Business Today

India Inc.'s baby boomers

M&M, HDFC, Aditya Birla Nuvo and others all have subsidiaries and associate companies that promise to outshine them in the near future.

By Anand Adhikari        Print Edition: July 15, 2007

Not many people know that the Toyota Motor Corporation began life as a division of Toyoda Automatic Looms Works, a Japanese textile machinery manufacturer. The looms business still exists, but Toyota is famous the world over for… well, Toyotas. The child has overtaken the parent; in the first quarter of 2007, it emerged as the world's largest automobile company, leaving even erstwhile #1 General Motors behind.

Can this happen in India? There have been no such instances till date, but a clutch of companies in high-growth industries like telecom, it, insurance, commodity exchanges and financial services is showing some promise in this direction. For instance, Tech Mahindra and Idea Cellular, promoted by Mahindra & Mahindra (M&M) and Aditya Birla Nuvo, respectively, have already surpassed their parents in terms of market capitalisation. Then, the country's second-largest private sector bank, HDFC Bank, has overtaken its parent HDFC in gross revenues. Here's a look at these and some others who may well become the stars of tomorrow.

Idea cellular

In 2006-07, Idea Cellular added close to 7 million subscribers; that's almost as much as the 7.4 million subscribers it had added in the previous nine years. That illustrates the aggressive growth plans of India's fastest growing mobile telephony company and justifies the $2-billion (Rs 8,200 crore) capital expenditure it has planned over next two years. Idea is targeting a pan-India presence, but there are challenges. Says Sanjeev Aga, MD, Idea Cellular: "We have to gear up our organisation to exploit the huge opportunities in the cellular market."

Idea Cellular is also aggressively scouting for inorganic opportunities. Only last month, it was courting B.K. Modi's Spice Telecom, but the talks failed over valuations. Following its Rs 2,125-crore IPO in February this year, Idea Cellular, which recorded a consolidated turnover of Rs 4,412 crore in 2006-07, has emerged as the most valuable company in the Aditya Birla Group. Aga is already thinking ahead. India's cellular subscriber base is projected to touch 500 million by 2010-11, almost three times today's level, giving individual players massive headroom to grow. How it handles this opportunity will determine whether it can become the proverbial "Toyota" of the Aditya Birla Group.

Tech Mahindra

The immediate target for this M&M subsidiary is to achieve $1 billion (Rs 4,100 crore) in revenues, a stiff, but not impossible target for the Rs 2,759-crore company that has grown at over 100 per cent in each of the last two years. Of late, the company has broadened the scope of its offerings by entering into the value-added telecom space through a joint venture with Motorola.

"We are a niche player in the telecom space," says C.P. Gurnani, President (International Operations), Tech Mahindra. The company has refined its offerings and moved beyond conventional it services to high-end, higher value-added services such as managed platforms and services, and consulting.

"We have developed the ability to provide solutions that support voice-data convergent systems, including Voice over Internet Protocol (VOIP), location-based services, innovative applications in the cellular space, IPTV, WiMax and next generation services," he adds. Questioned about Tech Mahindra, Anand Mahindra, Vice Chairman & MD, M&M, says: "Today, more than 50 per cent of the group's profits come from non-core businesses. Tech Mahindra's is the story of Indian economy." It is already more valuable than group flagship M&M. Can it become even larger? It can, but it must derisk its revenue stream by becoming less dependent on BT which currently accounts for 67 per cent of its revenues.

HDFC Bank

The 12-year-old bank sports a logo that's different from its parent's and has also adopted the "blue" colour instead of parent HDFC's blood red. Its business portfolio, too, is much broader-it is present in the retail, corporate banking and SME spaces-and this has enabled it to grow fast. "We are now taking our banking products to the interiors of the country," says Aditya Puri, MD & CEO, HDFC Bank. In fact, 50 per cent of its branches are already in the non-metro cities.

Paresh Sukthankar, Head (Credit & Market Risk), HDFC Bank, says: "Over the years, our customer service channels have gone beyond traditional branches." If the much-speculated merger between the HDFC and HDFC Bank takes place, it will change the banking landscape in India. If there can be a criticism, it is that the bank, which clocked revenues of Rs 8,405 crore in 2006-07, looks over-dependent on its CEO. Puri, however, says there are enough people to take over from him. Then, in a tacit admission of the criticism, he adds: "If in-house talent doesn't come up, we can always look outside."

Reliance petroleum

It's the newest kid from the Ambani fold on Dalal Street and it has already created history of sorts (yawn; why aren't we surprised?). Even before it starts commercial production (slated for December 2008), this 64 per cent subsidiary of Reliance Industries has notched up a market capitalisation of more than Rs 40,000 crore-making it more valuable than blue chips like m&m, Bajaj Auto, Hindalco and Grasim.

The company is setting up a 27-mpta greenfield petroleum refinery and polypropylene plant in Jamnagar, Gujarat. Work, reportedly, is already running three-to-six months ahead of its schedule (yawn, again). The refinery, in which global giant Chevron has a 5 per cent stake and the option of ramping this up to 29 per cent, will focus mostly on value-added products for the overseas market. Can Mukesh Ambani's first big venture since the division of the Reliance empire put his flagship in the shade? Watch this space.

Multi Commodity Exchange of India

MCX is all set to become a billion-dollar enterprise in a little over 1,000 trading days. Seldom in the history of India Inc. has a company achieved this in such a short period. In the middle of June, MCX also emerged as the world's third largest bullion exchange, behind only NYMEX and tocom. "Markets always value growth and future opportunities and that's what is reflected in MCX's valuations," says Jignesh Shah, MD & CEO of the exchange. Experts say it has tremendous scope for growth. Institutional investors like FIIs, mutual funds and portfolio management firms are not allowed to trade in commodities.

In contrast, they account for 40-50 per cent of the volumes in stock exchanges. Besides, retail investors are yet to enter the commodity market in a big way. Once these two classes of investors enter the market, trading volumes will rise exponentially. But the downside is political interference. The government recently banned futures trading in wheat in order to curb inflationary trends. Then, the I-T department raided the MCX premises, though the exchange claimed it was a "routine search for reconciliation of accounts". But these are likely to be mere blips in MCX's march to corporate superstardom.

Bajaj Allianz Life Insurance

Its strategy of focusing on non-metros has paid rich dividends for Bajaj Auto's life insurance subsidiary. Says MD & CEO Sam Ghosh: "We have become a billion-dollar company in terms of gross premium in only six years and will touch Rs 10,000 crore within the next two years." Explaining the sterling performance, he says: "Our costs are low compared to our competitors who focussed on metro areas." That got reflected in its first-ever profit of Rs 63 crore in 2006-07. SBI Life is the only other new-age life insurance company that is profitable.

But Bajaj Allianz Life scores over the latter in terms of market share-it is the largest private sector player in the market. The only rider to this growth story is its heavy reliance on unit-linked insurance plan (ULIP). But that's really an industry-wide trend. It's worrying-a prolonged downturn in the stock market may impact the fledgling industry's future growth.

And who knows, a decade down the line, when people say "Hamara Bajaj", it may be insurance they're referring to. After all, how many people relate Toyota to textile machinery and sewing machines?

THE NEW KIDS ON THE BLOCK

Can they overshadow the group flagships in the years to come?

TECH MAHINDRA: M-cap: Rs 17,430 crore

Parent: Mahindra & Mahindra / M-cap: Rs 17,190 crore

This telecom software provider is already more valuable than M&M.

RELIANCE PETROLEUM: M-cap: Rs 43,875 crore

Parent: Reliance Industries / M-cap: Rs 2,40,680 crore

This Reliance subsidiary has surpassed the M-cap of other group ventures such as Reliance Infrastructure (M-cap: Rs 700 crore) even before the start of commercial production.

MULTI COMMODITY EXCHANGE: M-cap: Rs 4,500 crore*

Parent: Financial Technologies / M-cap: Rs 11,670 crore

MCX is the #3 exchange in the world in bullion trading and is expected to surpass its parent's valuation in the next 2-3 years. *Based on the private placement of a nine per cent stake to Fidelity for $49 million in February 2006 and current performance.

IDEA CELLULAR: M-cap: Rs 31,200 crore

Parent: Aditya Birla Nuvo** / M-cap: Rs 12,850 crore

This associate company of Aditya Birla Nuvo has already surpassed the market cap of its principal promoter company. **Owns 30 per cent of Idea Cellular. Other group companies own another 26.35 per cent.

HDFC BANK: M-cap: Rs 35,138 crore

Parent: HDFC/ M-cap: Rs 44,930 crore

This 12-year-old bank is expected to surpass the valuation of its promoter company in the next two years.

BAJAJ ALLIANZ LIFE INSURANCE: M-cap: Rs 8,500 crore

Parent: Bajaj Auto / M-cap: Rs 21,430 crore

The biggest life insurer in the private sector is expected to surpass Bajaj Auto's market cap in the next three-to-five years.

Based on the recent DSP Merrill Lynch report and market sources. Market capitalisation figures as on June 19, 2007. In case of unlisted entities (like MCX), the valuation has been taken as M-cap.

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