MUMBAI: Proxy advisory firm IiAS has raised doubts if Aditya Birla Financial Services (ABFL) would benefit from the recently announced restructuring plan by the Aditya Birla Group. In August, Aditya Birla said they would be merging Aditya Birla Nuvo into Grasim and in the second step, the financial services business under Aditya Birla Financial Services would be demerged and listed separately.

“We believe Grasim and Aditya Birla Nuvo’s shareholders must question the rationale that the financial services business will benefit from being housed under Grasim,” said IiAS in its report released on Thursday. “Not only is the argument weak, but it’s also a point-in-time view.”

Aditya Birla group contended that housing the group’s financial services business within Grasim would help it leverage a stronger balance sheet.

“But without any explicit support from Grasim, it is unlikely to benefit from Grasim’s stronger credit quality. The financial services business has the size to raise capital from the market on its own. Additionally, the Aditya Birla group has been increasing its debt without commensurate increases in revenues and profits – as a result, the group’s overall credit quality may be under pressure over the medium to long term,” IiAS said.

IiAS believes that AB group’s rationale for the financial services business benefiting from a stronger parent is tenuous.

“For a subsidiary’s rating to be equated to the parent’s, there must very strong strategic and financial linkages between the parent and the subsidiary. In the case of ABFSL and Grasim, the strategic and financial linkages are neither strong (between a financial services business, and a textiles and chemicals manufacturer) nor materially different from those that exist between the financial services company and the group as a whole. Therefore, it may be simplistic to assume that because ABFSL is housed under Grasim’s ‘AAA balance sheet’, it will get access to AAA-priced debt.”

The report further states that if ABFSL were to benefit from Grasim’s stronger rating, there must be a history of credit support (provided in the past) or an explicit intention to support from Grasim. If Grasim supports ABFSL, it will either raise debt or reduce its on-balance-sheet liquidity: in both cases, it will impact Grasim’s credit protection measures. If it relies on other companies of the group supporting ABFSL capital requirements, then there is really no benefit of being housed directly under Grasim.

Will Grasim support ABFSL?

Grasim suggests that the listed businesses are able to raise capital on their own and therefore do not need Grasim’s support. Between 2007 and 2016, UltraTech increased its capital employed by almost 9 times to Rs. 34,300 crore on 31 March 2016 (from Rs. 3900 crore on 31 March 2007) and Idea raised Rs.15,600 crore.

If Grasim has not had the need to support the listed businesses in the past, will it make an exception for ABFSL? IiAS asked in its report.