BT 500 in 2020

Dipen Sheth        Print Edition: November 15, 2009

Dipen Sheth
Dipen Sheth

Guessing the future may be fraught with risk, but it’s also pure, unadulterated fantasy. The challenge is not only about being right, but being imaginative about one’s guesses. One needs to base one’s guesses on where the country is poised to go in the next 10 years and how various sectors will pan out. My guesswork may be partly based on the hard evidence available today, but it’s more of a wishlist for what needs to happen if the aspirations of a billion-plus Indians are to be realised in the period leading up to 2020.

Finance/Banking: If the economy must roll, then finance will provide the wheels. Another trillion dollars of incremental GDP will surely take financial services to the top of the market cap charts. The largest bank by assets or market cap today, State Bank of India, is unlikely to be overtaken in a hurry. But if any other bank has to even grow into the Top 10 companies by market cap, my guess is that it would be HDFC Bank, currently #16 by market cap. That means HDFC Bank can catch up with and, indeed, outpace the wounded ICICI Bank. Why?

Despite the difficult economic conditions of the past year, the bank still beats industry averages hands down every quarter and, most importantly, continues to maintain excellent asset quality, although mostly it is a retail lender. And this without even being present in the home loan business (its parent HDFC is the largest home mortgage lender in the country). I suspect it won’t be long before HDFC Bank becomes a leading corporate lender as well. Dark horse: Axis Bank.

Infrastructure: Outside of consumption, infrastructure— capital goods, power, construction or real estate—is the one reason why India is staring at multi-year growth in the high single digits. Barring BHEL (#6 this year), I cannot see any pure play in capital goods making it to the Top 20. On the other hand, L&T (#5) seems to be attempting all sorts of forays (power generation equipment, nuclear power equipment, defence, shipyards, thermal power, etc.). These can, potentially, take L&T beyond BHEL on my 2020 wishlist even as it continues to do wonders in its core (infrastructure and construction) business. My personal take is that L&T is trying to do too many things and runs the risk of faltering on more than one great idea (the Satyam investment is an example). Still, a capable management and a large addressable opportunity will keep L&T within the Top 5 slots by 2020.

Notwithstanding the very large opportunities, the new investments in the power sector are most likely to see inglorious outcomes as they grapple with issues ranging from timely commissioning to fuel supply bottlenecks and regulatory hurdles. Expect exciting noises, aggressive investments and fairly large-scale destruction of shareholder wealth as companies across the spectrum (Tata Power, Reliance Power, Adani Power, GVK, Jaiprakash, Lanco Infratech) promise, struggle and stumble over their power packed dreams. And the most boring part is that NTPC may well remain the most valuable power company. Yawn!

As for real estate, we might not only see DLF missing a Top 10 rank (#11 currently), but even falling out of the Top 20! There will be increasing pressure on real estate companies to acquire land as the country urbanises, and the recent controversies over SEZs and real estate projects will keep real estate a fragmented industry at the top. Instead, a focus on asset ownership (and movement towards a REIT-like character, perhaps, by merging DLF Assets or making it a subsidiary) might help DLF secure a place in the BT 2020.

Commodities, Resources & Minerals: It’s no surprise that the top two positions today are occupied by oil companies (Reliance and ONGC). And this is unlikely to change, given the central role that fossil-based fuels will play in our lives. It is quite likely that Reliance will acquire more oil fields, venture forward into distributing gas and increase its oil refining capacity even beyond the current 60-odd MTPA. Else, where can it deploy its ever-growing cash reserves? In sharp contrast, the muted reserve accretion of ONGC might see it slip further away from Reliance in terms of market cap. Of course, a sufficiently motivated and ambitious oil ministry can reverse this trend.

In the metals category, my dark horse vote goes to the ambitious, brilliant and hardworking management of Jindal Steel & Power. India’s first mega project of 1,000 MW in the private sector has rolled out without a hitch, even as steel and sponge iron capacity has been steadily upped. Profits have grown 10-fold to cross Rs 3,000 crore over five years. Of this profit, more than half has come from power, where the company seems to have earned close to cent-per-cent return on invested equity! This is a management which is aggressively rolling out mega projects in thermal power, hydel power, iron ore mining, steel making and oil & gas exploration in India and abroad—Bolivia and Georgia.

In fact, pure plays in metals—Tata Steel, SAIL and Nalco—could well slip out of the Top 20, as aggressive, profitable and diversified players like JSPL and Sterlite (zinc, copper, aluminium and power) get into the growth mode. PSU miner NMDC is just below NTPC in the market cap rankings, but suffers from a very low float of under 2 per cent. And there’s Coal India, waiting in the wings, for a listing that someday promises to take it into the Top 10…

Consumer Goods & Services: With well over a billion folks and rising aspirations, it is only natural that some of the most valuable companies should be catering to the consumption theme. While Bharti (and, indeed the rest of telecom) will falter as the business turns into a commodity, I think input costs (hardware and tower rentals) will also shrink as the first wave of price cutting hits telecom. Thereafter, prices will be low enough for consumers to be willing to pay a premium for superior services. And that is where Bharti will earn a second round of capital appreciation for its investors. Not only because it’s a great telecom company, but probably because it’s the only great telecom company that’s listed in India (there’s no way that RCOM can figure in my respectability sweepstakes in another 10 years)!

Would it not be great to see a retail company in the Top 20? It would, but methinks Pantaloon needs to get performance considerably better, not just investor “perception”. The company has faltered on generating cash flow in its value retailing segment and may face fresh challenges in the newer formats such as home improvement, DIY, sports and appliances. In a recent meeting with their management, I sensed a clear shift of emphasis back towards lifestyle—a format that Pantaloon has mastered and scaled up in. Pantaloon remains what it was even five years ago: A phenomenally creative and talented dark horse, but a dark horse nevertheless.

Several auto companies will compete to get into the Top 20 by 2020, and my bet would be Hero Honda (#20), the largest two-wheeler maker in the world today, would remain in the Top 20 rather than Maruti (#18), Mahindra &Mahindra (#34) or Bajaj Auto (#45), considering what it has achieved in volume growth, manufacturing cost, product quality and pricing power.

Pharma: Next on my wishlist is the pharma sector. This sector has not yet put a single company into the Top 20 in spite of having all the ingredients required for market cap: Knowledge, expertise, franchise, intellectual rights, etc., etc. The reason is that all our domestic tigers have grown up with their strengths in officially “duplicating” patented drugs under lenient Indian patent laws. But many Indian drug companies are now running multi-pronged businesses straddling domestic pharma, drug discovery, global generics and CRAMs. Sun Pharma (#25) is the only real bet from this pack to possibly make it to the Top 20.

IT Services: The technology sector—which has stalwarts Infosys, TCS and Wipro in the Top 20—is the most difficult to predict, given the high degree of innovation inherent to the sector. So far, the growth of all these companies has been through the services offshoring model, something that may not necessarily sustain in the future. But they have largely failed at the creamier slices such as strategic IT consulting or R&D. Will Indian tech companies bring in new innovation over the next 10 years? I sincerely hope so, but can see very little advance indications to that effect. And herein lies the challenge for the sector: Do something path-breaking and something un-replicable by the Western world. Else, I will say that we may well see no IT companies in the Top 20.

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