Of Hedgehogs And Foxes

WILLIAM THORNDIKE JR. may not sound familiar but he’s the founder of Boston-based Housatonic Partners, a boutique private equity firm specialising in investments in small and medium-sized companies since 1994. The firm manages over $1.4 billion in assets. Thorndike’s experience in investing companies run by entrepreneurial managers inspired him to write The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. Published in 2012, Warren Buffett considers it an “outstanding” piece of work.

In chronicling the exploits of the eight CEOs in the book, Thorndike Jr. refers to philosopher Isaiah Berlin’s instructive contrast between the “fox,” who knows many things, and the “hedgehog,” who knows one thing but knows it very well. Drawing a parallel to the world of business, the author mentions that most CEOs are hedgehogs — they grow up in an industry and by the time they are tapped for the top role, have come to know it thoroughly. In doing so, these CEOs gain several positive attributes associated with hedgehogness, including expertise, specialisation, and focus. Foxes also have many attractive qualities, including the ability to make connections across fields and to innovate. The CEOs in the book were definite foxes given their versatility and innovation, ability to connect various industries and disciplines to develop fresh perspectives and pioneering approaches, thus achieving exceptional results.

But what’s unique about doing business in India is that the CEO not only has to be a good hedgehog but also needs to think as a fox to spot unique opportunities in a rapidly evolving economic landscape. In a manner of speaking, this year’s edition of the Fortune India-EY Best CEOs is an ode to those exceptional entrepreneurial managers who have not only made a mark in their sectors but are efficient capital allocators with a focus on higher return ratios.

What makes the list comprehensive is the spread of 18 sectors as diverse as FMCG to chemicals, BFSI to infra & allied, automotive to textiles. While stalwarts Deepak Parekh and A.M. Naik have created enduring legacies with HDFC and L&T, the 22 CEOs — who have made the cut this year — command a cumulative ₹14.70 lakh crore in total income and ₹1.52 lakh crore in cumulative profits with a phenomenal ₹40.97 lakh crore in market value.

Consistently achieving a high return on equity (20% or more) over a prolonged period is the sign of an exceptional company run by a great manager, and this year’s list has 10 such individuals. The only distinction is that of the 10 names, two are professionals — Salil Parekh at Infosys and Debashis Chatterjee of LTIMindtree — compared to eight founders running the show. Incidentally, both the IT companies are also the toppers in return on equity (RoE) with a 3-year average of 32.78% and 31.89%, respectively. Parekh, who took charge in 2018, has kept growth ticking at 17% CAGR over the past three years, even as profits compounded by 13%. As a

hedgehog while Parekh has driven growth, as a fox, he has quickly identified the game-changing impact of generative AI. “We are working on 80 generative AI projects for our clients. The work we are doing covers large language models for software development, for text, document, voice, and video,” Parekh told analysts over an earnings call. An indication of its Gen AI prowess comes from the recent $1.5 billion deal it bagged from a global company. That gives Parekh the confidence about what lies ahead. “Though transformative programmes have slowed down, clients are still going in for short-term RoI projects. Generative AI is going to transform everything that is happening within our portfolio,” says Parekh over the call. Keeping company with Parekh are Debashis Chatterjee of LTIMindtree and Anand Deshpande of Persistent Systems.

Just as the CEOs mentioned in The Outsiders, Fortune India-EY’s Best CEOs may or may not necessarily be charismatic but are practical and agnostic in temperament. They systematically tuned out the noise of conventional wisdom by fostering a certain simplicity of focus. Thorndike says this led the CEOs to focus on cash flow and capital allocation, forgoing the blind pursuit of Wall Street’s obsession over reported earnings. It’s no different with Indian CEOs. For instance, within the automotive space, Vellayan

Subbiah of Tube Investments made a smart move — as a fox — on the EV transition by buying companies and fast-tracking launches. More importantly, from being an ancillary maker he has made the forward integration leap to become a manufacturer. However, Subbiah is not selling short-term targets to analysts. “Our only request is to give us a little bit of time. The new business is very difficult to put on quarterly pressure … and I do not want to get into that habit of forecasting,” Subbiah told analysts over an earnings call. By cutting out the noise and focusing on what is right, Subbiah — a fourth-gen member of the Murugappa Group — has managed to deliver the best return ratio of 29.91% among automotive ancillaries.

Within the infra space, look at how next-gen Karan Adani, son of Gautam Adani, is steering growth at Adani Ports & SEZ. With a diverse business profile, the company has weathered the cyclicality associated with the trading business. “We do not rely only on containers or only on coal and that is the strength of the company that if we are seeing a slowdown in one part, we are able to ramp up quickly on the other part of the cargo segment and de-risk from just one particular pocket,” Adani informed analysts in an earnings call. Despite a capital-intensive business, the company has been delivering an average RoE of 15.47% over the past three years.

Though not on a similar scale, the Mumbai-based end-to-end logistics solutions provider, Allcargo Logistics, has been beefing up its contract logistics operations.

Among conglomerates, CEOs of companies belonging to groups such as Tata, Birla and Mahindra have kept the flag flying high. Tata Power has been churning 16 consecutive quarters of profits. Similarly, Anish Shah, managing director & CEO at Mahindra Group, has kept the company on a growth path by pruning businesses that were draining capital without adding any value. “If I ever had the option, I would give it back to shareholders,” is Shah’s quick response to Fortune India’s query on what would he spend the money on if he had leeway of excess cash. Incidentally, M&M has made a conscious decision to hive off its electric vehicle (EV) business as a separate arm with external funding. However, despite the focus on capital allocation, an investment of ₹417 crore in RBL Bank has flummoxed the Street, given the group has a financial services company. Shah informs Fortune India that the investment is strategic, aimed at understanding the banking business better. While it’s still early days, Shah is thinking as a fox. “If the RBI allows industrial groups in banking, we can either have the option of not being a bank and continuing as Mahindra Finance or converting Mahindra Finance into a bank. The third option could be merging with the bank,” says Shah.

Though textile may not be considered a sexy business right now, it is one of the core industries of the economy. KPR Mill (textiles maker) and Lakshmi Machine Works (machinery supplier) have made it to the list. KPR maintained its performance thanks to its vertically integrated facilities, increased revenue, and profitability from the sugar segment, driven by a favourable ethanol market. It has churned out an impressive three-year average RoE of over 26%. While a ₹500 crore capex towards ethanol and modernising spinning division are expected to keep the momentum going, LMW, which has over 70% market share in domestic textile machinery sales, continues to have a robust order book at ₹5,300 crore, giving it a revenue visibility beyond 12 months. Despite the cyclicality of the business, LMW has delivered RoE of over 17% in FY23. Again, like a hedgehog, LMW is looking to go deeper in the textile machinery market with two products, a winder, and the air jet, both of which are an addressable market of over $2 billion.

In financial services, State Bank of India and Bajaj Finance remain the top performers and that should not come as a surprise as the stalwarts at the helm know their game like the hedgehogs. But the jury’s consensus for the “Best of the Best” CEO is Sanjiv Mehta, who recently hung up his boots at the country’s oldest FMCG multinational. Despite operating in a hyper-competitive consumer business, Mehta has kept the return ratios burning bright at Hindustan Unilever. His most talked about strategy ‘Winning in Many Indias’ (WIMI) has helped keep growth ticking. Recognising the heterogeneity of the country, product launches and strategies were tailored locally. For instance, the formulation of Brooke Bond Red Label tea in the North is quite different from what was sold in the East, so does the formulation of Surf Excel differ in various parts of the country. “Somewhere we are driving penetration, in some places we are upgrading the consumers. WIMI gave us a significant competitive edge,” Mehta tells Fortune India.

Even as MNCs such as HUL are digging deep into India, there are others such as Shah of M&M who are aspiring to go global. In the farms business, Mahindra Group intends to be a global player and has acquired tractor companies in Japan, Turkey, and Finland. “If there is something meaningful for us to acquire at a reasonable price, we will look at that as well,” says Shah. The acquisition of Mitsubishi Tractors helped the company roll out its latest Oja series. It now plans to export these to ASEAN markets. “Why should an Indian company be subservient to global players? We want to be the acquirer and create value,” says Shah.

Ambitious as it may sound — especially as some CEOs’ return ratios look like work-in-progress — one thing is clear that the interplay between hedgehogs and foxes is here to stay.