The Telegraph
Since 1st March, 1999
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Birlas fret about valuation
- Kumar Mangalam feels the market under-values his firms

Mumbai, July 2: Kumar Mangalam Birla is disappointed at the way markets treat his companies, which he feels have everything in them to be valued higher.

After a year of moving into, and going out of, businesses, the 36-year-old chairman of the AV Birla group said the changes he wrought in the group should have earned the shares of his firms a better deal.

“I must say that the market capitalisation of the group correlates very weakly with the sharp increase in value addition. This is a source of disappointment. While I do not think that we need to be drawn into the expectations game of the kind fuelled by analysts, over a period of time, we do hope the market valuations will reflect our underlying strengths and performance,” Birla said.

Though he makes no bones about the fact that the market should be more generous than what it is now, there is a faint realisation that the low valuations could be the result of the cyclical nature of the group’s commodity businesses. “I must add that in the course of shrinking the business portfolio and placing larger bets on a few industries, we have a high-risk strategy, though it holds out the promise of generating higher returns.”

Analysts say Birla’s lament — the first time an industrialist has confided that he is unhappy with the valuations of his companies — is essentially a message to shareholders that his companies deserve much better.

“It is primarily done with the motive of taking his shareholders into confidence,” says Arun Kejriwal of Kejriwal Research & Investment Services. “It is to say that even the management knows that despite our efforts, the value enhancement has not taken place. It is, after all, a public relations exercise of sorts,” he added.

The Aditya Birla group has carried out a sweeping restructuring and re-orientation its core businesses in the past few years. It has quit the sea magnesia project, selling the plant and machinery even at scrap value to cap its losses. The Birlas have also pulled out of the petroleum refinery business at their expense — a one-time loss on the books of Grasim Industries and Hindalco. Analysts have applauded the moves, saying they are all a stitch in time.

While the group bit the bullet by walking out of certain businesses, it also made some high-stakes investments. One of them was the recent Rs 2200-crore deal that gave it control of Larsen & Toubro’s cement business. Then came the forays into infotech and business process outsourcing (BPO) through acquisition of companies like PSI Data and Transworks.

The recast wave also swept through Indian Rayon. An amalgam of diverse businesses, it was turned into a leaner, more focused entity when its cement wing was spun off into Grasim.

Indo-Gulf’s copper business was folded into Hindalco, which now has more muscle to stake a strong claim to Nalco, the state-run aluminium major on the block. Hindalco had snapped up Indal a few years back by acquiring the equity stake of Alcan.

These gains appear to have been lost on the market. Many say it could be because the group holds small stakes in its firms. The Birlas, for instance, have only 20.42 per cent in Grasim, while financial institutions and foreign institutions are sitting pretty with 38.23 per cent.

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