BT 500: COVER STORY
The BT-500: Why They're Changing
It isn't hard to put a theme to this year's BT-500. The best companies in the business are re-inventing themselves with an eye on the value sweepstakes.
By Team BT
They're out there-companies gutting their insides in an attempt at re-inventing themselves. These aren't low-profile companies few have heard of; they are day-in-a-life corporations, entities with which an individual comes in touch with on a quotidian basis. Like Hindustan Lever Ltd (HLL), whose ads are, arguably, seen once a day by at least someone in each of the 60 million households that have a television set. Or Reliance Industries which, again arguably, makes one product or another that goes into the ubiquitous plastic products no home can do without (not to mention a presence in fabrics). Or even Infosys Technologies which, despite being in a business not many people can understand (come now, be honest), boasts a public-and media-cadence normally reserved for politicians and performers.
That's right, some of India Inc.'s finest are changing. Actually, make that 'almost all'. Barring Zee Telefilms (the only listed company in a group whose entry into the access side of the convergence business is a logical next step) every other company in the honours club of the bt-500 (the top 10) is changing. Or has articulated an intent to do so. For each of these companies realises that only a radically new business, or a radically new way of doing business, will ensure that it stays where it wants to be: on top.
Lever's M.S. Banga recognises the need to change. In an earlier interview (See BT, June 7-21, 2000), the Chairman of HLL (Rank: 1) admitted as much: ''You can only build the businesses of tomorrow, if, today, you are experimenting on where to go.'' So does Dhirubhai Ambani, the Chairman of Reliance Industries (Rank: 6). In his address at the company's Annual General Meeting, on June 13, he said: ''(We will) participate in attractive opportunities in New Economy sectors, and use the Net and new technologies to e-enable Reliance and enhance value for customers, suppliers, employees, and shareholders.''
Thus, Lever is 'experimenting' with business concepts that range from an urban laundry service to a rural micro-credit operation; Reliance makes page 1 of the pink brigade every other day with news of a possible acquisition or an announcement of a new venture (the latest is insurance); ITC (Rank: 5) has extended its Wills brand into up-market leisure-wear and is strengthening its hospitality business; end-to-end consulting is the new mantra at Infosys (Rank: 4), Wipro (Rank: 2), and Satyam (Rank: 9); HCL Technologies (Rank: 3) operates in the high-margin technology services business; and Ranbaxy Laboratories' (Rank: 10) energies are now focused on developing new drug molecules.
The Radical Growth Imperative
Each of these initiatives is as non-incremental as the term can be. They need to be that. The reasons range from plateauing growth in existing businesses in some cases to a justifiable desire to earn more profits, not just revenues, in others. And the ultimate objective is the need to live up to the market's expectations. The market capitalisation of a firm is an indicator of the market's estimate of its future revenue streams: the higher the market cap, the greater these expectations.
HLL's sales grew by a mere 7 per cent in 1999-2000 as compared to the previous year. On a base as huge as Lever's that wasn't an insignificant absolute. Still, the company does operate in a market with limited growth opportunities. Analysts like Shalini Gupta, 30, of Motilal Oswal, a Mumbai-based brokerage are aware of that: ''HLL has the best brands and its quality of management is high. But the markets in which the company operates aren't growing and HLL's marketshares are slipping.''
If Gupta knows it, you can bet your bottom-dollar that so do most of HLL's on-the-ball managers. Says Sid Khanna, 47, CEO, Andersen Consulting: ''HLL is in very mature businesses; its products already boast a high level of penetration. So, it is difficult for the company to grow its traditional businesses. That's why it is studying consumer behaviour-to understand what it can do to grow using its existing competencies.''
ITC faces a similar challenge. Its sales grew by just 4 per cent in 1999-2000. And tobacco isn't exactly a great business to be in at this point in time when every has-been smoker with a fax machine becomes a spokesperson for one anti-tobacco lobby or another.
The issue is different for companies like Wipro, Infosys, and Satyam that clocked growth rates of considerable magnitude in 1999-2000: 29.6 per cent, 73.8 per cent, and 79.1 per cent. Their recently-acquired focus on infotech services and consulting is a fall-out of three things: one, a realisation that margins are higher in these businesses; two, a recognition of the NASDAQ's fascination for companies operating in this space (this enchantment, with companies like Razorfish, Scient, and Viant has since waned a trifle); and three, a competitive advantage that isn't really sustainable. Today, Indian software hot-shops enjoy an advantage over others in terms of cost. Over time, this advantage will erode. And already slim margins will become slimmer.
By moving up the value chain these companies are sidestepping this eventuality. As Shiv Nadar, the CEO of HCL Technologies, puts it: ''We will move more and more into forward engineering. Why? Working in forward engineering must mean something to stakeholders. We are in it because the yield is higher.''
The anxiety exhibited by these companies in re-inventing themselves is also indicative of their unwillingness to displease the market. Ravi Kapoor, the Head of Investment Banking at DSP Merrill Lynch, agrees: ''Market cap is a function of future growth as perceived by investors. Today, they perceive these companies as being high-growth. In that context, these companies need to have a business model that can generate the high growth to justify the market cap.'' There's a flip-side to that: those companies that do not build such models could see their market value declining.
The Perfect Time For Radicalism
If there's one thing going for these companies, it's the fact that the timing is just right. ''The current fundamental shifts in technology and their impact on business creates an environment where hyper growth is possible,'' explains Ralph Heuwing, the Managing Director of The Boston Consulting Group (India). Technology apart, it is a great time to diversify (something that some of these companies are doing). Entry barriers are down: businesses like telecom and insurance have just been opened up to private companies and capital is freely available. What some of these companies are doing, then, is simply tapping the opportunities before anyone else can.
Chandra Srinivasan, the CEO of consulting firm A.T. Kearney sums it up best: ''Each of these companies is just being opportunistic. That's good. Being opportunistic is part of the Indian corporate DNA. Most of these companies grew through opportunism; it's part of their corporate culture.''
Most companies in the honours club possess the advantage of healthy cash flows. New Economy companies like those involved in the infotech and pharma business can afford to invest this in their existing businesses, albeit in a way that will help them move up the value chain to a zone where the profits are higher. Companies in other businesses cannot: the only way in which they can effectively deploy the cash at their disposal is by diversifying into new high-growth areas. Fortuitously, these businesses are completely new or have just been thrown open by the powers that be to private companies.
The Challenge Of Competence
Entering new areas of business is good. Trying to do things differently is better. Only, both require companies to develop or acquire skills they may not possess. Kearney's Srinivasan lists three things that these companies need to focus on if their growth strategies are to work: intellectual capital, cultural fit, and mind-set change. ''That's not an easy task even for a company like Reliance,'' he says. That's not to say none of these companies will make it. These, remember, are some of corporate India's best known names.
If infotech services is the way to go, for instance, the big three infotech companies will have to acquire a marketing front-end that can interact closely with customers and help them implement the infotech solutions they (the infotech companies) come up with. Realistically, all this takes is the intent to set up an operation in continents like America and Europe, and hiring people with front-line consulting skills and domain knowledge.
Doing this isn't particularly difficult. Says Kapoor of DSP Merrill Lynch: ''They can look at inorganic growth through acquisitions, and try and pick up any missing links like a front-end. None of these companies, though, have made significant acquisitions yet. But this is something that the market is discounting.''
Still, the Ranbaxy example shows that acquiring these 'new' skills isn't impossible. Apart from a focus on molecular research (for which it has had to acquire significant capabilities in research), Ranbaxy is also trying to tap the lucrative generics market-worth $ 7 billion, about 250 per cent the size of the Indian pharma industry-that will open up in the US once 40 block-buster drugs go off patent in 2005.
Any company seeking to tap this market needs to build capabilities in manufacturing, marketing, and distribution, on the ground (in the US). This is exactly what Ranbaxy Pharmaceuticals Inc., the company's wholly-owned US subsidiary has done. Today it has 22 US drug approvals and seven manufacturing facilities. And there's no reason why Ranbaxy's peers in the top 10 cannot replicate the company's success.
The ingredient most critical to the success of these companies is innovation. Explains Heuwing of BCG: ''Sustainable hyper growth is only possible in a culture of constant innovation. This requires an entrepreneurial organisation structure, and an environment where failures are allowed, multiple ideas allowed to compete, high potential opportunities are generously equipped with funding, and flawless and speedy execution has been mastered as an art.''
The Risk-Rewards Equation
can they pull it off? They probably can, believes Naina Lal Kidwai, the Vice-Chairman of investment bank JM Morgan Stanley: ''Remember, these are good companies. They've performed consistently. And they're going about this (their growth initiatives) in a conservative manner.''
That caution was evident in Infosys Managing Director Nandan Nilekani's warning to analysts in August that while the company could possibly increase its margins by working with dot.coms, the opportunity would come loaded with risk.
Circa September 2000, most growth initiatives announced by the top 10 are still on paper-although their value multiple, the ratio of market capitalisation to sales, indicates that the markets have factored them into their expectation of the company's future revenues. Says Narayan Seshadri, 43, Head, Business Consulting, Arthur Andersen: ''All these companies are using infotech and the Net to improve the way in which they go about their business. At the moment, the businesses are the same. As for their other plans, apart from announcing them, they haven't really done anything.'' Srinivasan of Kearney is a little more critical about the spate of announcements: "At the moment, it is all about bragging rights."
To resort to a cliché, only time (and the markets), then, will tell how well the top go about their growth plans. Some of their attempts at diversifying-based on the premise that they are better off investing their money outside their existing area(s) of business-may pay off. Some, may not.
Others could discover that the use of the Net and Net-enabled technologies to be nothing more than another business process improvement technique, one that delivers finite (and definitely incremental) growth. Kapoor of DSP Merrill Lynch claims he won't be surprised if focus becomes the mantra again in a few years: ''In the US, several companies have gone from a conglomerate phase, to a core-competence phase, and then back to the conglomerate phase. May be in a few years, we will see these companies shedding some of the businesses they have picked up.'' That, too, could happen: the long-term strategies of the top 10 necessarily revolve around the creation of shareholder value. In market-speak that means living up to expectations of growth and revenues (and what New Economy gurus call p2p, the path to profitability)
The market, despite all its imperfections, will only reward those companies serious about their growth strategies. Talking up a scrip in the short-term is alright; it would be impossible to do so in the long-term. Seven of the top 10 companies from the first bt-500 (1992), who are now leading lives of relative obscurity out of the honours club, know that.
Reported by Seema Shukla & Suveen K. Sinha