KUMAR MANGALAM BIRLA, after avoiding diversification for one-and-a-half decades, decided to enter paints in early 2021. Reason: His Aditya Birla Group needs growth channels for the next decade at a time when India Inc.’s rapid rise amid a wave of indigenisation is throwing up new opportunities. Paint is a natural extension of his white cement wall putty business. It can also ride the massive distribution of the group’s cement business, UltraTech, India’s largest. Birla also announced entry into B2B e-commerce for building materials, direct-to-customer (D2C) digital platform for branded apparel and branded jewellery retailing.

At Reliance Industries Ltd. (RIL), India’s biggest corporate entity, chairman Mukesh Ambani is building a fourth vertical (after petroleum, telecom and retail) with a renewable energy foray. He entered NBFC (non-banking financial service) and FMCG businesses recently as an extension of the B2C venture. It is listing the NBFC, Jio Financial Services, as a separate entity. RIL is also joining hands with Brookfield Infrastructure Partners and Digital Realty Trust for setting up data centres across India.

Tata Group has zeroed in on a wide range of businesses, including aircraft manufacturing, defence, FMCG, precision engineering, semiconductor, super app, payments, battery manufacturing, 5G technology/infrastructure and hyperloop transportation.

Godrej group, run by the fourth generation, has also entered the NBFC space with Godrej Capital Ltd. (GCL). It had earlier unlocked the value of its real estate arm by launching an IPO in December 2009 and appointed Pirojsha Godrej, son of Adi Godrej, as operational head.

Tata Sons Chairperson 
N. Chandrasekaran
Tata Sons Chairperson N. Chandrasekaran
Image : Photograph by Narendra Bisht

O.P. Jindal’s son, Sajjan Jindal, is looking at electric car manufacturing, in addition to JSW Group’s recent forays into paints and cement. “Whatever businesses we will do will probably be capital intensive. That is our core strength,” says Sajjan Jindal.

As India’s fast-growing economy and state-backed indigenisation throw up opportunities, India’s legacy conglomerates are looking for a transformation by diversifying into emerging areas. Value accretion for shareholders should be top priority, says Gautam Singhania, chairman and MD, Raymond Group. It’s the responsibility of business houses to build valuable assets when the time is good, he adds.

Most bets are in new-age businesses or sectors that are getting organised— for instance, semiconductor and solar module manufacturing are new while jewellery and lending are becoming more organised. “Large conglomerates, which have weathered economic slowdowns and sector-specific crises, are in an advantageous position when the economy moves up. They strengthened balance sheets by reducing debt when (several) businesses were getting shut during Covid-19,” says Rishabh Shroff, partner with law firm Cyril Amarchand Mangaldas. They have learnt from promoters and groups such as Thapars, Mafatlals, Modi Enterprises, Lalbhai and Walchand, all of whom failed to manoeuvre the fast-transforming business landscape after India liberalised its economy in 1991. The giants of today want to avoid their mistakes. Will they be able to?

RIL Chairman 
Mukesh Ambani
RIL Chairman Mukesh Ambani
Image : Photograph by Getty Images

First-mover Advantage

If there is one group that has never shied away from diversification, even at the peak of the global wave of ‘core competence’ that decried diversification, it’s the 155-year-old Tata Group. That malleability, perhaps, is also the secret to the group’s longevity. Starting as a trading company with ₹21,000 capital in 1868, Tata has since diversified into steel, power, hotels, chemicals, automobiles and IT services.

High debt is not a hindrance to diversification when traditional businesses are doing well. Tata Group has a combined debt of ₹3.5 lakh crore. But it also has established businesses like TCS, Tata Steel, Tata Motors, Tata Power, Tata Consumer Products and Titan, all industry leaders. This gives the holding company, Tata Sons, the financial muscle to stay on the prowl for new opportunities.

N. Chandrasekaran, chairman of Tata Group, wants to create future-ready businesses in next five years by investing $90 billion. The group has set up a new battery company under Tata Sons and is investing $5 billion to set up a Giga battery factory in U.K. with a capacity to produce 40GW of cells annually. Tata Steel signed an agreement with IIT-Madras start-up TuTr Hyperloop in December.

Tata is also building electronics into a strong division which will be able to manufacture components for the iPhone. It has built a manufacturing facility for aero-structures for Boeing’s AH-64 Apache helicopter in Hyderabad. Tatas’ another JV with Boeing’s rival Airbus is building a facility to make transport aircraft in Vadodara, Gujarat.

Aditya Birla Group Chairman Kumar Mangalam Birla
Aditya Birla Group Chairman Kumar Mangalam Birla

“We created companies for precision electronics manufacturing, 5G technology stack and digital super app. We are building a world-class airline and a battery manufacturing plant. These are businesses of the future,” Chandrasekaran recently said in an interview to Fortune India. Tata Group is also consolidating its telecom equipment and technology offerings under Tejas Networks. Tata Sons acquired a controlling stake in Tejas for nearly ₹1,890 crore in 2021. It later acquired a 64.4% stake in semiconductor firm Saankhya Labs for ₹284 crore. This will be essentially for its 5G equipment and technology play. Chandrasekaran also wants to be in semiconductor manufacturing.

Value Unlocked: Changing Status Quo

In late 2000s, the late Rahul Bajaj executed one of the most value-accretive diversifications in corporate India. In 2008, he demerged Bajaj Auto, launched an NBFC and asked his second son, Sanjiv Bajaj, to head operations. The late Nanoo Pamnani, brother-in-law of Rahul’s wife who had become CEO of Citibank in India at 37 and had just retired, became Sanjiv Bajaj’s aide. Sanjiv and Pamnani chose Rajeev Jain as CEO. The rest is history. Bajaj Finance Ltd. (BFL) and its holding company Bajaj Finserv (which also has two insurance joint ventures) are together valued at ₹7 lakh crore. This is ₹1.5 lakh crore more than State Bank of India. Bajaj Finance’s operations were spread across 3,733 locations as on March 31. It has ₹2.47 lakh crore assets under management. The NBFC, which accounts for the biggest chunk of lending for consumer durables and digital products, registered a consolidated profit of ₹11,508 crore in FY23, up 64% YoY. Net non-performing assets were just 0.34%. It recently launched subsidiaries for home loan and securities businesses.

Historically, one of the most noteworthy diversifications in India Inc. remains Azim Premji’s pivot from vanaspati oil to information technology in 1980s after government asked IBM to leave India. Premji, who left engineering at Stanford University after his father’s death, delved into consumer products such as soaps, shoes and lightbulbs, as well as hydraulic cylinders, in his early years. Initially, Wipro entered into many global tie-ups for computer hardware, but it was his software foray that created massive value over the years. Wipro is one of the global software leaders along with TCS and Infosys.

But in recent times, there is no parallel to what is happening at RIL under Mukesh Ambani. RIL did, not one but two very large diversifications, into retail (Reliance Retail) and telecom (Reliance Jio). Critics never believed Ambani would be able to build India’s Walmart when he was struggling to build Reliance Retail from 2006 to 2016. He took six years to launch the telecom business. But Jio, launched in 2016, disrupted the sector with aggressive pricing and latest technology, triggering downfall of many telecom companies, including brother Anil Ambani’s Reliance Communications, Aircel and Tata Docomo. Vodafone had to merge with Idea Cellular of Aditya Birla group but failed to compete with Jio and is now neck-deep in debt. Bharti Airtel is the only strong competitor to Jio. RIL repeated the disruption in Reliance Retail, which raced past Kishore Biyani’s Future Group, Bharti-Walmart and Aditya Birla group’s More to become India’s largest retailer.

What changed the game was massive funding from Facebook, Google and global private equity investors. When most parts of the world were locked down after Covid-19 breakout in March 2020, Ambani raised ₹2.4 lakh crore and made RIL net debt free. It also raised ₹53,124 crore through rights issues. The last fund-raising valued Jio Platforms at ₹4.9 lakh crore and Reliance Retail at ₹4.2 lakh crore. Jio rolled out fiber-to-home and 5G services, while Reliance Retail diversified into e-commerce and FMCG. Ambani is looking to broaden the portfolio to de-risk each vertical, says an insider. Now, RIL is investing ₹75,000 crore in its 4th vertical, renewable energy, mostly for building 100 GW solar energy capacity. It wants to build four Giga factories — one each for photovoltaic panels, energy storage, green hydrogen and fuel cell systems — at Jamnagar. It is acquiring companies and technologies to complete the project and become net carbon neutral by 2035. “A foray into financial services is also happening. It will be a full-fledged NBFC like BFL. We already have a strong customer base in retail and telecom. It’s good enough to build the business by offering all types of short-term loans initially,” says a senior executive. Recently, Jio Financial Services formed a joint venture with BlackRock to start asset management business in the country. It will start with $300 million initial investment.

Godrej group also considers NBFCs an extension of its core abilities. Adi Godrej’s family has handed over Godrej Capital Ltd. (GCL) to Pirojsha Godrej, steering Godrej Properties, valued at ₹46,000 crore, since 2012. According to sources, Pirojsha, who graduated from Wharton School and got his MBA from Columbia Business School, is the last word in finance and acquisitions across Godrej Industries and associate companies. GCL, which has expanded retail operations to six new cities, in addition to diversifying into consumer loans, is a subsidiary of Godrej Industries and holding entity for Godrej Housing Finance and Godrej Finance Ltd. Godrej Industries wants to build a ₹30,000 crore balance sheet by 2026 for which it has committed ₹1,500 crore investment. It expects that the business will require ₹5,000 crore equity by 2026.

Adi Godrej, Chairman Emeritus, Godrej Group
Adi Godrej, Chairman Emeritus, Godrej Group
Image : Photograph by Getty Images

Automobile giant M&M also executed diversification with its foray into IT services with Tech Mahindra in 1986 and financial services with Mahindra Finance in 1991. Strong balance sheet of the SUV maker helped new businesses access funds for growth. The group also made quite a lot of acquisitions, including Satyam Computers, which merged with Tech Mahindra in June 2013. Tech Mahindra is valued at ₹1.2 lakh crore in stock markets and Mahindra Finance at ₹39,000 crore. Tech Mahindra posted a profit of ₹4,857 crore in last financial year while the NBFC recorded a profit of ₹2,071 crore.

RP Sanjiv Goenka (RPSG) group ventured into FMCG and IT-enabled services in the last decade. It acquired Firstsource Solutions in customised business process management (BPM) services space and diversified into snacking with launch of Too Yumm! and acquisition of Evita. It also acquired a digital Ayurvedic brand Dr Vaidya’s. The group runs Spencer’s Retail, one of the pioneers of organised retailing in India. “I grew up with the fact that I will join the family business. We were cotton traders and today we do so many different things. We have added new businesses like BPM services, FMCG, sports and VC fund in the recent past. The advantage of the family business is that it allows you to reinvent to stay relevant and create new legacies,” says Shashwat Goenka, sector head, retail and FMCG, RPSG and chairman of Spencer’s Retail.

Search for Next Big Thing

Corporates taking part in the ongoing diversification boom are looking to seed the next phase of growth, especially in areas where competition is low. Smaller groups, after all, cannot make multi-billion dollar investments and risk their traditional businesses. Even banks avoid lending to smaller players for non-core projects.

Adani group, though being run by the first generation, has a long list of ambitious forays—data centres, petrochemicals, steel, defence, aerospace, road, metro/rail, airports, financial services and media. In 2022, months after incorporating Adani Cement, it acquired Holcim’s 70 million tonnes cement capacity, Ambuja and ACC, for ₹81,360 crore and emerged as the second-largest cement manufacturer in the country, behind UltraTech’s 117 MT.

Aditya Birla Nuvo Ltd. has announced plans to build six paint manufacturing plants with an investment of ₹10,000 crore. This will make it the largest paints player after Asian Paints. The sector is less capital-intensive with competition from focused players like Berger and Kansai Nerolac. Sajjan Jindal’s JSW Paints is also trying to be among the top three in paints. Abhijit Roy, managing director and CEO of Kolkata-based Berger Paints, says paint companies need more than technology and money. Building network and teams for market dominance is very important, he adds.

But Birla is unfazed. Grasim, has announced a foray into B2B e-commerce for building materials with an investment of ₹2,000 crore, in addition to TMRW, a D2C platform for branded fashion apparel. The group, which has diversified into telecom, grocery, fashion retail and financial services since Kumar Mangalam took over in 1995, recently announced a ₹5,000 crore investment in branded jewellery when the industry is facing a slew of challenges, including low demand due to rising gold prices. Even Tata Group company Titan’s jewellery business Tanishq and Reliance Jewels have been facing headwinds. But unorganised players are finding it difficult to protect margins and many are looking to exit, says a CEO of a retail jewellery chain. The entry by big groups into jewellery retailing is timely, say experts.

As in case of the Birla group, Sajjan Jindal’s JSW group is also looking for opportunities to secure future cash flows. Jindal believes domestic private sector groups like his have to play a big role in India’s journey from a $3 trillion economy to a $10 trillion economy over next 10-12 years. He expects huge opportunities in two transitions — thermal power to renewable and IC engine cars to electric vehicles. The steel baron is investing in energy transition through JSW Energy, which is eyeing opportunities in solar and wind power. It is also investing in manufacturing wind turbines, solar panels and lithium-ion batteries and implementing green hydrogen and ammonia projects. The $22 billion group had earlier diversified into adjacent sectors such as cement and paints without much success. It is also looking to make drones. Hinduja group, which diversified into automobiles with acquisition of Ashok Leyland in 1987, later entered IT, real estate and renewable power. Now, it is looking to buy a stake in MG Motor India.

Not All Diversifications Work

Some diversification attempts fall flat. Take Wadia group’s airline business. Go First filed for bankruptcy in May citing losses caused by Covid-19, fuel costs and engine procurement issues. Go First, originally GoAir, was set up in 2005.

Venugopal Dhoot, who founded first home-grown consumer durables company, Videocon, lost his assets because of diversification into telecom services and oil exploration. Videocon is yet to find a new owner in bankruptcy court.

Anil Ambani unsuccessfully diversified into ship building, defence, cement and financial services. The Ruias of Essar group lost steel and oil refining businesses. When Essar Steel became bankrupt, Essar Oil sold its Indian assets to Rosneft.

Risk Vs Return

Some failed, others succeeded. Ajay Piramal, who became chairman of Piramal Enterprises after his brother’s death in 1984, diversified into pharma by acquiring assets and adding products in 1990s and 2000s. When it became India’s fifth-largest drug maker by sales, Piramal Healthcare Ltd. sold its domestic formulations division, the most valuable part of the business, to Abbott Laboratories for ₹17,484 crore. He bought 11% stake in Vodafone Idea for ₹5,864 crore in FY12. He exited in 2014 at ₹8,900 crore.

Gautam Singhania of Raymond Group, who diversified into FMCG, engineering and real estate, recently sold his consumer business — deodorant and sexual wellness portfolio along with Park Avenue and Kamasutra trademarks — to Godrej Consumer Products for ₹2,825 crore. “We sold the FMCG business as we got great value,” he says. This helped Raymond Ltd. become a net zero debt company.

Indian conglomerates were focused on improving efficiency over last decade when economic headwinds toppled many businesses. In the course of becoming more efficient, most built the full value chain and stepped out to master the concept of circular economy. But nature of the business is changing from basic mass manufacturing/services to specialised products and technologies. This has opened new opportunities.

JSW Group Chairman Sajjan Jindal
JSW Group Chairman Sajjan Jindal
Image : Photograph by Narendra Bisht

In addition, India’s economy is expected to grow around 7% in coming years, which will enhance purchasing power of individuals. “Groups like Binani, Singhals, Jaypee and Essar shrunk. Reduction in number of conglomerates also gives big ones space to take calculated risks,” says a former CEO of an infrastructure giant.

In one such situation, Pirojsha Godrej, chairman, Godrej Capital, successfully identified the scope of the real estate business. He started the financial services business with home loan services to buyers of Godrej Properties Ltd.‘s apartments in select geographies in 2020. “Having seen strong customer acceptance of our offering, we are very optimistic about prospects of our financial services venture and will be entering new markets,” he said that time.

Finding right opportunities is fine. But in some situations, many conglomerates land up in the same business and compete with each other. For instance, Tata, Ambani and Adani will face-off in the renewable energy space. Mahindra is also enhancing its solar panels business. Adani is stepping into hydrocarbon and petrochemicals, a forte of RIL. It has formed a JV with Welspun for oil exploration and production. While Jio-BP ramps up the fuel station business, Adani is becoming aggressive in CNG stations. Birla and JSW will fight it out in the paint sector along with Asian Paints. Many of them are looking to become India’s ‘Tesla’ and spending heavily in electric cars business. The rampant diversification of conglomerates can also escalate as the big-money race.

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