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NOV. 19, 2006
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 BT Special
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Rural-Urban Divide
The rural-urban divide continues despite a high growth rate. According to the 61st round of the National Sample Survey, apart from rural-urban wage differentials, gender differentials are very much a part of the present-day Indian economy. The urban regular wage earner earned Rs 194 a day, which was one-and-a-half times the rural average of Rs 134 a day in 2004-05. Interestingly, the wage gap is most pronounced among graduates. An analysis.

The Asian Agenda
Is a region-wide free-trade area a realistic goal? So far, 183 free trade agreements have either been signed or are being proposed or negotiated across Asia. The share of intra-regional trade has risen to about 55 per cent last year from 40 per cent in the early 1990s. Aside from trade in goods, there is a need to focus on free trade in services. Given the stalled WTO talks, it is vital for Asian countries to pursue further market opening and structural reforms.
More Net Specials
Business Today,  November 5, 2006
Global, Local & Very Vocal

If global growth is a seesaw, it's beginning to tilt towards India Inc. This year's BT 500 listing is an early-on barometer of that rebalancing act.

Global foray: Videocon's bid for Daewoo Electronics demonstrates India Inc.'s quest for new foreign markets

"Columbus reported to his king and queen that the world was round, and he went down in history as the man who first made this discovery. I returned home and shared my discovery only with my wife, and only in a whisper.
"Honey," I confided, "I think the world is flat."

Thomas L. Friedman

The World is Flat (The Globalised World in the Twenty-first Century)

If Friedman was to ponder a sequel to his best-seller of 2005 a decade or so down the line, he may well reconsider that The World Is Round After All. The World is Flat is based on a sound premise that "the global competitive playing field was being levelled" (aka "the world is being flattened") with plenty of help from the personal computer, optic fibre pipes, satellites and the internet. Friedman's tome to that extent is a paean to the Indian it services global delivery model built on the inimitable-at least, so far-backbone of a cost-effective and talented workforce. Friedman terms this phenomenon of a shrinking and flattened world Globalisation 3.0; Globalisation 1.0 and 2.0 were driven by American and European individuals and businesses, including one Christopher Columbus.

Maybe it's time for Friedman-or anybody else for that matter-to herald the advent of Globalisation 4.0. It's a world where the playing field may soon, and once again, be uneven. Only this time, it would be inclined towards the side of India (and China), unlike a decade ago, when Indian business quivered in fear at the prospect of being steamrolled by global competition. TWIF is all about the Indian it services' contribution to globalisation by delivery of intellectual capital from Indian shores to virtually any other global outpost. The World is Round After All would be about the palpable ambition of India Incorporated-almost en masse-to hop on to the globalisation bus, as our BT 500 study testifies. A cursory run through the top 50 will reveal that roughly 40 per cent of these companies have made at least one international acquisition in the past three years. And such cross-border activity on the mergers & acquisitions (M&A) front isn't restricted to just the companies with large market capitalisations. Even mid-cap firms are a part of the m&a frenzy, with some of them paying sums that are larger than their latest revenues. Examples: Tata Coffee's acquisition of Eight O'Clock Coffee in the us, Subex's buyout of Azure Solutions and Aban Lloyd's purchase of Sinvest.

Cigarettes still account for over two-thirds of ITC's revenues, but Chairman Yogi Deveshwar is attempting to derisk by offering consumers a range of foods products

Clearly, Indian companies today are in a position to take on their foreign counterparts, not just at home but on overseas battlefields too. And the appetite for new geographies is just one reason why the country has become the flavour around the world, across all seasons. Indian companies that were once viewed as fair game for marauding global predators, have turned hunters themselves. Tata Steel's bold bid for a steel maker four times its size, Ranbaxy's six acquisitions in less than 18 months and Videocon's buyout of Thomson Electronics' global colour picture tube business along with its recent $720-million (Rs 3,312-crore) bid for Daewoo Electronics all amply indicate the pent-up ambition to be significant players on the international stage.

And then there's the flourishing domestic market. Along with the quest for new foreign markets, also working in favour of Indian companies is burgeoning private consumption, estimated to contribute close to two-thirds of growth in its gross domestic product (GDP); for China that figure stands at 40 per cent. At the same time, belt-tightening initiatives during the gut-wrenching cyclical downturns of the mid-nineties and early 2000s have made Indian industry a more efficient user of capital and assets-average return on capital (ROCE) employed of India's large-cap brigade has risen from low single digits to high double-digits. For the top 25 in the BT 500, ROCE ranges from 56 per cent to 210 per cent (as in the case of Godrej Consumer Products). Similarly, on the return on assets front, the range for the top 25 is between 20 and 48 per cent. Such efficiencies make it easier for consumer-oriented businesses to take advantage of the burgeoning purchasing power, last estimated to be residing with at least 300 million Indians. That in itself is enough to have marketers across the globe salivating, but even more seductive is the fact that there are a little over 700 million more with the potential to be converted into consumers.

All this means that the Indian industry is fascinatingly poised at the vanguard of multiple growth opportunities, which all have the potential to coincide swimmingly and realise in handsome sales and profit growth for many more years to come. The first mouth-watering prospect is international markets, where Indian companies are either acquiring bases, or establishing beachheads to offer their products and services. The second break is the great urban bazaar, fuelled in no small measure by mall-stomping, coffee-guzzling, brand-possessed consumers getting more affluent by every credit card swipe. And the third opportunity over the longer term-which isn't the least by any yardstick-lies at the mammoth base of the great Indian pyramid, where people will aspire for a better quality of life and will hopefully be left with surpluses to spend.

The success of the Reliance model is based on the consistency of Chairman Mukesh Ambani's vision, which involves a relentless focus on integration and value-addition and an obsession with economies of scale
Last fortnight when a fire broke out at reliance Industries Ltd's (RIL's) Jamnagar refining facilities, punters on Dalal Street were naturally apprehensive about whether refining output would be cut, thereby, hitting margins, profitability and the share price. At the time of writing, the extent of the damage, according to the RIL management, was minimal, although not all sections of the market were willing to accept that at face value. Millions of shareholders who've been with the company for the past two decades would be concerned, not alarmed. They've been through worse. In 1998, RIL's petrochemical complex in Patalganga in Maharashtra's Raigad district was submerged in 20 inches of rain. Close to 400 people died, and 1,500 families lost their homes. The complex had disaster written all over it; but after two weeks of crisis management-during which 6,000 skilled people from all over India worked non-stop-the polyester unit began humming. In another five days it was running at normal capacity. Even Jamnagar has witnessed crisis before. In July 1998, when the Ambanis were putting up the 27 million tonnes per annum refinery, western Gujarat was lashed for four hours by high-velocity winds. About 550 people went missing. But in 15 days, 60,000 people were back at the site, and the refinery was commissioned by December 1999-ahead of schedule.

Reliance has never been a stranger to adversity. Last fortnight's fire will doubtless have an impact on production and exports in the short term, but will duly even out in the long run. It's not by accident that RIL is #1 on the BT 500 listing; more than creating capital-intensive assets, the success of the Reliance model is based on the consistency of its vision, which involves a relentless focus on integration and value-addition, an obsession with economies of scale (and also turning adversity into opportunity). A diversified, yet integrated strategy, is helping in spreading the risks, and this can be best appreciated in the prevailing climes of fluctuating crude oil prices. That's reflected in the lower gross refining margins of the company, down by 2 per cent to 10.4 per cent in the second quarter of 2005-06. But higher margins in petrochemicals-which make up roughly one third of RIL's portfolio-saved the quarter for RIL. They may have not been high enough to balance out the thinner margins in refining, but ensured RIL could clock a 9 per cent growth in profits after tax in challenging market conditions. (RIL also had to contend with a flood in Gujarat, which resulted in a partial shutdown in the plant in Hazira.)

RIL also tops the BT 500 charts because it invariably succeeds in its value-unlocking initiatives. A recent series of demergers, for instance, has resulted in Reliance Communications-the CDMA telecom service provider-debuting at #9 on the BT 500. Going forward-or rather backward, from refining-there's oil & gas exploration, where the company is slowly but surely moving towards monetising its gas reserves; by mid-2008 production is expected to start in the Krishan-Godavari (KG) basin. However, ventures into the totally different ball games of retail and special economic zones (SEZ) would be decidedly higher-risk. In retail, RIL is attempting to appeal directly to consumers by creating a world-class shopping environment and backing it with elaborate supply-chain infrastructure-something furthest removed from its bread and butter activities. Yet, there are common threads: The focus on economies of scale and value-addition is one; Chairman Mukesh Ambani, who blueprinted the implementation of the Jamnagar refinery in less than 36 months, is the other. The possibilities for value-creation never end at RIL, but the risks keep mounting too.

A glance at the top 50 on the BT 500 reveals that almost every company is targeting at least one of these opportunities, with 35-40 per cent of them firmly focussed on the domestic urban and semi-urban prospects. A few, like Mahindra & Mahindra (M&M), ICICI Bank and Bajaj Auto, have the opportunity to do all three-think international, local as well as rural. And they're doing exactly that. The M&M group, even as it sells its utility vehicles in markets like South Africa, is selling vehicle financing in rural areas. ICICI Bank is providing micro-finance to village folk, and at the same time, wants at least a quarter of its portfolio to be international. A domestic-oriented sector-at least for the time being-like telecom (represented by Bharti Airtel and new entrant Reliance Communications in the Top 10) is growing at a rapid rate of 30-35 per cent. Cellular operators are adding roughly 6 million subscribers a month, have a total subscriber base of 170 million, and the market is expected to double to 350 million in four years. And there's plenty of steam left: Urban penetration is estimated at a little over 30 per cent, and the best part-rural penetration is just 2 per cent! Meantime, rapid urbanisation and a willingness of the rural consumer to uptrade spell good tidings for the marketers of fast-moving consumer goods (FMCG), the fourth-largest sector of the economy, estimated at a little over $13 billion (Rs 59,800 crore).

Sterlite Chairman Anil Agarwal is just one of many Indian business promoters looking outward to acquire assets. In 2004, he bought copper mines in Zambia

It's early days yet, and the global economic balance is still tilted towards the West-which still accounts for around 30 per cent of the world's gross domestic product; but make no mistake: Indian companies of all sizes and hues want to make the world their market place. That Indians are globally competitive has been well established; if Indian companies become globally competitive too, and they're in a hurry to prove exactly that, the global rebalancing would be complete. If global growth was a seesaw, it's clearly beginning to tilt on the side of economies such as China and India.

If any observer of Indian industry was to wake up after a decade-long slumber and was to be told that India would be a global force to reckon within a few years, he'd probably prefer to go back to sleep. In the early nineties, foreign companies and capital were ushered into the country, perhaps not with open arms, but welcomed nevertheless by a government keen to reform and dust off years of apathy to capital and profit. It's not a level-playing field, grumbled sections of industry captains.

How times have changed. A decade and a half ago, when Business Today embarked on its first BT 500 study, Indian industry was still grappling with the speculated consequences of tentative liberalisation-eventual capitulation to foreign investment-driven MNCs appeared a distinct possibility. With a little help from policy makers, plenty of assistance from domestic consumers, and some intense introspection, Indian companies have not only survived, but thrived. Consider: A glance at the top 15-20 list reveals some of those names hogged the top slots in 1992 as well: ITC, for instance, was #2 in 1992, and #1 in 1993. Today, it's not doing too badly for itself at #6, elbowed out by newer rivals in newer-age businesses like it services and telecom. Other names that continue to dominate the top positions include Hindustan Lever (#5 in 1992, #7 in the latest BT 500), Reliance Industries (#6 then, #1 now), and Larsen & Toubro (#5 in 1993, #10 in 2006).

Doubtless more interesting is the arrival of a clutch of rapidly-growing corporations in sunrise industries. Take it services. Infosys, which debuted in the BT 500 in 1994 at 230, is today at #3. Of course, it did not take long for Infosys to climb up the market cap sweepstakes. In 1997, it nudged upwards to 83, further up to 30 a year later. By the turn of the century, Infosys was sitting pretty at #4. Wipro, which first squeezed into the BT 500 in 1992 at 279, is today at #5. Just above Infosys is TCS, which got listed on the exchanges only two years ago. Interestingly, till the late nineties, the IT bandwagon was hardly a force to reckon with (obviously the world wasn't flat then). By 1997, there were three it companies in the BT 500. But-surprise-the #1 it firm in market cap wasn't Infosys. Nor was it Wipro. It was it education major NIIT, at 66. By 2000, the top 10 had four it companies, and three of them were in the top 5.

Sandwiched between the it bandwagon is telecom giant Bharti Airtel at #4, and making its debut on the BT 500 is another telecom major, Reliance Communications (created out of a de-merger from Reliance Industries), at #9. And for good measure, there's a bank, ICICI Bank, at #8, which interestingly has occupied the same position since 2003.

India's #1 cellular telephony player, Bharti Airtel, has a 24 per cent share of the Indian subscriber base, which stood at 170 million as of September. Now, Chairman Sunil Mittal is attempting to penetrate deeper into rural India

Along the way, the multinational presence in the BT 50 has reduced. In the first two BT 500 listings (in 1991 and 1992), there were some 16 MNCs in the first 50. Today, there are just about eight, including a new listing, Maruti Udyog (in which Suzuki of Japan has majority control). Whilst almost none of these foreign companies has packed their bags and exited the country, the list has whittled down primarily because of industry consolidation, back home as well as internationally. For instance, Brooke Bond, Pond's and Lipton are now a part of the HLL stable. And Hindustan Ciba Geigy doesn't exist in its original avatar as it was merged into Sandoz to form Novartis, although the chemicals business was hived off into Ciba Specialty Chemicals in the mid-nineties. Yet, there are some MNCs that have slipped down the pole, or simply crashed out of the top 50 (even 100). Best example: Ingersoll-Rand, #23 in 1992, and at a distant #279 today. That the company is a maker of construction equipment-a booming sector one would assume-makes the fall surprising. Also shocking is that the company's market cap has barely budged-in fact, it has declined marginally-from the Rs 1,105-crore levels of 1992. Castrol India is another notable fall. In 1992 and 1993, the company was at 28 and 17, respectively, in the BT 500 rankings. In 2006, it lags at 127, with its market cap barely doubling in the last 14-15 years. MNCs that have held their ground include HLL, ITC, Siemens and ABB (the latter having improved its position significantly in the past 15 years).

Whether MNCs have lost out or not isn't the point. That Indian companies have been able to hold their own against the best from the world is; after all that appeared unlikely when the floodgates were opened for foreign investment in the nineties. A few domestic manufacturers have made substantial progress in coming out of the MNC shadow. Consider Bajaj Auto, for instance, a late starter in the motorcycles market, but which is today not too far behind market leader Hero Honda Motors. Latest market share estimates peg Bajaj at 34 per cent and Hero Honda at around 44.5 per cent. Bajaj may be #2, but that the growth in its market cap is higher than that of Hero Honda, is testimony that investors expect Bajaj to further narrow the gap between itself and the Japanese giant's India joint venture in the years ahead by riding on its indigenous design and development skills. Still in the auto sector, utility vehicles manufacturer M&M is still holding on to its #1 position, despite stiff competition from Toyota of Japan for some time now (recently, Toyota overtook Ford to take the #2 slot by sales in the us market).

Eight-10 years down the line, don't be surprised to find Friedman huddled with a Rajiv Bajaj or a Sunil Mittal or one of the Ambani brothers (his muse for The World is Flat was Nandan Nilekani, CEO, Infosys Technologies). They might just tell him: "The global competitive playing field isn't flat any more. It's inclined towards India." Friedman might then call his wife and whisper: "Honey, I think The World is Round After All."




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