Butter Chicken at Birla Maybe, But The Stockholders Are Left With A Lemon


29 thoughts on “Butter Chicken at Birla Maybe, But The Stockholders Are Left With A Lemon”

  1. Aditya Birla group has been a value destroyer and not creator. Other than Idea, how much other companies would have created value in the last 2 decades.

    Like wise other than TCS, which are the Tata companies that would have created value for investors in the last 2 decades?

    During the last 2 decades, economy has opened up more opportunities- but my feel is that many Tata and Birla companies might have created far lesser value than broader indices.

  2. A lot of these consultant articles are eulogies written to potential clients/past clients. Sort of the emperor’s new clothes story – if I worked on the acquisition, I write eulogies praising the action to create a “self-fulfilment/grandiose cycle”. If I did not, I want to work on your next acquisition – value accretive or not.

    Classic example of Abilene’s paradox/pluralistic ignorance. Everyone doubts it but is afraid to say his opinion, because everyone thinks the others look it positively, so may be I am wrong.

    This is a classic example of how a small self proclaimed coterie of people can create an illusion of well being. It takes a child’s courage to call a bluff, a bluff.

    Look around you and it is there everywhere – sports, politics, governance.

  3. Dear Prof,

    Your analysis has been done with the benefit of hindsight. Without getting into the argument of whether Mr. Birla created value or not, what I would request from you is your analysis next time a big bang corporate action is announced by an Indian company. And if the analysis will be convincing enough, I would also like to put where my mouth is (plz read short the stock).

    Request you not to read my comments as a sarcasm because I really admire you.


  4. Dear Prof

    When any business is sold the sellers believe they hv got outstanding value. When JLR was sold, Ford Motor Co was highly relieved. The purchase of Novelis followed a downturn for metals and in a commodity market u cant do much.


  5. Dear Sir,

    This something I have not understood well. Tatas and Birlas are very large organizations and among those which did survive and mostly did well post the Indian liberalization of the 1990s. If they both are fundamentally so bad in capital allocation decisions, what led them to the current position they are in (Its the opposite of ‘if you are so smart, why aren’t you so rich’ – ‘If you are so dumb, why are you rich?’)? Is it because:

    – They are good in capital allocation within the firm but are bad when it comes to making acquisitions. Hence the sum total kind of plays out since the number and value of capital allocation decisions within the firm is higher than acquisitions made.

    – They is no strong reason why they are where they are. They used to have good capital allocation skills before ‘or’ a strong headwind in terms of economic growth but that premise is no longer true. Hence they should eventually become a small form of their former self. We are just seeing that happen. 20 years is just not long enough a time period.

    – The initial premise itself is wrong – ‘Just because a firm is not great in capital allocation, it should eventually die’ – That need not happen. They won’t end up like a Samtel since fortunately they are mostly not in industries which change so rapidly. They might just be under performers in Nominal terms and most likely wont generate any worthwhile Real returns (which can be negative as well).

    1. A value destructive capital allocation process does not necessarily mean financial oblivion. Although that might turn out to be the eventual outcome, it can take a long time for that to happen. One quick way to understand is that if you start rich and then use your money to invest in projects, that earn subpar returns – say 6% a year, when interest rates are 10% a year, then while it’s true that you’re destroying value, it’s also true that you’ll be reporting positive accounting earnings year after year while you’re destroying that value. Every rupee you earn, will, over time, become less than one rupee of incremental market value and in the long run you’ve earned maybe hundreds of millions of dollars (at least on paper) but your market cap would not grow anywhere close to that.

      Investors should always relate earnings retention and incremental market cap changes over long time periods (to even out the influence of inefficient markets). They should also relate this relationship of earnings retention and market cap changes to the basic quality of the underlying businesses and also the quality of management’s capital allocation decisions.

  6. Hello Professor,
    I am a great admirer of urs..thanks for this insights…
    I hope Suzlon’s Promoters Mr. Tanti too had read this book….may be even if he had know abt this his intentions is always being doubted…..Suzlon was such a great business and just to grow bigger its’s promoters dragged into quicksand of debts….I pitty its shareholders…and same I think for Apollo Tyers – do share ur thoughts on this acquistion as well – I totally understand that ur sights are not to buy or sell stocks, but as we know when TATA’s brought JLR people was sceptical too and for many years TATAMOTORS was trading low and after some fantastic (as I may say) its truely increasing the value of its equity shares….So what I feel is be sceptial on acquistion – give them some time – grab it at turnaround hints- and u will never loose…
    OFFCOURSE Management intensions also plays an important role here…
    Do share ur views on this
    Bhushan Shah

    1. When a group does a lot of M&A deals, one should evaluate their performance by studying all of their deals not just one deal.

      However, if a group has done several M&A deals and one deal alone constitutes a size which largely explains almost all the money spent on all deals, then it makes sense to look at that one deal in detail. I used this latter approach in Hindalco’s case.

      The averaged out experience in acquisitions for acquirers has been poor. There are exceptions but they are few. One should keep in mind this baseline information while evaluating any M&A deal.

      Baseline information matters. Track record matters too. Those are the two things I would focus on…

  7. respected friends,
    i belive u all are not aware of what manufacturing factories/units in india are passing by. they are having one the most toughest time globally. its quite bad luck for TATA/BIRLA that they went for acquisition like corus, tatly, noviles and have made loss . but imagine if global cues were better then same company would have done extremely better.
    my take is that its global manufacturing factories are facing downward trend. ones global consumer confidence will strong-up, same companies will outperfom.

    well these are my take, rest regards.
    pranav mehta

  8. When we speak of overseas acquisitions by Indian companies , by and large they have been value destroying eg . Dr. Reddy – Betapharm , Tata Steel – Corus , Suzlon – RePower , UCAL Fuel – AMTEC , Hindalco – Novelis etc . Interestingly in several cases the acquired company is far bigger than the parent company as can bee seen from Novelis , Corus , JLR etc .
    The JLR acquisition has turned out to be favourable for Tata Motors primarily because of robust demand from China . However how long will this last is a question mark .When the downturn comes , Tata Motors financials will be severely impacted as JLR dwarfs the parent company . Remember Ford sold it off because it was going through a severe bad patch . Like cyclical depression ,US auto companies have periodically been on bankruptcy’s door .

    Coming to Hindalco and the Aditya Birla Group in general , the level of corporate governance is appalling . The management behaves arrogantly with small investors . Last year I was a speaker at the Hindalco AGM in Mumbai and I was highly critical of the company’s working . As Kumarmangalam Birla was getting uncomfortable with my questions , he asked me to sit down . I told him that I was not there to ask questions which suited him . The audience also loudly protested against his rudeness and I was able to complete my speech .

    The secretary of this company is also known to ‘ bribe ‘ speakers to praise the management . The company holds its AGM very late in September and gives the excuse of Novelis financials . Some time back the company had proposed some resolutions for 1 ) Increasing the MD’s salary and 2 ) Issuing pref. warrants to the promoters .

    Proxy advisory firms opposed these resolutions on the ground that 1 ) MD’s salary around Rs. 20 cr is already around the highest in India and there has been no improvement in the company’s performance to merit an increase in salary 2) Promoter wants a new pref . issue , when an earlier one was allowed to lapse as prices had fallen . This shows the lack of commitment to the company .

    These points were also raised by me at last year’s AGM .The MD – Debu Bhattacharya gets paid over Rs. 20 crore a year and Chairman – Kumarmangalam Birla around Rs. 40 crores + ( all group cos . including Hindalco ) .

    The shareholders have however got a raw deal . If one considers the cost of funds and inflation , there has been a capital loss ( 2 rights issues made a few years ago at Rs. 96 /- ) . Also the dividends have been slashed .

    Prior to 2010 , the management gave the excuse for poor performance of Novelis because of can stock prices non – revision till 2010 . However the performance is still not satisfactory .The Novelis acquisition has burdened the company with a huge debt , which is increasing further because of expansion in India – greenfield and brownfield . The interest burden is killing the company .

    Apart from Idea Cellar non of the Aditya Birla companies are performing well . While the promoters and management is raking it in , the small shareholders are suffering .

    Best to AVOID this group for investment .

  9. Dear Prof

    Thank you for sharing your wonderful insights even more wonderfully written. Maybe Mr Birla’s true feelings were articulated when he said “I believe Hindalco never had headier times than today”

    Another brilliant insight I learnt from your write-up is the presence / absence of key words in the Chairman’s letter.

    Again if the seller says his Board unanimously agreed that the transaction delivers “outstanding” value and the buyer says “When you are acquiring a world leader you will have to pay a premium. This is something reasonable” and seeks support from shareholders for a strained near term Balance Sheet; we get clues on where the deal is tilted.

    Worse, by diluting since the acquisition; shareholders not only lose on existing book then by poor performance, they also have had to cough up more. It’s a little like getting into an auto to take you to a destination on a running meter. He will say, “Haan saab baitho, I know where your destination is” and once you get in you know he has no clue. It just doesn’t matter to him as his asset is gainfully employed while you are torn between getting down to take another auto and joining him in searching your place! You lose time and more money!!

    Well the most startling what Mr Birla said in his piece about types of food served in their cafetarias. Vegetarianism as a company value. That has revealed much more about how a family owned firm functions than a lot of what I read so far.

    Thanks once again for writing so eloquently.

    Warm regards,

  10. It’s always a pleasure to read your insights into the corporate world of India, Sir.

    On the other hand, I’d like to know about reading material which introduces you to, and gets you going on, the various valuation processes that one may use. I’m aware of the “Manual of Ideas” which is a collection of methods and techniques used by some of the renowned value investors. Please recommend other books in the same spirit.


  11. Professor, the only point I saw in the article was Rupee depreciation which has moved from 38-62 against the USD… making an insane impact on the whole transaction.. even if the transaction was initially hedged … long term cost of hedging will take away the benefit of lower cost of borrowing from abroad…

  12. Ok Professor…I read your attachement on Hindalco….Yes indeed, Novelis, Corus etc. were acquisitions with wrong timings…true it costed a lot to all the shareholders…I have been reading quite a lot about the Birla group, especially Aditya Birla Nuvo…It evolving as a fantastic company…increasing return on capital…decent capital allocations (though there are businesses which are laggards like the agri & BPO)…Also we understand that idea has been very shrewd in 3g bidding etc….Considering the recent steps of the past 3 years, I get a very good sense of confidence that Birla group has been conservative and has made good investments to fuel growth and profits along with good ROE’s.
    I would like to seek some advise from you as to why only because of one wrong acquisition is Birla group portrayed as a unsound capital allocator…Grasim, Ultratech have always maintained industry leading returns (leaving some few like shree cements)…Also the way in which Idea is performing it has been leading recovery for the industry….What would be your views?

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