Do Business Conglomerates in India belong to another era or they are here to stay?

In the mid-1990s, a group of multinational executives had come to India to explore new opportunities in the country as part of a Harvard Business School executive education programme. Ratan Tata was invited to address them. During his talk, he explained some of the challenges that the group was going through. Up to the 1980s, the Tatas had not been in the highly lucrative businesses that gave enormous profits like fibres and fertilizers. Instead their key focus had been basic industries that were severely affected by bureaucratic controls. The Tatas’ strength was in establishing manufacturing facilities and projects of a capital-intensive nature and managing them well. Businesses that required a trading instinct or retail businesses requiring marketing expertise such as textiles and toiletries had met with limited success. Another criticism of the Tatas was that they had lacked as hard a nose for profits as compared to other business groups despite technology leadership.

During that session, most multinational executives started lecturing him on how the Tata strategy and structure would not be sustainable in a more liberalized environment. They suggested that Tatas should focus on one or two core areas and divest other businesses. Professor C.K. Prahalad from the Ross School of Business had written papers on similar lines. Professor Michael Porter from Harvard Business School was doing a study on India’s competitiveness, and had published a CII Report ‘Developing India’s Competitive Advantages’ with Professor Pankaj Ghemawat, now at the Stern School of Business, and Babson College Professor U.S. Rangan. Among other things, the report had suggested that business houses could soon become a thing of the past, and would not survive in new India without radical changes. Asia had witnessed the rise of many soup-to-nuts behemoths that thrived when economic tides were high and eventually fell apart. Some of these included Korea’s Daewoo, Indonesia’s Salim Group and Thailand’s Charoen Pokphand. 

Tatas Turnaround?

Two decades later, most of their recommendations were disproved by the Tata Group by thinking global and implementing best-in-class practices. Under Ratan Tata, sales had increased from ?24,000 crores in 1991 to ?600,000 crores in 2012, with 58% of sales from overseas and worldwide employment reaching 450,000. By 2018, Tata Group’s consolidated revenues increased to over ?710,000 crores with over 67% from overseas sales, thereby making it India’s most globalized conglomerate. During this period, its market capitalization crossed ?945,000 crores, employee base increased to ~720,000 and geographic presence expanded to 150 countries across five continents.

As Adi Godrej observed, the Tatas’ global acquisitions stirred the world into acknowledging the hitherto unknown concept of an ‘Indian MNC’. While retaining their top position in basic sectors like steel, heavy vehicles, power and chemicals, the group had substantially overcome their lack of success in certain industries such as retail through Titan or consumer durables through Voltas. Its expertise in the service sector was established through the phenomenal success of TCS. The Tata Group not only became globally competitive and globally present, but also gained industry leadership in most businesses. All this, without losing sight of core values and commitment to India.

Yet, the Tata Story hasn’t been one without mistakes, misjudgements and missed opportunities. I have captured many of these in my latest book 'The Tata Group: From Torchbearers To Trailblazers'.

Are Conglomerates in India and Overseas Comparable?

Oftentimes, there have been comparisons between the Tata Group and other global conglomerates. Given the differences in the macro-economic situations, this would be a fallacious comparison. A better hypothesis would be: Could the Tata Group have grown faster if it didn’t have the group structure and was in India, versus it had the Group structure? The general observation is that most group companies suffer being part of large groups. Yet, well-run group companies benefit rather than suffer. The Tata Group would fall in the second category. Despite some limitations, Tata companies have benefited by being part of the group. They couldn’t have done better if they were independent companies. The cohesive group structure facilitated larger investments in innovations, infrastructure, new industries and areas benefitting multiple stakeholders, besides giving them the most powerful Tata brand worth over US$19.5 billion (2019).

An analogy to explain the pros and cons of a holding company–operating company structure would be that of a satellite launch. To launch a satellite in space, you send a big rocket ship to place it in the orbit. The rocket ship is very useful until it gets in the orbit, but once it is in the orbit, if the rocket ship doesn’t disengage, the satellite can’t float. Being a group company is like that. The head office that propels the individual into the orbit is like the rocket ship, which is a great advantage. But if it continues to hang around and drives it down, then it is like a rocket ship that doesn’t disengage. It is a balance between how much it needs to engage or disengage that determines whether, in the end, it will benefit or not. However, for launching purposes, being a member of the Tata Group has been enormously valuable for all Tata companies. Its conglomerate structure has thus been its strength even in the 21st century and would remain so for a very long period.

Conglomerates in the LinkedIn Top Companies 2019

Let's now delve into the three companies that have featured in the LinkedIn Top Companies 2019 list and belong to conglomerates. The three have little in common other than the fact that they are among the top 10 brands of India, have been outstanding performers in terms of wealth creation during the last two decades and belong to conglomerates with diverse business interests. Let’s take a brief look at their individual journeys.

Tata Consultancy Services (TCS):

Today, a super star performer of The Tata Group and the largest contributor to its revenue, profits, employee base and market capitalization; many may not know that in mid-1970s, FC Kohli, then CEO of TCS had recommended to JRD Tata that the company, which was then a subsidiary of Tata Sons, should be shut down as he did not see many opportunities for its growth and success. After nationalization of banks by the Indira Gandhi Government in 1969, there was declining business with banks as the Central Government did not want computers in India. It believed that computerization would lead to mass unemployment. It is contextual to mention a fact that few know. It was TCS that had developed the now ubiquitous permanent account number (PAN) system for the income tax department way back in 1977. Impressed by the output, the company was given an assignment to computerize the total processing of income tax. However, Charan Singh, then finance minister, decreed that there would be no computerization in the finance ministry as it could create unemployment! If implemented, India would have been far ahead of several countries through a fully computerized tax administration system.

Fast-forward 40 years, and you have a company that is the largest IT employer in India with nearly 420,000 employees from 151 nationalities, and US$19.09 billion (?132,290 crores) in revenues. In April 2018, when it crossed US$100 billion (~?700,000 crores) in market capitalization, it became India’s most valued company. With 289 offices across 46 countries and 147 delivery centres in 21 countries, TCS is present across five continents. In the 1970s, it redefined the image of Indian software programmers. In the 1980s, it redefined software exports. In the 1990s, it redefined the quality paradigm in the IT industry. In the 2000s, it redefined global software delivery. In the 2010s, it redefined the financial potential of an IT company while creating value for multiple stakeholders, including customers, employees, shareholders, industry, government and the country at large.

Larsen & Toubro (L&T):

Established in the post-World War II years by two Danes - Henning Holck-Larsen, a chemical engineer specializing in cement technology, and Soren Kristian Toubro, a civil engineer; it is today India’s most admired engineering and construction company. L&T caters to over 40 countries and has manufacturing facilities in India, China and the Gulf. Its supply chain extends to five continents. It has a distinguished record of achievements notably to nation building – whether the Mangalyan space project, the Arihant submarine or the world’s tallest statue – Statue of Unity. It also has to its credit complex public and private sector projects across industries as well and educational, healthcare and public service infrastructure across India and Indian Ocean rim countries. Its conglomerate business structure is complex and consists of Independent Companies (also known as verticals or operating units) and subsidiaries and business interests in diverse areas including engineering, construction, power, manufacturing, shipbuilding, smart city infrastructure, financial services, information technology among others.

During the Naik era, L&T’s market capitalization grew over 40 times, from Rs 3,700 crore in the year 2000 to Rs 1,60,000 crore by 2015. By March 2018, its revenues were at ?119,862 crores with an employee base of 104,000+. Its market capitalization is nearing ?200,000 crore. Currently in the news for attempting to takeover Mindtree, few among the millennials would know that the company, which now looks unassailable, was the target for an acquisition not once but three times. Two among them were Reliance Industries and the Aditya Birla Group. How the then Chairman and Managing Director A.M. Naik deftly managed to retain the company's independence and successfully thwarted takeover attempts makes for a very interesting story that I have captured in a separate article.

Reliance Industries:

From 1977, when the Reliance Industries IPO was launched by the founder Dhirubhai Ambani, the company has seen phenomenal growth in four decades crossing a market capitalization of US$127 billion (?880,088 crores). With 187,000+ employees in 2018 and interests in diverse businesses including energy, petrochemicals, textiles, retail and telecommunications, it has several financial firsts to its credit under Chairman and Managing Director Mukesh Ambani. It is India’s most profitable private sector company with a revenue of over US$62.3 billion (?430,731 crores) in 2018. Consequently, it also has the distinction of making the highest tax contributions by an Indian private sector company. Reliance is also India’s largest exporter. In 2018, it contributed nearly 9% of India’s exports worth ?176,117 crores. In the quarter ending December 2018, Reliance Industries became the first Indian company to post a quarterly profit of ?10,000 crores. Its conglomerate business structure is both vertical and horizontal. In the textiles to polyester to petrochemicals to oil refining and oil exploring chain, it is vertically integrated. But it also has horizontal businesses with retail, infrastructure, telecom, life sciences and other kinds of businesses embedded in it.

Diversity in Holdings

Even though these three companies are part of large conglomerates, their ownership structure is very different.

L&T is a thoroughly professional company with 100% public ownership and no promoter stake. Life Insurance Corporation (LIC) and Foreign Portfolio Investments (FPI) hold over 18.5% stake each.

Reliance Industries on the other end has a substantial promoter holding at 47.19%. Public holding stands at 52.81% with LIC again holding 7.6% and FPI at 23.9%.

In TCS, promoter (Tata Sons) holding stands at 72.02% and public holding at 27.95% of which LIC again holds nearly 4.06%. Nearly 67% of the promoter (Tata Sons) is held by Tata Trusts which are public charitable trusts legally mandated to use 85% of their earnings for social welfare. I have captured this model in a separate article.

Despite being ‘conglomerates’ in structure, their holding patterns are totally different. One cannot hence conclude that a particular holding pattern has a positive impact on decision making, corporate performance and outcomes. Three distinct patterns have delivered sustained and substantial performance on most parameters.

Concluding from where I began, do Business Conglomerates belong to another era or they are here to stay? The success story of these and several other Indian conglomerates, which haven’t made it to the LinkedIn Top Companies 2019 list including Adani Group, Birla Group, Godrej Group, ITC, Mahindra & Mahindra Group, Murugappa Group, Sundaram Group and several others, indicate that conglomerates have made a substantial contribution to the success story of India Inc., and are here to stay in the 21st century.