| Aditya Birla Group
has ridden its commodity cycles smartly
aluminium and copper, the Rs. 140,000-crore ($28-billion)
Aditya Birla Group lives off two of the worlds most
sought after, hence, volatile commodities. It was the earliest
among Indian groups with a global view of business, with plants
across the globe even a decade and a half ago. Yet, it has
gone on an acquisition overdrive since 2000, picking up as
many as 15 companies. But the downturn has come to haunt the
Group that earns a majority of its revenues from commodities.
Businessworld's Rajeev Dubey and Muthukumar Kailasam met the
Group Chairman, Mr. Kumar Mangalam Birla to ask how he rides
the commodity cycles in tough times. Excerpts:
What is the fundamental philosophy that guides your
handling of the commodity cycles that play such critical
role in the business of your Group?
Inherently, every commodity goes through cycles of growth
and de-growth. That is something you have to live with.
You have to become the lowest cost producer, so that you
are least affected or the last person to be affected.
Second, you move down the value chain and keep moving closer
to the customer, getting into value-added products to the
extent possible. That reduces the cyclicality to an extent.
These are the only two things you can do to mitigate the
impact of commodity cycles, besides, of course, quality
and customer service.
There are different theories on how to ride the cycles.
There is the stick-to-the-knitting theory, and there is
the lateral integration theory. You seem to be going the
Integration makes sense in most cases.
I cant say if it works across industries, but in
most cases it makes sense. Stick(ing) to the knitting
I dont think it is a good idea for India. The country
is in a stage of evolution where many sectors are opening
up that were earlier not open to private participation.
Sectors such as insurance and telecom. If you stick to the
knitting, then you are shutting off opportunities. Take
retail, for example. No one has expertise in that area.
So by that logic, no one should have invested in retail.
Sticking to the knitting would probably apply to a developed
economy where there is low growth. In our case, it is very
much an economy that is in an evolutionary phase, where
new industries and opportunities are available to the private
Lateral integration had not been the practice till recently.
But in these times, it seems to be gaining acceptance.
In a sense, it gives you greater control of your destiny.
This, of course, was part of the strategy behind your
largest acquisition Novelis. It faced quite a bit
of criticism, but why did you remain silent?
It is simple logic. Like I said, for a commodity, it is
important to get into a value-added segment that
is a much more consistent and less cyclical business. Novelis
has the largest downstream play for numerous rolled products,
and it is the leader in all except for one. Plus, it has
a very high level of competence in its manpower.
In the medium to long-term point of view, it was very important
to acquire. You could question it by saying that you paid
a little less for it, or you paid more for it. All of that
one has to take into account on a long-term perspective.
Sometimes, shareholders views may not exactly be similar
to the views of the management. An acquisition of this size
cannot get accretive in one year. Also, I think we are not
yet used to such big acquisitions. So, it takes time to
understand the complexities, and to get used to it. We have
to see (it) from the point of whether it is an asset that
is adding value in the long term.
Given the fact that commodity cycle is now down, when
will Novelis deliver shareholder value?
If we knew that commodity cycles would go down, then we
would have paid less. No one knew about it. Having said
that, the long-term value remains the same. We had said
from the beginning that it will be value accretive in three
years. After this cycle, it may be value accretive in four
years. So, there is another three years to go. Which, for
an acquisition of this size, is quite reasonable.
To what extent has Novelis been hit by auto sales drop
in the US and Europe?
It has been (affected) because of drop in sales in both
auto and construction.
And how is it countering it?
By providing technical services to customers and by customising
aluminium. Thats the way to counter this downturn
to an extent.
Where do the acquisitions of copper mine figure in this
We are mapping and looking around for mining. It has to
suit our requirement in terms of size, location, etc. Such
acquisitions will give us better control over scarce resource.
Is it tougher to manage commodity cycles from India
or from abroad?
When you are abroad, you are more prone, face more direct
and fierce global competition. So, in that way, it is much
more difficult managing them.
Commodity businesses are prone to dumping. How should
it be handled?
The government has to be quicker in implementing safeguard
duties against dumping. Other governments are faster. We
are not asking for protectionism, but just cooperation in
these special circumstances like every other developed country.
Economic nationalism is gaining ground across the world
as the global slowdown worsens. To what extent does it hurt
Yes, this is already happening. I think we are beginning
to see the bottom, and we should be able to recover to a
large extent by the end of the second quarter. I think recovery
would be very sharp in India.
But are nationalistic concerns hurting a Group such
as yours that works across geographies?
It does hurt. But it is very important for us as a country
to be alert in such situations and have a strategy to tackle
The changes in your Group profile over the years suggest
that you are looking at a balancing factor against commodities.
Is that a conscious decision or one led by opportunities?
It is a conscious decision to have a part of the portfolio
that is asset light. It is not opportunity-led; that happened
Are you looking at more non-commodity sectors to balance
the commodity bias of the Group?
We have a presence in financial services, BPO and telecom.
We are not looking to invest in sectors beyond this as of
is the strategy behind the acceleration in M&As? Are
you consciously taking more risks?
I think so, because the risk of capital for the industry
as a whole has changed. Industries in India, particularly,
are in the consolidation stage, more so than they have been
in the past. The fundamentals are stronger as companies
have grown and that gives them the ability to acquire. So
it is both companies have become larger and financially
And how much of it had to do with, let us say, the capital
that was available?
One, it was readily available, and it was also supposedly
cheaper than in the past. And also, as companies became
stronger and financially more robust, I think the appetite
for acquisitions and risks becomes larger.
How has the Novelis acquisition changed your view of
things? Does it makes sense to do business in India or does
it make sense to look abroad?
Again it depends on the quality of asset. For example, if
I want pulp for viscose fibre, Canada has the best wood
and the best quality of pulp, thats why we acquired
it there. There is no comparable wood here in India. In
the case of Novelis, there is no comparable company here
in India or anywhere in the world. So, it is asset specific.
But say, you had cash in hand and you want to deploy
it. Would your destination be India? Many people believe
now that India is too expensive for investment...
I wont say that. I think you have to take a sectoral
approach and see how it works for each sector.
Your Group has grown in the last fiscal, but profit
has dipped. How do you plan to bounce back?
Through productivity improvements and cost rationalisation.
For commodity business these are the two basic levers that
one would work on, which we are doing.
Any immediate plans to retire debt?
Not as of now, I think it is the time to preserve liquidity.