Fastest growing conglomerates

When Ratan Tata steps down as Chairman of Tata Sons in December, he can do so with a sense of satisfaction in the knowledge that the group he steered through two decades of economic reform is India's leading business house. Four years ago, the Mukesh Ambani-controlled Reliance Industries Ltd (RIL) was ahead of the Tata Group in terms of market capitalisation.

The Business Today Research Bureau compiled market cap data for India's leading business houses and averaged the April-to-September figures for each year since 2008/09. To rank the country's biggest conglomerates, the average market capitalisation of all listed companies in a group were added up.

Some interesting trends came to light. Perhaps the most interesting one is the robust growth of the Bajaj Group, which ranks sixth in terms of market capitalisation. Having increased its market cap at a compound annual growth rate (CAGR) of 24 per cent in four years, it has pushed Shashi Ruia's Essar Group out of the top 10. The Bajaj Group grew the fastest of all the top 10 conglomerates by market cap. The next two in terms of CAGR are the Hero and Tata groups (the Hero group is not among the top 10 by market cap, however).

The Tata Group, with its diverse manufacturing and services footprint, has the biggest market cap - Rs 4.45 trillion (a trillion equals 100,000 crore). Its valuation has grown at 14 per cent CAGR over four years. In terms of both valuation and growth, the Tatas are now miles ahead of RIL, which has second place in terms of market cap.

The Tata Group has gained the most in terms of absolute change, adding Rs 2.1 trillion to its valuation since the first half of 2008/09. In 2011/12, 74 per cent of the group's revenues (Rs 1.91 trillion) came from three of its 26 listed companies - Tata Consultancy Services, Tata Motors and Tata Steel.

Bhaskar Bhat, Managing Director at Titan Industries, says: "The Tata Group strongly drives innovation programmes which have taken deep root," says Bhat. He adds that the group's growth was accelerated by aggressive inorganic expansion globally.

If one looks at only cumulative growth in four years, then only one business house is ahead of the Tatas among the top 10 by market cap. The Bajaj Group's market cap has grown faster at 24 per cent CAGR to Rs 76,891 crore - three times the 2008 figure. In the four years up to 2011/12, the group's income more than doubled, and profits shot up from Rs 1,235 crore to Rs 4,235 crore. Growth is driven by the flagship, Bajaj Auto Ltd, which contributed 58 per cent of total income and 71 per cent of profits in 2011/12.

Among the top 10 by market cap, the Aditya Birla Group, controlled by Kumar Mangalam Birla, came in third in terms of CAGR over four years. At Rs 1.3 trillion, it was third in terms of valuation, too.

Both the Ambani brothers have clearly lost. RIL's market cap of Rs 2.43 trillion has declined six per cent, losing Rs 89,786 crore in valuation from a year ago. Even so, based on the stock price on October 12, 2012, Mukesh Ambani was the world's 14th richest man, with a net worth of $24.5 billion, according to the Bloomberg Billionaires Index.

The Anil Dhirubhai Ambani Group has seen the sharpest fall - 21 per cent CAGR - in four years. Valuations have shrunk by more than a third. The group, which was at third place in 2008/09, has slipped to the ninth spot, with a market cap of Rs 62,959 crore. The profits of Anil Ambani's group businesses have dropped from Rs 4,834 crore in 2007/08 to Rs 2,986 crore in 2011/12, due largely to a poor show by Reliance Communications. Reliance ADAG is ahead of only the Adani Group.

Sankaran Manikutty, strategy expert and visiting faculty at the Indian Institute of Management, Bangalore, notes that family-promoted groups tend to hold on to a non-core business even though it is bleeding, because a family member heads it. Such groups should exit non-core areas and strengthen other businesses, he says.

Bajaj has narrowed its valuation gap with the top guns. Some business pundits think this is just the beginning. India, one of the world's largest consumer markets, with an efficient banking system, should have had 30 to 40 business houses as big as the Tata or Reliance groups, says Nikhil Vora, Managing Director at financial services company IDFC Ltd. The signs indicate that it is headed that way, he adds. "Smaller groups no longer have a mortal fear of taking on big business houses. The increase in the confidence levels of smaller companies is the most important change in the last five to six years."

Ashish Iyer, Partner at Boston Consulting Group, points out that the country has seen the emergence of sector-specific conglomerates in recent years. He mentions no names, but an example would be Vedanta, a single-commodity metals player that has grown in other metals categories to become a conglomerate.

Business houses, Iyer says, will continue to grow because of the size and the strength of their balance sheets. "This will help them raise capital at cheaper rates and attract talent," he says. "A new stand-alone company would not have these advantages."

On the flip side, says Manikutty, companies within large business groups often cannot leverage each other's strengths because increased shareholder activism limits their flexibility.

With the most recent round of big-ticket reforms, such as allowing foreign direct investment in multibrand retail and letting foreign airlines invest in Indian carriers, opportunities are increasing for Indian businesses.