Can The Son Fill Papa's Shoes At Birla Group?

The markets vote against Birla Group's new CEO

It has been a year since the unexpected death of the well-known Indian industrialist Aditya Birla. In his 52 years of life, Birla had amassed 37 companies into a mammoth, $5 billion textile, cement, and aluminum empire. When he died, the mantle passed to his son Kumar Mangalam Birla, a 29-year-old bespectacled accountant and London Business School MBA. Kumar inherited some of the biggest companies in India, including their seasoned management and solid reputation among investors.

But despite this strong position, fears are mounting among critics, large investors, and even some of the group's senior managers that the Birla scion is simply not up to the job. They accuse him of erratic behavior, an inaccessible management style, and misplaced priorities. The result has been a general dumping of Birla-related stocks. In the last year the market value of the group's four largest companies--Grasim, Indian Rayon, Hindalco, and Indo Gulf Fertilizer--has plummeted by $1 billion, a 37% drop. That's more than double the decline in the Bombay Stock Exchange index. To top it off, Kumar Birla is sending conflicting signals. Sometimes he declares his desire to please shareholders. Other times, he sounds oddly indifferent. "I don't care a damn if they dump my stocks," he told BUSINESS WEEK in telephone conversations.

NOT ENOUGH. Now investors are wondering when these blue chips will halt their dangerous slide. Kumar, whose family owns 20% to 25% of the Birla companies, has taken steps to placate investors by creating a new logo, building brand identity, and trying to consolidate operations. In mid-November, he renamed his conglomerate Aditya Vikram Birla Group, or AVB Group, after his father. "We have been fortifying ourselves in existing businesses," he says. "I sincerely hope this is what investors are looking for us to do."

But a new logo and brand strategy have not triggered a rebound in the company's stock market fortunes. AVB Group's problems are not just a matter of a young chief's inexperience. Birla's companies are mostly in commodities businesses, which are suffering from a slowdown in the economy and from new competition in a liberalized economy. Profits at aluminum maker Hindalco, for example, are down 2.5% for the first half of this fiscal year, and sales have dropped 16%. As a result, major projects initiated by the patriarch, such as a copper smelter and a pulp plant, are now on hold.

What's more, although highly diversified companies like those in AVB Group were once market darlings, they are now passed up by investors looking for tightly focused manufacturers. "The group has been deluged with macroeconomic changes, market changes, and a change of guard, all at the same time," says Brij Gopal Daga, chief general manager of Unit Trust of India, one of the biggest investors in the country and a holder of 8% to 10% of Birla's stock.

Other problems are hitting AVB Group. The company used to profit handsomely from tax incentives awarded to corporations that launched big industrial projects, such as cement or fertilizer production. Yet now the government has ended them, leaving AVB Group with ventures that are eating up capital.

GRUMBLING. AVB companies have also diluted their equity by going offshore with too many stock issues, says Samir Arora, chief investment officer of Alliance Capital in Bombay, who purged his funds of AVB Group stocks. And analysts complain that the companies are only nominally independent of each other. "When decisions are made, they are made as AVB Group, not as Grasim or Hindalco," says Sanjeev Mohta, head of research at James Capel India. That means profitable Birla group companies routinely provide financial support to poor performers.

The young Birla has not helped restore confidence in the group with his management style. Senior managers and large investors, who spoke on condition of anonymity, complain that he misses meetings and is slow to respond to requests to meet. They say he prefers seeking national awards honoring his father to such routine but vital tasks as meeting with investors.

The young CEO angrily rejects the charges of inaccessibility. Kumar says that he and his team work long hours; that he personally responds to letters even from small shareholders; and that he spends his time meeting investors "everywhere, on flights, at home, over meals." He says he has not refused any appointments that he knows of, except when a previous meeting overran or when he has had an emergency.

In Kumar's favor, he still controls established companies that are cash-rich and financially conservative. His group is among the lowest-cost producers of aluminum and cement in the world. Kumar's supporters also point out that the father's managers have not deserted the son, even though some are grumbling.

And Kumar has shown some restraint. He decided against a new issue of $125 million in Grasim stock, for example, when the Indian stock market was tanking in July. "Any other under-30 would have used it to show his bravado," says Gita Piramal, a historian and friend of the family. Such moves show some of the astuteness of a manager. Now, Kumar Birla must show he is a leader as well.

Before it's here, it's on the Bloomberg Terminal.