S K Birlas Quiet Revolution

Sudarshan Kumar Birla prefers to stay out of the limelight these days. But his Rs 1,500 crore Calcutta-headquartered group is bustling with activity. It is refocusing itself by shedding stake in some businesses and reassessing its strengths in the rest. But the Birla patriarch is happier keeping the covers on his plans.

The silence is understandable. It was only three years ago that Birla was ousted from the Rs 242.55 crore Chloride Industries. Today, the group with interests in diverse businesses like cement, textiles, plastics, heavy engineering chemicals and international trade, is in the midst of a restructuring exercise. The objective is to prioritise the groups business interests by bringing down its stake in non-core businesses. The process began in late 1996 with the group companies VXL Landis and Gyr (turnover Rs 44 crore) where the Birla stake came down to 26 per cent from full control.

 

This strategy will be extended to other group companies like VXL Engineers and Siddharth Soya. What is interesting here is not just the ongoing upheaval at one of the countrys oldest business houses. It could provide pointers to several other business groups up against the same problem: a widely diversified business portfolio.

For the Birla group, the strategy primarily concerns the non-core businesses. These are electronic meters, engineering and soya oils, which together contribute about Rs 130 crore of the groups Rs 1,500 crore turnover base. In late 1996, the group began putting in place its new strategy for non-core businesses by its moves relating to group company VXL Landis and Gyr, the electronic meters maker, and now intends to extend this to the other companies, VXL Engineers and Sidharth Soya, as well.

The first step

The S K Birla prescription for surviving the changing times is simple. In a situation where the business does not fit into the groups future vision, it will bring exposure down. Despite the lower stakeholding, the group will continue to be involved in the company, either financially or managerially. Says a source close to the group, The strategy is to remain associated with the non-core businesses and add value. That way, the group will be involved in the business and reap the benefits once the company grows further.

Consider the case of the Rs 44 crore VXL Landis and Gyr (VLG). The S K Birla group had originally set it up as Universal Electricals Ltd, with its plant at Joka near Calcutta. The company, which supplied meters to state electricity boards, found the SEBs unable to remain regular customers owing to their severe financial strains. In 1985, the group thought it best to merge it with flagship Birla VXL Ltd. Birla had two options before him: restructure the company or close it down. In a state like Bengal, the latter option was virtually ruled out, and Birla went about searching for new avenues for his meters business.

Eventually, in 1993, the group joined hands with Swiss giant Landis and Gyr (L & G). And Universal Electricals was hived off into a 60:40 joint venture VLG. With a 40 per cent stake, L&G brought in about Rs 11 crore to the equity. This amount was spent in importing high-class machinery. The new enterprise spent Rs 30 crore to modernise, upgrade and extend its factory.

But in 1996, the $7 billion Swiss franc engineering giant Electrowatt, the European engineering giant, acquired L&G internationally. This brought about a shift in the meters business. When the focus moved from electromechanical to electronic meters, Birla decided to relinquish his dominating role in the venture. Consequently, as an associate company, VXL sold 34 per cent of its stake to L&G for about Rs 30 crore. This brought the SKB holding down to a lower, but critically important, 26 per cent.

The change in stakeholding will mean many things. While the foreign partners can bring in balancing equipment, technology and new products, the Birla group can help through finance, marketing and its network in India, says a Birla manager. For the foreign major, it is a good entry strategy. For the Birla group, it serves the larger purpose of focusing itself more narrowly on non-core businesses. However, one thing the group is clear on is that it will not hive off these businesses in a distress sale.

Extending the strategy

The VLG experience proved a few things. A turnaround strategy can be pushed through without pain, retrenchment or harsh decisions. Significantly, no Universal worker was retrenched under the new arrangement. Instead, they were provided with training to keep them abreast with the latest technology. Even control was relinquished in such a way as to ensure a smooth transition.

The group has proved that this was a turnaround strategy which has clearly worked, says the manager.

The VLG formula is likely to be extended to at least two other non-core areas. VXL Engineers and Sidharth Soya Products are both wholly-owned subsidiaries of Rs 536 crore Birla VXL.

VXL Engineers with a loss of Rs 4.89 crore has been ailing for quite some time now. The downslide began two years ago, when the ministry of defence slashed its budget. The unit, which earlier manufactured specialised fuses for Russian guns, has today diversified into telecommunication instruments and components. Sensing that telecom is a high-growth possibility, the Birla group is looking around for a joint venture partner.

The company is in a growth sector and has a skilled workforce. That can be exploited to introduce new products, explains a senior Birla group executive. The company is now moving towards rationalising its base product, fuses, and adding new items to its product line. The foreign partner in VXL Engineering could then use the products and components for its own requirements and also export them.

Or consider Sidharth Soya which relied heavily on exports. With the dwindling of Birlas overseas presence his Malaysian company, Nalin Industries after successive losses, went under in 1993 Sidharth Soya started making losses. By 1994-95, the company was in the red with a loss of 2.12 crore. With a turnover of Rs 71.56 crore and a gross profit of Rs 2.99 crore in 1995-96, the company is today looking at minimising the risk factor. From its main business of bulk oil extractions, it is now looking at value addition. Going retail or a foreign tie-up are the two options. Value addition apart, the Birla group could help liaise with government agencies, help in domestic marketing and even finance.

Preparing for tomorrow

While textiles, cement and chemicals will be the key focus areas, the Birla strategy is to nurture some businesses with future potential. One such company is Birla Metals, which is putting in place a mega iron-making complex with an estimated Rs 700 crore investment. The complex will also have a slag cement plant to go with it.

Says a company executive, The expansion strategy is to add value in a much larger way, using the management skills developed by the group in its core businesses. Birla Eastern, the think-tank outfit of the group, is responsible for outlining these broad strategies for growth. Towards that end, the group is planning expansions and strategic diversifications like iron-making.

In fact, the lure of seeing present non-core operations turning into core businesses is one of the key reasons why the group has chosen to remain associates in some fields. For instance, after selling off its 34 per cent stake in VLG at Rs 35 per share, the new VLG board will have two Birla representatives. This is a clear indication that the group does retain more than a passing interest in the company.

A key to the Birla strategy is the introduction of new products in all its businesses. While foreign partners will lend lustre to its product mix, in the core areas, the group is moving ahead by extending its range. For instance, Birla VXL Ltds textile group is entering the ready-made garment sector in partnership with the Haggar Clothing Co of the US. It has also entered into an agreement with Masuzawa of Japan for setting up a subsidiary to manufacture spun silk yarn mainly for export. And while the group goes ahead with its plans quietly, the revamp is expected to bring it back on the growth path.

The S K Birla prescription for surviving the changing times is simple. In a situation where the business does not fit into the groups future vision, it will bring exposure down.