 |
Software, telecom, steel &
automotives are four sectors that the Tata Group is counting
on for super-growth
R. Gopalakrishnan/Executive Director/Tata
Sons |
When Warren Buffett, perhaps
the greatest investor of all time, started acquiring the stock of
Berkshire Hathaway in the 1960s-at that time a humble textile manufacturer-the
company was worth just about $8 per share. When Business Today last
checked the company's price on the New York Stock Exchange (NYSE),
it stood at a mind-numbing $106,710. Berkshire today is an insurance
and banking behemoth, has an investment portfolio to kill for (Coca-Cola
and American Express being just two of the marquee names on that
list), and for good measure has some 50 subsidiaries that operate
in varied areas ranging from jewellery to candy to furniture. It's
also the world's most valuable company to boot, with a market value
of a little over $1.4 trillion.
The likes of Berkshire-and Buffett-come once in a lifetime.
As does appreciation of the kind this stock has witnessed. Yet,
the Berkshire example extols the virtues of long-term investing,
something Buffett swears by. As one of the countless Buffettisms
go: "Only buy something that you'd be perfectly happy to
hold if the market shuts down for 10 years."
| WHY INDIAN MEGA-CORPS
AREN'T A PIPE DREAM |
| Sensex is poised for 50K: Short-term blips
notwithstanding, long-term global interest in Indian stocks
is high. Some of the biggest global investors like Calpers,
Vanguard and Barclays still have a very low exposure to Indian
equity
Billion-dollar cross-border transactions: Mega-sized outbound
acquisitions will provide the impetus for non-linear growth,
by virtue of which even today's mid-caps have a chance of
pole-vaulting into the $100-billion league in 8-10 years
There's tremendous value still locked in Indian companies:
The process of de-merging allied businesses, listing emerging
ones and merging related activities has only just begun
The PSU goldmine: Right from ONGC to NTPC and State Bank
of India to yet-unlisted public sector behemoths like BSNL,
Oil India and Life Insurance Corp, there's huge value waiting
to be dug out. LIC and BSNL, for instance, have revenues
of $25 and $9 billion respectively
Younger companies will disrupt current rankings: Those
with real estate/SEZ projects, insurance activities and
forays into sunrise sectors like retailing have a real chance
of hot-footing it into the big league
Don't forget the India story: With the economy set to
grow at 8-9 per cent over the long-term, companies riding
on domestic consumption are onto a good thing
|
 |
Infosys has become a truly globalised
company without leaning too heavily on acquisitions
Nandan Nilekani/CEO/Infosys Technologies |
If the Indian stock markets had to put up the shutters for 10
years, where would some of today's favourites-as well as a few
rank outsiders and yet-unlisted companies-be? Or, to cut to the
chase (this isn't after all a feature on the virtues of long-term
investing): Which Indian companies are best poised to become $100-billion
giants, by market value, in a decade, or even less? A flurry of
cross-border acquisitions, and impressive double-digit earnings
growth on the back of a booming economy and a burgeoning consuming
class, have set India Inc. firmly on a high-growth path. Yet,
in comparison with their global peers, or even some of their Asian
counterparts, domestic corporations are still puny. Example? Bharti
Airtel may have registered an over 2,000 per cent spurt in share
price over the past four years (since the Sensex was at 3,000),
but its market cap at $32 billion is still small when compared
to China Mobile's $189 billion. Similarly, ICICI Bank, India's
largest bank by market value, which stands at $20 billion, can't
hold a candle to HSBC Group's $201 billion. At $43 billion Reliance
Industries is the Indian company with the highest market capitalisation,
but its global peers, ExxonMobil, BP and Royal Dutch/Shell, are
miles ahead.
The good news, though, is that an entry into $100-billion club
is only a matter of time for a clutch of Indian corporations.
The triggers? Long-term interest in Indian stocks (which is why
Morgan Stanley believes a 50,000 level for the Sensex isn't impossible
in less than 10 years), the beginning of an era of billion-dollar
cross-border transactions, unlocking of heaps of value from existing
operations, the imminent listing of some public sector Goliaths
alongwith young companies from emerging, high-growth sectors;
as well as unique, organic, scalable and global growth models
of companies like Reliance and Infosys. Says Edward Pulling, Managing
Director, Pacific Regional Group, JF Asset Management: "India
will soon have 8-10, $100-billion companies in market cap."
| LONG HAUL AHEAD |
| The global top three in respective
industries and how their Indian counterparts stack up. |
SECTOR
COMPANY COUNTRY MARKET VALUE
($ BILLION) |
| BANKING |
Citigroup US 266.2
HSBC UK 201.29
Bank of America US 242.72
ICICI Bank India 20
State Bank of India India 14 |
| SOFTWARE & SERVICES |
Microsoft US 287.89
Google US 142.65
Oracle US 86.91
TCS India 28
Infosys India 29
Wipro India 20 |
| OIL & GAS |
ExxonMobil US 441.69
BP UK/Australia 211.19
Royal Dutch/Shell UK 217
ONGC India 43
Reliance Industries India 43
Indian Oil Corp India 12 |
| TELECOM |
China Mobile China 189.72
Vodafone UK 169.73
A&T US 142.92
Bharti Airtel India 32
Reliance Comm India 20 |
| SECTOR |
COMPANY COUNTRY MARKET VALUE
($ BILLION) |
| UTILITIES |
Elecricite de France France 94.94*
E.ON Germany 31.31
ENEL Italy 67.71
NTPC India 27
GAIL India 6 |
| MATERIALS |
BHP Billiton Australia/UK 135.98
Rio Tinto UK/Australia 73.77
Anglo American UK 77
Tata Steel* India 17
Hindalco* India 10.5
* Provisionally combined with Corus and Novelis |
| FINANCIAL SERVICES |
Berkshire Hathaway US 1,481.1
UBS Switzerland 125.03
ING Group The Netherlands 100.94
HDFC Group* India 18
* Includes HDFC and HDFC Bank |
| AUTOMOBILES |
Toyota Motor Japan 219.50
DaimlerChrysler Germany 71.24
Honda Motor Japan 74.37
Tata Motors India 8
Market capitalisation as on February 13, 2007, figures in
$ billion, *m-cap as on February 28, 2006
Source: CMIE; Investopedia |
Whilst the likes of Reliance, ONGC, Infosys, Bharti and TCS
would be the obvious choices to propel India Inc. into the $100
billion club, don't forget the till-date unlisted pack, which
is capable of packing quite a punch. Consider, for instance, Life
Insurance Corporation of India (LIC), which for the year ended
March 2005, reported a topline of $25 billion and profits of $0.15
billion (Rs 697 crore). Compare those figures to China Life Insurance:
Sales of $9.4 billion and profits of $0.87 billion for the year
ended December 2005. Today, China Life Insurance has a market
capitalisation of $150 billion and is China's biggest life insurer.
In less than a year, its value has surged almost five-fold, from
$30.5 billion last March. LIC, of course, is still a state-owned
corporation, and the private sector brigade is just six years
young. Says N.S. Kannan, Executive Director, ICICI Prudential
Life Insurance: "The industry is still at a nascent stage
and the potential for growth is immense due to relatively low
penetration levels. Per capita life insurance premia in comparison
to GDP is still lower and that offers enough opportunities for
further growth in the coming years." Adds Pulling: "With
India expected to replicate growth being witnessed by the Chinese
economy, life insurance companies of HDFC, ICICI and Bajaj have
the potential to emerge as large as China Life." Pulling
points out that sectors like real estate and roads & ports
can also throw up $100-billion companies in the years ahead.
 |
RIL is ideally placed to serve
world markets with domestic capacities of global scale
Mukesh Ambani/CMD/RIL |
Don't forget some other so-far-unheralded jewels in the public
sector. Take Coal India. With an 85 per cent market share in coal
mining in India, the company is among the largest coal producers
in the world with profits of $1.9 billion (Rs 8,550 crore) and
revenues of $7.5 billion (Rs 33,750 crore). According to the foreign
brokerage CLSA, using Chinese comparisons, the current market
cap of Coal India could be in excess of $30 billion and could
easily exceed $50 billion in a few years. Ditto with the state-owned
telecom colossus BSNL, whose revenues are pretty much in tune
with those of Saudi Telecom, at $8.9 billion (Rs 40,177 crore).
And Saudi Telecom's market cap is already in the $90-100 billion
bulge bracket. Of course, what goes against BSNL is its track
record of low profitability, thanks in the main to its huge work
force. So, whilst Saudi Telecom's net profit stands at $3.31 billion
for the year ending December '05, BSNL lags behind at $1.9 billion
for the year ending March '06.
Yet, if you go by the growth rates and valuations being racked
up in the telecom sector, BSNL's day in the sun may not be a long
time coming. As, Ridham Desai, Managing Director, Morgan Stanley,
points out: "Telecom is one sector that will grow faster
than others. And I wouldn't be surprised to see companies like
Bharti Airtel touching a $100-billion m-cap in the coming five
years." Bharti Airtel has been among the fastest growing
stocks in recent times, outperforming the Sensex handsomely. In
the last four years the stock of the telecom major has jumped
nearly 2,200 per cent, compared to a 383 per cent increase in
the benchmark bse Sensex. Currently, the company has a market
value of $32.3 billion (Rs 1,45,368.5 crore). Since Bharti is
already among the top-10 GSM cellular operators in the world,
analysts from CLSA expect the company's subscriber base to touch
120 million by the year ending March 2012 from the current 29
million. It would then become the third-largest operator globally
with a cash profit of $5 billion (Rs 22,500 crore).
 |
Bharti Airtel has been one of the
fastest-growing stocks, outperforming the Sensex by far
Sunil Mittal/Chairman/Bharti Airtel |
Bharti's entry into the $100- billion isn't difficult to project
based on its domestic, organic growth story (although Chairman
Sunil Mittal has reportedly hinted at mega-acquisitions overseas
in the days ahead). However, the fortunes of a clutch of Indian
corporations have suddenly brightened courtesy the large-size
acquisitions they've pulled off in the recent past. Consider,
for instance, two recent acquisitions, and how they promise to
overhaul the market cap sweepstakes for the Indian companies involved.
Without British Steel giant Corus, Tata Steel's value on the bourses
is a shade under $6 billion. If you add Corus' market value, the
steel giant from the Tata stable rockets to consolidated capitalisation
of $17 billion, which would make it the second-largest Tata company
after TCS, which is currently Bombay House's most valuable company,
at $28.8 billion. Similarly, Hindalco's buyout of Novelis, once
completed, will give the Aditya Birla aluminium-major a provisional
capitalisation of $10.5 billion. Others like Tusli Tanti of Suzlon,
and Venugopal Dhoot of the Videocon group are just two examples
of promoters in a hurry to grow non-incrementally on the back
of overseas buyouts.
However, just as in the case of Bharti, two companies that are
hurtling towards $100 billion with almost purely organic roadmaps
but which still give them a great shot at being global companies
are Reliance Industries and Infosys Technologies. By straddling
the entire hydrocarbons value chain, with operations that begin
upstream with exploration and production, move on to refining
and end with petrochemicals and polymers, Reliance is ideally
placed to serve world markets with domestic capacities of global
scale and size. A 29-million tonnes per annum refinery dedicated
solely for exports will also ensure that Reliance is one of the
biggest global refining players. As far as value goes, analysts
point out that once the company begins gas production in a couple
of years, its value will easily more than double (which is why
they don't rule out the demerger of the exploration and production
business). Then, Reliance also has mega plans for special economic
zones, for agri-retail, for healthcare, which can result in mind-boggling
valuations if these projects take off.
 |
ICICI Bank has a unique business
model that minimises the need for acquisitions
K.V. Kamath/CEO/ICICI Bank |
An innovative business model coupled with its unique culture,
systems and processes make it possible for Infosys to become a
truly globalised company without leaning too heavily-or perhaps
at all-on acquisitions. Or, as Nandan Nilekani, CEO, Infosys puts
it at a Nasscom-Business Today panel discussion last fortnight:
"It's not a great idea to contaminate the business model
unless there is a sound, strategic reason to do so." Infosys,
says Nilekani, has created a model that creates value for customers
faster, better and cheaper, and it's a model that's disruptive
to incumbents. "We can't have an acquisition that upsets
the economics of the business model," adds Nilekani. However,
it's not as if he's ruling out buyouts totally. "Given that
our intent is to create a next generation it services and consulting
firm, there are acquisitions that could make sense if we want
to expedite the pace at which we enter new geographies, develop
domain skills. It could be because there could be a business model
out there that we think we need to have but we can't build organically."
Another company with a unique and well-hedged business model
that minimises the need for cross-border acquisitions is ICICI
Bank. In the near future, it expects to have rural and international
operations accounting for half of its asset base. The other half
will, of course, accrue from retail banking, with home loans and
consumer loans to a thriving middle class, ensuring the growth
engine doesn't falter.
Unarguably, Ratan Tata is in the sweetest position. Not only does
he have 28 listed companies with a collective market cap of close
to $60 billion, he's also got the unlisted Tata Sons, which boasts
of a turnover of close to Rs 1 lakh crore (by virtue of its holdings
in various Tata companies). Right up on the list of listed companies
is TCS, with a market value of a little under $30 billion. R. Gopalakrishnan,
Executive Director, Tata Sons, says, software, telecom, steel and
automotives are four sectors that hold promise for huge growth.
Tata Teleservices, the CDMA-telecom player, of which only the Maharashtra
circle is listed, is estimated to be valued over $11 billion by
analysts. What's more, Gopalakrishnan points out that the Tata Group
has some 90 companies which provide an opportunity to build critical
mass via mergers and demergers. "M&A is (also) the way
to grow," he adds.
 |
He is in a hurry to grow inorganically
on the back of overseas buyouts
Tulsi Tanti/CMD/Suzlon |
M&A may be the way to go but, as experience in global markets
suggest, two out of three such transactions are doomed to fail.
In that light, a host of value-destroying acquisitions will come
to the fore, particularly when business cycles turn for the worse.
Says Prahlad Shantigram, Managing Director & Head Corporate
Advisory, Standard Chartered Bank: "Many deals being done
are leveraged buyouts, which are risky and could hit companies,
and markets, badly." Another concern is the seemingly stretched
valuations at which Indian companies are buying out assets in
their keenness to go global-which is reflected in the Tata Steel-Corus
and Hindalco-Novelis transactions, and in Suzlon Energy's proposed
takeover of Repower Systems. What's more, concluding an acquisition
by no means ensures success. Making it work does. "The real
work starts after the deal," avers Frank Hancock, Managing
Director, ABN Amro Asia Corporate Finance.
Clearly, M&A is risky business, but for most of India Inc.
that's the only way to enter the big league of global mega-corps.
As Manish Chokhani, Managing Director, Enam Financial Services,
says: "If companies have to grow to $100 billion in m-cap,
consolidation is the way to go." A handful like Reliance
and Infosys may be poised to make it largely on their own steam.
The routes may be different, but for the elite of India Inc.,
the $100-billion destination is just a few milestones away.
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