NOV. 10, 2002
 Cover Story
 From The Editor
 Ranbaxy Inc.
 BT 500
 ONGC Uncapped
 BT Billboard

Q&A: Anshu Jain
The London-based Anshu Jain, Head of Deutsche Bank's Global Markets division and member of the bank's Group Executive Committee, was in Mumbai for a day recently. He spoke to BT about trends in global debt markets, banks' appetite for coprorate risk, derivatives and the implications for India.

Travel Agent Blues
India's big travel agents are feeling the heat. Commissions are getting squeezed, even as big-ticket travel-overseas particularly-is suffering. So, how are the travel biggies coping? Innovations. Ever paid a consultancy fee for your holiday advice? Better get used to it.

More Net Specials
Business Today,  October 27, 2002
Scale Up Or Perish
IT services, media, healthcare, cement-it doesn't matter which sectors they come from. Tomorrow's leaders will not necessarily be those just dabbling in high-growth areas but those that are able to create wealth.

If you think you're a guru of new-age sectors-and there are quite a few of them out there, most self-appointed of course-try figuring out which 'hot' industry we're talking about here: A reputed consulting firm has estimated its size at Rs 10,000 crore, growing at 30 per cent annually. Required: high-tech equipment, and highly skilled people. It comprises thousands of bit-players all over the country, mostly unorganised, with only a handful of established majors, some of which are trying to consolidate the industry via acquisitions. Multinationals like Speciality & Gribbles (okay, we've started dropping names to make your task easier) entered the business, via joint ventures with Indian companies. The biggest US company in this business is Quest Diagnostics which, via a string of acquisitions, has become a $5-billion colossus, and is today one of the more exciting mid-cap stocks in that market. Indian companies that are trying to make a mark in this highly-fragmented business include Ranbaxy, Dr Reddy's, Nicholas, and Metropolis Health Services.

Right, we're talking about the pathological laboratory business here-unglamorous perhaps but harbouring enough potential for growth and return on investment to put to shame many of those hanging on for dear life to the hype bandwagon. But wait a minute: Don't get taken in by the whopping size of this industry: It means little, given that the industry is so highly fragmented. Metropolis, for instance, founded way back in 1981, boasts a turnover of Rs 35 crore, and a valuation of Rs 50 crore. The good news for Metropolis' Chairman, Dr Sushil Shah, though, is that the opportunities for consolidation are enormous. He believes that some time down the line there will be just a handful of reputed names in this business, just as in the US where most of the mom 'n pop labs-some 22,000 of them-have been either gobbled up by the majors or just forced out of business. Instead, just about a 100 established players rule the roost today. Shah is hoping to follow suit: Via acquisitions he wants to up sales to Rs 100 crore in two years, and valuation to Rs 200 crore, after which he will consider roping in a strategic investor to fuel further growth.

The New-Age Areas Need to Ramp Up Rapidly to Climb up the Valuation Sweepstakes
Balaji Telefilms: Expects heady growth of 60 per cent in its revenues and 90-95 per cent in its profits. But its business model is limited, and it will have to look to acquisitions to scale up.
Market Cap
Net Profit
Panacea Biotec: Being small works in favour of biotech companies, yet this company has immense potential to spurt in terms of revenues and valuations once it's in a position to outlicense molecules to global pharma majors or is able to grab contract research opportunities from them. It won't happen tomorrow, though.
Market Cap
Net Profit
Apollo Hospitals: Getting into sunrise areas like managed healthcare, clinics and pharmacies to propel growth. Scalable, yes. Quick growth: No way.
Market Cap
Net Profit

If you're wondering what's the point of starting out a feature related to BT's list of 500 companies ranked on basis of market capitalisation with an arguably obscure, unorganised industry that boasts no listed players, read on. The pathological laboratory sector, like media and entertainment, hospitals, biotech, BPO or any other Next Big Thing, doubtless boasts a huge potential for growth. But first these businesses need to scale up. And one way that process could happen is via consolidation. "Many of these sectors-biotech for example, which will call for sustained R&D spending-need to scale up or they will die after 10 years," points out P. Krishnamurthy, Vice Chairman, JM Morgan Stanley.

That's the challenge for most of Emerging India Inc today, be it a Balaji Telefilms, or a Panacea Biotec, or an Apollo Hospitals-even as Balaji keeps scoring big points on the innovation and quality fronts and grows its topline at a mind-boggling 60 per cent, it has to expand its current business model (software production) to leapfrog into the next league. In biotech, small may work to the advantage of such companies that depend on a small pool of highly-skilled scientists to find cures for hitherto untreatable diseases or ways of increasing the human lifespan, but how do you sustain the research expenditure? Answer: scale up, by offering contract research opportunities to global pharma majors, and outlicensing molecules to them for further development.

Some CEOs may decide they don't need to grow in terms of market valuations, but then they have little choice but to fund their own growth plans (rather than investors getting into the picture), which few Indian entrepreneurs can realistically consider. The other option is to bring in a foreign partner, but the danger here is that you may no longer be in the driving seat. Consider the case of Jayesh Choksi, Chairman and Managing Director of Gufic Biosciences. In 1997, Choksi sold 5-6 of his pharma brands doing sales of Rs 100 crore. He decided that being a pharma company was going to be difficult post-2005 in the products patent regime as he felt that the opportunity in the US generics market wasn't sustainable, a JV could go sour, and he wasn't going to risk five-to-10 years of R&D effort on drug discovery. "But I still want to create intellectual capital," says Choksi. He's doing so by venturing into the relatively less research-intensive sector of agri-biotech.

The IT Services Sector Is At The Crossroads, With Companies Having to Redefine Their Positioning-Fast
I-Flex: Arguably India's only successful software products company. Banking solutions package, Flexcube, is beginning to make waves in overseas markets.
Market Cap
Net Profit
Mphasis BFL: Bucking the slowdown in IT services, on the back of rapid growth by BPO subsidiary MsourcE.
Market Cap
Net Profit
Infosys: Amidst high billing pressure, it is benefiting from a pick-up in offshore outsourcing by its clients, even as it expands its client-list and aggressively growing its verticals business.
Market Cap
Net Profit

But the problem for Choksi is that after selling his pharma brands, he's lost on on size (in the first year after the sale, he had a turnover of just Rs 21 crore). As compensation, he's diversified into the fmcg business, which would have management gurus frowning. But Choksi has little choice: His hybrid seed business could be a winner in the medium to long term, but till then he's got to grow-in two and a half years he aims to hit a turnover of Rs 100 crore, up from Rs 37 crore in 2001-02. That's imperative to attract private investors, who in turn could help fund his R&D efforts in agri-biotech.

Growth is Fine, But Returns?

To be sure, being in a high-growth industry is just the beginning, and just not enough. What will separate the men from the boys is the ability to create wealth, which means earning returns that are higher than the cost of capital. Growth on its own means nothing. Rajeev Gupta, Executive Vice President of DSP Merrill Lynch, points to the example of the fertiliser sector: huge growth potential, given that more and more farmers are using fertiliser. Problem, though, is that the country is just not competitive to make fertiliser since naphtha and gas costs are too high. Result? No value-creation in this industry.

Krishnamurthy points out that tomorrow's leaders will be those who are competitive, independent of sector, country or markets. For instance, software services is still a high-growth sector, at 20-25 per cent, but it's only companies that can reposition themselves away from the commodity pack-as providers of it-enabled service, business process outsourcing, offshore outsourcing, end-to-end consulting, you take your pick-that will last out the long term. "Sustainability coupled with reliability of business model will determine leadership over the long term."

Consolidation And A Global Recovery Could Help Propel India's Commodities Majors Into The Global League
Reliance: Stranglehold on the Indian petrochem sector, thanks to a series of acquisitions, the latest being the state-owned IPCL.
Market Cap
Net Profit
Hindalco: Has beefed up its status as an aluminium giant with the acquisiton of Indal. Nalco would be another feather in the cap
Market Cap
Net Profit
Gujarat Ambuja Cements: Its 'strategic alliance' with ACC and future acquisitions could make it a contender for the top slot.
Market Cap
Net Profit
Sterlite Industries (India): Rapidly emerging a metals maverick (copper and aluminium), helped by a string of takeover, including Balco, Malco and Hindustan Zinc.
Market Cap
Net Profit
Grasim: The proposed acquisition of Larsen & Toubro will make the company India's largest cement manufacturer by far.
Market Cap
Net Profit
Average market cap and net profit for H1 2002-03 in Rs crore

Gupta of DSP Merrill Lynch adds that competitveness will be driven by companies that can achieve income and demographics-induced growth in the local markets (for instance, two-wheelers that more people can afford, thanks to higher incomes, and education, where there has been a demographic shift, with close to a third of the population being under 13); also competitive will be companies that can sell products and services globally on a sustainable basis (pharmaceuticals and software services).

Clearly, the BT 500 listings in the years ahead will undergo plenty of changes. None of the inclusions and dropouts will be determined by collective high-growth sectors but rather by individual companies in these sectors with the ability to create wealth, be it an it firm or a commodities player. The services sector will doubtless have the edge, the proof of the pudding being Wal-Mart's accession of the No. 1 slot in the Fortune 500, a position that has been held by General Motors for much of the past 45 years. As a sector on its own, the meat and potatoes market may not be as big as say the IT industry. But then again a Microsoft or an Intel won't reach the $200-billion revenues Wal-Mart is expected to earn this year. None of these companies boasts that scale.

In India, retailing is still a long way off from reaching the scale of a Wal-Mart, with most of the players still not national, and not listed. But don't rule out the possibility of companies not represented in the BT 100 or BT 50 today finding their way into that elite space. It could be a media group, or pharma firm, or even a cement conglomerate-those that either scale up their business model, or consolidate their position in the industry via acquisitions, or those that do both. For, don't forget, as an author had pointed out, a third of the companies listed in the Fortune 500 list of 1970 weren't around by 1983. They hadn't disappeared. They'd been either acquired or broken into pieces.