f o r    m a n a g i n g    t o m o r r o w
MARCH 11, 2007
 Cover Story
 BT Special
 Back of the Book

The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
More Net Specials

Business Today,  February 25, 2007

The Race To $100 Billion
The Race To $100 Billion
In terms of market value, Indian companies are still puny compared with their international counterparts. Not for long though. Here are six reasons why the emergence of the Indian mega-corp is only a matter of time.
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."

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."

The global top three in respective industries and how their Indian counterparts stack up.
Citigroup US 266.2
HSBC UK 201.29
Bank of America US 242.72
ICICI Bank India 20
State Bank of India India 14
Microsoft US 287.89
Google US 142.65
Oracle US 86.91
TCS India 28
Infosys India 29
Wipro India 20
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
China Mobile China 189.72
Vodafone UK 169.73
A&T US 142.92
Bharti Airtel India 32
Reliance Comm India 20
Elecricite de France France 94.94*
E.ON Germany 31.31
ENEL Italy 67.71
NTPC India 27
GAIL India 6
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
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
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.