore on sales of Rs 5,081 crore.

Kesoram’s loss is mainly due to the tyre business, declining rubber prices, high finance costs and weak demand from the commercial vehicle sector. Century also made losses in the December quarter (see chart).

Both Kesoram and Century have gone through one round of capital infusion from the promoters. In June 2013, the Birlas increased their stake from 27.1 per cent to 48 per cent in Kesoram. In September 2014, however, its equity stood at Rs 18.2 crore and was close to becoming negative. In Century, the Birlas increased their stake to almost 50 per cent.

The Kesoram board has appointed a committee of directors to sell its tyre division. A decision is expected soon.

For Kesoram, cement was the key driver of profitability in 2013-14. It generated 10 per cent return on capital employed and contributed over 95 per cent of earnings before interest and tax (Ebit).

The BK Birla group companies are set for a transition on the lines of the Aditya Birla group when it was taken over by Kumar Birla after his father’s untimely death. Group companies will be asked to consolidate operations. In the cement business, the benefit of consolidation of Century, Kesoram and Mangalam with UltraTech is estimated at Rs 300-350 a tonne, say analysts. A large part of this will be driven by higher prices and lower costs.

Mid-cap companies sell cement at a three-four per cent discount to large-cap companies. This is true of the price difference between UltraTech and Century, Kesoram and Mangalam.

Analysts expect UltraTech to absorb the individual brands, which should help increase the Ebitda (earnings before interest, tax, depreciation, and amortisation) of the acquired assets by Rs 200-215 a tonne. There will be cost synergies and savings of Rs 75-100 a tonne.

Mangalam's plant in Rajasthan sells only 40 per cent of its output in the state. Another 40 per cent is sold in Delhi and the rest in Madhya Pradesh.

UltraTech had a bigger presence in Delhi and freight costs could be rationalised for the combined entity, said Credit Suisse analysts Anubhav Agarwal and Badrinath Srinivasan.

“Both plants of Kesoram are serving Maharashtra and it can be more economically served through UltraTech's plants. Likewise, the eastern part of Andhra Pradesh can be more efficiently serviced through Kesoram's plants,” the analysts said.

Century’s Maihar unit in Madhya Pradesh could focus on the state and Uttar Pradesh and the rest of the areas could be more efficiently served by UltraTech.

The recast will benefit shareholders of all the four cement companies and create a formidable company against competition from the Holcim-Lafarge combine in India.