Aditya Birla Group: Hit by capex and drop in commodity prices

The Aditya Birla Group has a reported steady decline in return on capital employed

The Aditya Birla Group has reported a steady decline in return on capital employed (RoCE) and return on equity (RoE) in the past five years while its debt grew at a rate of almost 30 per cent each year. At 9.1 per cent for 2015-16, the Birla group is far behind the business group topper Tatas, which had RoCE at 15 per cent. The RoCE of Aditya Birla Group has steadily declined from 11.6 per cent in 2011-12 to eight per cent by 2014-15.
 
Group executives said these metrics should be looked at in the context of massive investments undertaken and that too at a time when commodity prices crashed to record lows. In the past five years, the group has invested close to Rs  60,000 crore in creating capacities in cement and aluminium. This investment also includes Rs  20,000 crore in buying cement units from the Jaypee group. Idea Cellular is also investing in buying spectrum and increasing its 4G based network across the country.
 
Revenue of the group rose by 9.4 per cent, operating profit by 11.5 per cent, while net profit rose by 2.5 per cent at a compounded average growth rate in the past five years. As a result, the dividends have grown at the rate of 5.8 per cent during the period.
 
With the Grasim-Aditya Birla Nuvo merger, analysts said the promoters would be able to raise stake in group holding companies without spending any cash. The merged entity would own majority stake in UltraTech Cement (now held through Grasim), currently the group’s most valuable company and its cash cow.
 
For FY16, the group’s net debt was Rs  1,21,246 crore on revenues of close to Rs  1,99,279 crore. Its operating profit grew from Rs  22,175 crore in FY12 to Rs  34,794 crore in FY16.
 
Going forward, while gains from the capex in Hindalco and UltraTech will start flowing in, the challenge for the group would be to manage the large capex of Idea Cellular without stretching group finances. The entry of Reliance Jio has impacted the profitability of incumbent operators, forcing them to step up investment in network and spectrum.