TAKING ON THE WORLD
Sumant Sinha returns to India to unlock the value of the Birla Group
By Tom Leander

Picture yourself at a poolside idyll in Goa. Families lounge, children frolic in the water, leaves rustle in a warm breeze. Waiters carry fruit drinks to workaholic bankers, sunning themselves on deck-chairs and reading the financial papers with Varnet sunglasses. Taking his leisure at the pool is Sumant Sinha, a 36-year-old debt capital markets specialist at ING Barings in New York, home for the holidays with his wife and children. It's December holiday, 2001, and the last thing on his mind is to come home to India and become a CFO.

But Kumar Birla has just spotted him. The head of the legendary Birla Group, a conglomerate started by his great grandfather, Birla has been subtly pressing Sinha to become the finance chief of his company for a year. Birla Group is being challenged by global competition, intensifying in India's opening market, and the young tycoon, five years Sinha's junior, needs a CFO with the 'tude of an investment banker to chart a different course for the company. And Sinha looks like a good fit: he too comes from a famous family in Indian finance, with dynastic credentials. His father Yashwant, served as finance minister under President Atal Behari Vajpayee for three years until he was appointed external affairs minister in July.

They chat, introduce each other's wives and children. Finally Sinha bites the bullet. "So, have you found someone to fill that job?"

"As a matter of fact, I haven't," says Birla. Perhaps it's the pleasant breeze, the distant chorus of children in the pool, or the tycoon's engaging smile, but Sinha says yes.

Both he and the company will never be the same."

Part of the House

The Birla Group is a legend in India. Kumar's father, Aditya Vikram Birla, who died of prostate cancer in October 1995, built a business house that tallied US$5.6 billion in sales per year with profits of US$500 million. It has a market cap of US$4 billion, with about 700,000 minority shareholders.

Birla himself and his siblings and extended family have their wealth tied up in the majority ownership of its companies (no ironclad figure of their holdings has been published). Kumar Birla was listed as the 200th richest man in the world, with US$2.1 billion of personal wealth, on the Forbes list of billionaires in March 2002. But the Birla Group is one of Asia's most unwieldy conglomerates. It has evolved into a quasi-public company with major shareholdings extended like tentacles into many cash-rich businesses - primarily in metals, textiles, cement and fertilizer - as well as many under-performing ones. With 16 companies and joint ventures in India and 22 separate international companies, mostly in Southeast Asia, the group is India's most globally diverse business, but still lacks the heft of a "world-class" company. Birla, the eldest son and an heir apparent had been urging his father for years to modernize the group's structure. But the father resisted. By 2001, with the company firmly under his control, Kumar was ready to spread his wings.

He needed a flight navigator to pull together the company and extract the value locked up in the many companies. "One thing that me and Mr Birla [it's always Mr Birla] keep running across in our talks with investors and analysts is that the Birla companies are consistently undervalued. We had to find the reason why, and unlock that value."

But to extract the value in the company won't be easy. It's even difficult to fully grasp the company's size, its complex cross-shareholdings, doubled-up financial control systems, its separate companies with wildly different core businesses - all of the no-nos in the rulebook of managing to increase shareholder wealth.

And yet this is exactly what's needed for the company's long-term survival, because India is rapidly changing. The Indian outsourcing boom - led by comparable companies such as Infosys - has made India the world's second largest exporter of services, with Ireland being the first. P.K. Basu, an analyst with CSFB in Singapore, estimates that India's current account should reach a surplus of 1 percent in March. The Economist Intelligence Unit sees 6 percent GDP growth in India's 2003 fiscal year. And the Indian market is deregulating, transferring major companies into the private sector, removing tariffs and allowing foreign competition to enter for the first time.

To Sinha, something remarkable was happening. He was being asked to harness a company with the resources, brainpower and will to become a global player in its key industries—something that, outside of the high-tech world, no Indian company has succeeded in doing.

First Solo

Fast forward to November, 2002. The lobby of the Taj Majal Hotel in Mumbai is the buzzing center of several overlapping worlds. Refurbished in a traditional raj style, it seems an incongruous backdrop for the constant parade of conspicuous consumption. Ancient men in tuxedos are helped into the lobby from their Rolls Royces, a Bollywood star leads an entourage, supermodels sashay in pairs, wedding guests in bright outfits head toward the Harbour Bar. American retirees watch all in bewilderment. At around 8:00pm, when the lobby is at full tilt, Sinha is pacing, trying to hear the instructions of his boss on the cell-phone.

He's talking about what the newspapers were reporting in what is to become a notorious deal launched by Birla's largest company, Grasim, which is India's fourth-largest producer of cement for the next largest producer, called L&T. The newspapers had reported that morning - before Birla or Sinha had been notified - that Grasim's attempted buyout had been shut down pending investigation by the Securities Exchange Bureau of India (SEBI), the Indian SEC, for alleged violations of takeover regulations. The L&T deal is definitely the new Birla. Nothing like it in India had been tried before. Birla bought a 10 percent stake in the cement company, which had been actively looking to sell itself to a major foreign company, such as Mexico's Cemex and France's Lafarge, but not getting very far. Not wanting to sit on the sidelines, Sinha decided to raise the stake to 15 percent and then made an open offer to L&T shareholders to raise the stake to a controlling 35 percent.

L&T's management regarded this as a hostile bid, while Sinha dubs it, "semi-hostile". "Nothing in India had ever been done like this before," he says.

Sinha replaces his mobile phone in his inside suit jacket pocket, and dismisses the violation charge as ridiculous. He's clearly perturbed. L&T's major shareholders are several nationalized insurance companies, as well as the Unit Trust of India, an investment fund. Although neither Sinha, nor L&T or SEBI would comment on the progress of the investigation, one possible explanation is L&T's management complained about the Birla Group's aggressive negotiations with the major shareholders, which was designed to win their support for a hostile bid.

In any event, Sinha's strategy of combining the companies had backfired for the moment, prompting the new CFO to express frustration, if not wonder, with the way the M&A environment is unfolding in India. "It's hard to know," he says, "how to build a strategy. You see, the Indian rules for M&A are hard to read. You don't know whether to plan your action based on a current rule, a rule currently in draft, or a future one."

Yet the strategy makes sense. The Indian cement market is fragmented, with four major players. With so much capacity, it doesn't make sense to devote free cash flow to adding capacity. "But there's a powerful argument to gain value from consolidation," Sinha says. Plus, he describes it as a carefully crafted defense strategy to push Grasim into global markets. "With tariffs in India dropped now to 4 percent, a player like LaFarge or Cemex could enter with their eye on the long term and afford to reduce prices."

"This is a very price-sensitive business," Sinha adds, "with the margins very thin already." By owning a combined L&T and Grasim, Birla could protect the company against this kind of aggressive underpricing while it attained the capacity to buy a cement plant overseas. The journey of a thousand miles may begin with a single step, but in India that step always seems to have a banana peel beneath it.

Structural Impairment

If he knows he can count on resistance from the outside, Sinha holds out great hopes for the highly independent group of companies. Here his brief is multilayered. "I'm in charge of M&A," he says, "I'm in charge of governance-related activities. This means improving business processes, from IT to lines of reporting in finance. And I'm responsible for IR." The goal of all these tasks would be to unlock the value in Birla's groups of companies. "The first thing I did when I joined - now 11 months ago - was to visit analysts and investors and quiz them about Birla. The general feeling was that our companies were undervalued. The point was to find out why - was this a problem of perception, of management, of strategy?"

There are over 30 finance and treasury heads in Birla companies and it's in his relations with them that he says he has to proceed with care. Each one of these CFOs has been at the company for far longer than Sinha, and each is a kind of savant at the problems of his own business. Yet it is to them that he must turn to unlock the company's value. "I see the change here as incremental," he says. "Over the years, they've developed definite ways of doing things, and you can't simply come in and roll over them." Still, he admits there's a lot of confusion over the lines of reporting in finance, and, as such, a real potential for agency problems in which the finance chiefs become accountable to their own narrow corner rather than the greater good of the company.

The reporting structure of CFO to board is difficult to understand at Birla. Talking to the company's IR and communications director, for example, this reporter had to request clarification three times about the ultimate accountability of the CFOs. Finally, when I turned to Sinha, he said: "It is confusing."

The company expanded in the era known in India as the "license Raj". Sinha explains that the only way to grow during this period of about 25 years that spanned roughly from the Nehru era to the mid-1990s was to obtain a license from the government to go into a certain business. "The point is that you tended to pursue any business you could to obtain a license," says Sinha, " no matter whether it made sense given current businesses or not." The model that developed became fragmented, with certain companies, such as Birla's copper company Indal owning both an immense copper smelter and a fertilizer business. "What happens is that you get hit twice by the market," he notes. "If the fertilizer stocks are depressed, then copper goes down too, and vice versa. Who would want to invest with that unnecessary risk?" Another example would be Indian Rayon, Birla Group's smallest flagship, which CFO Adesh Gupta admits is a conglomeration of non-core businesses such as insulators and high-tech nestled into a company whose main product is viscose fiber. Likewise, the regulatory regimes of the license Raj encouraged companies to set up their governance structures in isolation, each with its own set of government connections and boards, and with an uncertain line of reporting and accountability.

That structure persists today. At the top sits Kumar Birla. Three bodies in charge of overseeing his companies report directly to him. First is a board of directors - which is responsible for Birla's business sectors - with each director in charge of a certain type of sector, whether it be metals, financial services, or fertilizer. Some of these directors are employees of the Birla Group, others are independents. The second body is a group of line officers - CEOs of the individual companies. Some of these line officers are also directors and heads of business sectors. The third body is formed of the "business functions," and this sector is comprised mostly of CFOs - reporting, too, to Birla. The most interesting thing here is that the CFOs in most cases do not report to the CEOs of their own companies, but collectively to Birla.

The multiple lines of accountability can lead to confusion, yet the structure has at least embodied a tradition of financial independence from individual businesses, giving the CFOs a degree of decision-making power. Financial accounting in Birla has its own traditions. The Birla family is Marwari, a name given to a group of people who hail mostly from Rajasthan. A system of accounting called partha was developed in Marwari culture that permeated many Indian businesses, and its principles still influence the accounting and financial structure of Birla. Partha is a manual system to determine input costs and the daily cash profits as compared to budgeted profits. Kumar's grandfather Ghansyam Das Birla, developed a system of accountability based on partha, in which each company in the group had to draw up a series of informed estimates of how much it should cost to manufacture a particular volume of production, sell it and meet a profit target based on this estimate. The amount of capital it takes to support the manufacturing was also taken into account.
The tradition developed in the group that all financial managers were accountable for very specific targets based on capital expenditure - and accountable directly to the top. As recently as 2001, Birla himself hired the Boston Consulting Group to install its Cashflow Return on Investment (CFROI) metric, which functions as a kind of computer-spreadsheet era version of partha. It is Sinha's job to make sure that CFROI is installed properly in Birla's many companies. (Yet the group company has yet to publish CFROI figures for its flagships.)

The case of Grasim shows just how much work he has to do. Sinha says that Grasim is making a healthy return on its capital. Grasim's annual report shows return on average capital employed - profits before interest and tax divided by average capital - to be 12 percent for 2002. But a more stringent look at the company's use of capital reveals it is losing money. The US consulting group, Stern Stewart and Co recently analyzed the cement sector in India on the basis of EVA, which subtracts after tax net operating profits to form a reckoning of how capital costs are affecting a company's results. Grasim's EVA profits stand at negative 217 crores (a crore is a unit of 10 million; 217 crores rupees equalled US$44 million on March 31, 2002) for last year. To be sure, many cement industry players are worse - Grasim's would-be acquisition L&T has a negative EVA of three times that much.

These dismal numbers make the reason behind Birla's crusade for its weaker cousin L&T abundantly clear. The only way to make money in this business is to force consolidation in the industry, producing economies of scale. This is a whole new adventure for India's managers. Consolidation not only means following the precepts of systems integration, streamlining the supply chain, but also firing many people whose jobs become redundant in the combined company. In an era in which the social safety net for Indians is diminishing, this will not be an easy thing to do.

Co-Pilots

NIt's possible, too, that the group's intricate reporting structure will have to be overhauled, and that much value is lost simply because under such a system it's very tough for the ultimate business owner - and his CFO - to glean what's going on in the subterranean gears of his empire. Sinha refers to the CFOs of various companies as his colleagues and business partners, but they don't - on paper - report directly to him. That he has the ear of his boss and the power to insert new controls and assess their businesses gives him clout. But Sinha will have to prove himself a master diplomat in order to shift the momentum for internal change. It is both Sinha's fortune and misfortune that he works primarily for a single, powerful shareholder - one who shares his taste in holidays and who takes the traditional route to hiring his own man. Why? Because in India, the inertia of tradition has a way of clobbering the forces of change. Kumar Birla himself must pay attention to the traditions of patronage inside his family as well as his vision of a modern, capital-conscious global company. That tradition is rich. His grandfather was a favored emissary between Mahatma Gandhi and the Indian business community. A global company based on the precepts of shareholder value is a far cry from Gandhi's satyagraha principle of moral action.

Something of the company's reluctance to be full-blown capitalists played out in Kumar Birla's father's attitude. Aditya Birla never trusted bankers. His aversion was solidified during a disastrous issue of global depository receipts for Grasim on the London exchange in 1994, following a relatively smooth listing for Hindalco, the third largest company in the Birla stable, that same year. The offering was underwritten and taken on the road by book-runner Citibank and joint-lead Merrill Lynch. But the issue hit the market amid a major financial crisis in India's stock exchange and banks, reducing investor confidence. The issue, which raised US$90 million, was 60 percent under-subscribed. Grasim was forced to turn to Birla's companies abroad for an additional US$30 million, and Citibank kicked in the rest with short-term loans.

Son Kumar's choice of Sinha, an investment banker with major Indian-family credentials, shows that he wanted someone who had infiltrated the enemy camp, someone skilled in the ways of New York, to support the company's bid for globalization. Sinha openly says that he will drive up to five major acquisitions in India this year. L&T is still in play, with the company's board holding out for a white knight investor, but this is just a dress rehearsal. He plans to drive a Hindalco bid for Nalco, the aluminum giant that the government has slated to put on the auction block next month (March 2003). A winning bid for Nalco, which earned close to US$1 billion in sales in its last fiscal year, would set Hindalco on the way to being a global competitor, giving it the scale to raise capital to buy companies overseas. "We have many advantages here," says Sinha. "For one, Hindalco - and all our group companies - are underleveraged, which means when it comes time for a major acquisition, we can turn to the banks." He's thinking like a CFO, but it won't hurt that he toiled as ING Baring's head of Latin American debt markets, raising funds for privatizations, for many years. He needs the horse-sense developed in these deals, as the Nalco competition has only one other Indian company, Sterlite Industries, and 12 foreign firms. The deal represents the first major privatization since India's loosening of regulations allowing foreign companies to enter the market, in line with its World Trade Organization membership.

Waiting for the deal has been painful, because, since Sinha joined, Hindalco has undergone a major realigning of businesses, restructuring, and preparation for international competition. Much is at stake. In November, the company implemented a retirement age of 62 years for all directors and business heads, ensuring that it could appoint fresh blood in management over the next few years. Birla also announced plans to take the copper business from its company Indal and merge it with Hindalco. Sinha enthuses about the advantages of this strategy. "With the combined companies," he says, "Hindalco can use the cash flows from the copper business to finance expansion in aluminium, and vice versa."

Sinha fully expected to spend 300 crores on the reorganization this year, including investment in a captive power station (major industrial companies cannot rely on the government grid). That's now on hold as he waits for the Big One.

"We're definitely going to make a bid for it," says Sinha. He adds: "It'll probably be the largest acquisition in Indian corporate history. It will probably require us to raise the largest financing in Indian corporate history." This translates, he says, to "almost a billion dollars from the market." Besides the company's pristine under-leveraged position, he notes that cashflow is strong, raising the ability to leverage even more.

But doesn't the size of a combined Hindalco and Nalco smack of a monopoly? "No," says Sinha, "With tariff barriers down to 4 or 5 percent, anybody can export into India. We wouldn't have a monopolistic position, just because we have x percent of the market. Being a dominant seller is good."

The vision for the super company?

"If we look at global metals companies," he says, "we necessarily have to sell outside the Indian market, because the Indian market is too small." True enough. With the US$2 billion market share, the combined company would still be puny next to a global giant like Alcoa, which has worldwide sales of US$20 billion.

What Sinha is looking for, he says, is the "size that gives you the ability with cash flows to go after better opportunities overseas."

The finance team at Hindalco buys into the strategy. "Even in our formative years, we planned to integrate operations - from smelters, power, conversion facilities - all in one place," says A.J.S. Jhala, group secretary of treasury at Hindalco. He adds: "The only way to launch a global model is to integrate."

Perpetual Motion

Misty in Mumbai always seems to be the forecast that rolls by in between news segments on CNN. And it frequently is. Birla's head office is on government reclamation land near Naraman Point in Mumbai and looks out toward the harbor and the Elephanta caves. The Indian financial press tends to portray this building as an art deco relic, but in fact it is a slightly worse-for-wear, very lived in office. Nobody in Birla, however, seems to spend much time at their desks these days. Mobile phones have allowed Sinha to make pinpoint phone calls like a kind of roving ambassador among Birla's decentralized holdings. And there's no doubt that his job is a little breathless. Two days before CFO Asia visited, Kumar Birla was commissioned to write a profile of Bill Gates, whom he interviewed on the way to the airport in a "billionaires' limo". The result had the dashed-off quality of being written by someone with little time to spare. Like his boss, Sinha is always doing something in a car on his way to the airport.

He'll need the energy - and a lot of focus. Being Birla's finance captain is among the most demanding CFO jobs in Asia. With a very public bid to turn one of India's legacy companies into a global giant and a simultaneous massive company reorganization, he runs the risk of putting the cart before the horse, of not fully preparing the flagships internally before foisting them into major expansion. But waiting provides too many chances for the competition to overpower his company's global ambitions.

With so many irons in the fire, it's going to be a hell of a year at Birla.

Tom Leander is editor-in-chief of CFO Asia