Targeting to rope in a strategic partner or a private equity player to rescue its stressed tyre business, Kesoram Industries, the flagship of B K Birla Group of companies, has decided to spin off the tyre division altogether into a separate company – Birla Tyres.
“It would be much easier for us to rope in a private equity or a strategic partner once the tyre vertical is turned into a separate company which will focus on tyres”, P Radhakrishnan, chief financial officer at Kesoram Industries said.
The 7.5 million tonne cement business of the company will remain with Kesoram Industries post this demerger.
According to the official, the nature of risk and competition involved in each of the cement business and tyre business is distinct, necessitating different management approaches and focus.
Radhakrishnan said via this demerger the group will be able to leverage its potential in each of the segments to the fullest, which will translate into paring its accumulated debt of Rs 34 billion while improve the cash flow situation.
“From September 2017 to September 2018, we have been able to reduce the debt by Rs 5 billion. We feel that reduction of debt necessitates the creation of a new corporate entity for the tyre business”, he said.
In the last fiscal year, although the cement business posted a Rs 1.28 billion profit, the tyre division posted a loss of Rs 1.29 billion which in effect led Kesoram Industries to post a pre-tax loss of Rs 14.3 million after adjustments.
At the EBITDA level, the cement business, in the 2017-18 fiscal year stood at Rs 2.12 billion but the tyre division posted a negative Rs 900 million.
Post the demerger, the tyre business will inherit Rs 10 billion of the accumulated debt from Kesoram Industries.
Currently, this tyre business, with a turnover of Rs 14.53 billion, accounts for 39 per cent of the company’s consolidated revenue.
According to this demerger proposal, passed by the company’s board on Tuesday, the new entity will have a similar shareholding structure like Kesoram Industries and will be listed on the country’s bourses after clearance from the NCLT and other relevant authorities.
As on September 30, 2018, the promoter holding in the company stood at 53.18 per cent.
The tyre business had always been a cause of worry for the company in the recent past. Citing over-capacity in this vertical and the need to reduce its debt, Kesoram Industries, in 2015, sold off it Laksar tyre unit to JK Tyre for Rs 21.95 billion.
At the time of that sale, the company’s tyre division was undergoing a loss of Rs 896.6 million while the long-term debt had mounted to touch Rs 35.22 billion.
It had thereafter charted out entry into the passenger car radial business via its plant in Balasore in Odisha for an investment of Rs 8 billion.