Striving to get 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 into a separate company altogether — Birla Tyres.
“It will be much easier for us to get a private equity or a strategic partner once the tyre vertical is turned into a separate company that will focus on tyres,” said P Radhakrishnan, chief financial officer at Kesoram.
The 7.5-million-tonne cement business of the company will remain with Kesoram after the 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 the group will be able to leverage its potential in each of the segments through this demerger. This will translate into paring of its accumulated debt of Rs 34 billion, while improving 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 the 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 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 stood at Rs 2.12 billion but the tyre division posted a negative Rs 900 million. After the demerger, the tyre business will inherit Rs 10 billion of the accumulated debt from Kesoram.
At present, 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 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 this company. Citing over-capacity in this vertical and the need to reduce debt, Kesoram 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 long-term debt had mounted to Rs 35.22 billion.
It had thereafter charted out an entry into the passenger car radial business, through its plant in Balasore in Odisha, for an investment of Rs 8 billion.