Mumbai: Billionaire Kumar Mangalam Birla plans to spend $2 billion (around Rs11,000 crore) in the next three years to add capacity and maintain his group’s position as the world’s largest producer of viscose staple fibre.
The Aditya Birla Group plans to raise its ability to produce the fibre used to make rayon, wipes and diapers by as much as 43% to 1 million tonnes by 2015, Krishna Kishore Maheshwari, director of the pulp and fibre business, said in an interview. Last week, Aditya Birla Group agreed to buy Terrace Bay Pulp Inc., a paper pulp mill in Canada, to secure raw material supplies.
Birla, who runs businesses from cement to telecommunications, is betting his plan to acquire suppliers and add capacity will help the company control costs and enable it to profit from rising demand in Asia, home to the world’s two most populated nations. The investment in the fibre business will aid the group in boosting combined revenue by 63% to $65 billion in three years.
Funding growth: Aditya Birla Group chairman Kumar Mangalam Birla. Photo: Abhijit Bhatlekar/Mint
“These are very challenging times,” Maheshwari, 57, said in his Mumbai office on Wednesday. “The company aims to be the best quality producer at the lowest cost with focus on developing new products and improving cost structures.”
Grasim Industries Ltd, the largest producer of the fibre in the group, gained 0.27% to end trading at Rs2,650 apiece on BSE in Mumbai on Thursday. The stock has risen 6% this year.
The investments include $300 million on a new plant in Turkey, $250 million in Terrace Bay in three years and Rs3,000 crore in Indian factories. In the last fiscal year it spent $340 million acquiring and is now in the process of investing $75 million in raising capacity at Domsjo Fabriker AR in Sweden, Maheshwari said.
The company is delaying its big plans to invest in wood plantations in Laos to secure supplies after failing to get approval for 60% of the land required for the project in the Southeast Asian nation, he said. Birla had proposed the investment in 2006.
“The business is cyclical and it’s good that the company is raising capacity now so it can benefit during an upcycle,” Ajit Motwani, an analyst at Emkay Global Financial Services, said in Mumbai. “The fibre business looks very promising especially as it’s a substitute to cotton, which requires huge land area to grow.”
Cotton futures have fallen 19% in New York this year. Maheshwari is predicting a rebound, which will boost demand for viscose staple fibre. The US Department of Agriculture cut its forecast for world cotton inventories in the 12 months ending 21 July 2013, by 2.8%, led by a decline in output from India. “The drop in cotton prices made current market conditions challenging,” Maheshwari said. “Eventually cotton prices should be over $1 a pound, up from current 70-75 cents.”
To boost profit margins, the group, which started as a cotton trader in 1857, is aggressively focusing on specialty fibre products used in making high-value clothing, Maheshwari said.
Earnings margin before interest, taxes, depreciation and amortization was little changed at 25.04% in the year ended 31 March at Grasim, which earned 20% of its revenue from selling the fibre. About 75% of the company’s sales came from its cement business.
The company’s unit UltraTech Cement Ltd on 20 June was asked to pay a Rs1,180 crore fine by India’s anti-trust agency on charges it was part of a cartel. The fine, imposed on 11 cement suppliers for price-fixing, must be paid within 90 days. UltraTech plans to challenge the order, Maheshwari, who is also the managing director of Grasim, said.
The company hasn’t changed its expansion plans, he said. UltraTech is in the process of raising capacity by 20% to 62 million tonnes by 2014, according to Grasim’s annual report.
The first priority for the group in the cement business will be India as the domestic market is growing and the company wants “to encash the market fully”, Adesh Gupta, chief financial officer said in a conference call on 7 May.
The company may look at acquisition opportunities in countries around the Indian Ocean, he said.
UltraTech Cement is exploring both organic and inorganic growth, Birla told shareholders in Mumbai in September. The company plans to raise annual capacity to 75 million tonnes in a few years, he said.
UltraTech had in April 2010 acquired the management control and equity stake of ETA Star Cement Company LLC, Dubai together with its operations in United Arab Emirates, Bahrain and Bangladesh. A unit of the company borrowed $220 million for the acquisition and repayment of loans, according to a letter to the shareholders in October 2010.
Jaiprakash Associates Ltd, developer of India’s only Formula One track, is in talks to sell one of its cement units to the Birla Group, two people with direct knowledge of the discussions said on 8 June. The group was also one of the potential bidders for Lafarge SA’s cement operations in South Africa, two people familiar with the situation said on 21 December.
Expansion in cement and its rising focus on fibre may help Grasim boost revenue 7% to a record Rs26,900 crore in the year ending March, according to a median estimate of 28 analysts compiled by Bloomberg.
“We are expanding our geographical footprint, capacity footprint, R&D footprint to sustain and grow,” Maheshwari said.
