Billionaire from old money challenges to Gautam Adani

Gautam Adani’s meteoric rise to the world’s ninth-wealthiest individual began in the 1990s with a port on India’s west coast and an enduring friendship with a politician who is now the prime minister. The remainder of his efforts have been focused on finding the next industry that will expand his debt-fueled empire.

The port brought in coal, liquefied natural gas, and palm oil, so Adani entered those industries as well as adjacent ones. Once he began supplying coal to power plants, for instance, he expanded into mining in India, Indonesia, and Australia, as well as electricity generation and distribution. He supplied Indian cities with piped gas and set out to harvest solar and wind energy. Extending his logistics dominance to include airports, grain silos, and data centers was only logical, as was selling a cooking medium to Indians for frying samosas: he simply had to refine the Indonesian palm oil arriving at Indian ports, of which he now owns 13.

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If a single company was going to build so much infrastructure, was it not logical for it to also produce cement? The businessman from the home state of Prime Minister Narendra Modi, Gujarat, has encountered opposition with his most recent expansion — Adani is paying $10.5 billion to acquire the entire India operations of Swiss building-materials specialist Holcim Ltd. The challenger is not Mukesh Ambani, the only Indian business magnate currently wealthier than Adani. A new billionaire has emerged.

Kumar Mangalam Birla is a member of a wealthy family, whereas Adani is a first-generation entrepreneur. During India’s freedom struggle, his great-grandfather, who diversified from textile trading to jute manufacturing and much more, was a confidant of Mahatma Gandhi. Due to the socialist turn in post-independence economic policies, Birla’s father expanded the commodities conglomerate into Indonesia, Thailand, and the Philippines. In 2007, Birla acquired the US-Canadian Novelis Inc. to create the world’s largest aluminum rolling company.

Kumar Mangalam Birla
Kumar Mangalam Birla

But then Birla had to contend with the 2008 financial crisis, a boom-and-bust in China’s demand for commodities, and a lengthy, costly entanglement in telecom, an industry disrupted by Ambani’s 2016 foray with cheap data and free voice calls. Despite the fact that a government-backed rescue of Vodafone Idea Ltd NSE 0.54% prevented the telco from failing, a new battle has begun. Adani, pursuing his strategy of entering adjacent industries, competes with Birla in the latter’s cement family business.

It is therefore not surprising that Adani’s acquisition of Holcim India prompted a swift response. UltraTech Cement Ltd NSE -2.69%, which is controlled by Birla, recently announced a capital expenditure of 129 billion rupees ($1.7 billion) to increase its cement capacity by 22.6 million tons per year. This equates to $75 per ton. Meanwhile, Adani is paying nearly twice as much per ton to acquire an estimated 73 million tons per year capacity from Ambuja Cements Ltd NSE -0.14% and ACC Ltd NSE -2.26% this year. If Adani is going to pay a premium for scale, Birla will build inexpensively. The game begins.

When Ambani waged a price war in India’s telecom industry, Birla was harmed. But it will be difficult for Adani to defeat Birla in the cement family borough of the latter.

Birla, who was worth $6.5 billion in early 2013, when Adani was not even a billionaire, now trails by nearly $85 billion. But he is a cement expert: UltraTech’s current capacity of approximately 120 million tons per year gives it a 20% market share, surpassing the 12 % that Adani recently acquired. It is not, however, a solid indication. According to Mumbai-based Kotak Institutional Equities, Adani has the option of expanding his capacity to 100 million tons at a relatively low cost: $80 to $90 per ton. This should reduce his acquisition expenses.

UltraTech can generate between $3.20 and $3.90 more Ebitda (earnings before interest, taxes, depreciation, and amortization) per ton than Holcim. Kotak asserts that Adani can close the gap by eventually merging the two acquired companies, discontinuing royalties to Holcim, and reducing expenses through waste heat recovery. However, Birla does not lack options. Similarly, he will enter adjacent industries to fortify his moat. The group hopes to be India’s No. 2 paint manufacturer within the next five years.

It is too early to say who will emerge victorious in India’s building-materials war, but one thing is certain: Birla will not take any new competitors lightly. In 2017, when he decided to merge his Idea Cellular Ltd NSE 0.54% with Vodafone Group Plc’s India business, he may have believed that scale — the merged entity began as India’s largest telco by subscribers — would shield him from Ambani’s relentless pricing attack. It did not occur. The government won a case in the Supreme Court regarding past dues from cellular companies, putting Vodafone Idea’s very survival in jeopardy; customers fled the joint venture, in which Birla holds a substantial minority stake. New Delhi was ultimately compelled to offer a bailout to prevent the telco market from becoming a duopoly led by Ambani.

Telecom is more heavily regulated than cement. However, Birla must lament the ease with which Adani outbid him and another Indian billionaire for Holcim’s assets by agreeing to assume any liability stemming from a price-fixing case brought by India’s trustbusters.

The deeper question Birla must answer is, however. How should he respond if Adani decides to dethrone him as king of cement? Fight or flight? His great-grandfather, the patriotic Ghanshyam Das Birla, wagered on Gandhi and prevailed against the British rulers and their corporations, including Andrew Yule NSE -2.26Z% & Co. In Modi’s India, taking on Adani, who also views himself as a nationalist businessman, may be a risky proposition.

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