Survival strategies

Companies respond to opportunities and threats in a manner that might seem contradictory but relevant to their predicament

To understand how Indian companies are strategizing to stay in the game as banks become selective, equity investors impatient and the debt market expensive, there can be no better instructive exercise than observing the Ambani brothers. When the RIL group was divided in early 2005, the younger sibling’s portfolio had a combination of new economy and traditional but emerging businesses. Refinery and petrochemical complexes and the nascent retail outlets were assigned to the elder brother. More than a decade later, Anil is divesting stakes. The huge power plants put up to benefit from the deficit are slow in showing results.  Reliance Energy has been sold and Reliance Jio is taking over Reliance Communications. Foreign investors have been offered substantial shareholding in the financial services, asset management and insurance companies. Mukesh, in contrast, is facing a different predicament: how to deploy the reserves accumulated through old economy operations to keep the shareholders happy. Believing wireless services to be as essential as oil, voice calling was offered for free and data at bargain tariffs to create a big bang. The contradictory styles of the two capture the current preoccupation of Indian promoters to survive and grow. Heavily-leveraged companies are shrinking their balance sheets to concentrate on their competency. Those on the leadership perch are darting back and forth to become a one-stop shop or diversify to boost the return ratios.

The important lesson is that companies’ cash utilization and leakage-stemming policies are responses to the evolving situation. ADAG slipped not solely because of misjudgment. Rather external factors such as the Supreme Court’s crackdown on irregular issuance of telecom licences and the subsequent chaotic regulations skewed calculations. At the same time, Tata Motors’ determination to pull off its Jaguar-Land Rover buy appears to be paying: Main market China is stabilizing and the euro region is recovering. The second outcome is if unbridled ambition can hurt a company so also too much cash. RIL has quelled investors’ revolt over the mediocre capital appreciation by its aggressive RJio posturing, possible only because of its liquidity chest. In contrast, tech companies are distributing bonus shares and resorting to buybacks as they navigate an uneasy transition to digital offerings from back-office support. The third take-away is that the idea of growth differs for different companies. A high-entry barrier requires huge capital and patience. These are the strengths of large groups who were prominent in bidding for spectrum and circles. For a mid-sized sanitary-ware maker, extending the presence in the kitchen to ride on the housing boom is less risky than integrating backwards to secure supply of inputs. The fourth draw-down is that if commoditization of brands poses a danger to some, it presents an opportunity to the others. Consumer durables and FMCG are turning into generics. On the other hand, the expiry of patents is a window to the developed world for copy-cat pharmaceutical producers.

The fifth inference is that regulated industries that attract due to the fat margins can also become graveyards. Some ambitious entrepreneurs want to be present across the commodity spectrum for pricing power though these sectors are susceptible to policy whims and are cyclical. The distressed core sector assets are a testimony of how aping the current fashion can lead to destruction. At the same time the fact that the interested parties are seeking consolidation rather than trophies indicate careful homework of the outlook. Many first-generation entrepreneurs have become millionaires by servicing the needs of the recession-proof healthcare sector that is, however, subject to intense scrutiny. Mines can be shut due to local agitation. Price caps are imposed on scarce and essential requirements. The sixth conclusion is, despite the captive audience, B2B players yearn for B2C presence to shield the core cyclical operations and gain a direct entry into homes. Retail lending, asset management and insurance are the flavor though most conglomerates have not been able to replicate the success achieved by their flagships. The seventh observation is that if the upside of India’s consumer markets is the rapid urbanization, the downside is intense competition. The churn in the mobile handset segment has not deterred new entrants. The eighth lesson is the nature of tie-ups is changing from expanding the market to preserving the existing share. Pooling of equity or know-how-access ventures between Indian and foreign peers are giving way to collaboration with competitors. Joint custody of assets and sharing of resources by rivals indicate the trend is likely to turn into a tide. The bottom line is that one size does not fit all when adapting to the changing environment. The key is to be ruthless in letting go and careful while spending.

-Mohan Sule