India Inc. In Diversification Rush

IN MARCH, the Central government approved the 120-year-old Murugappa Group’s plan to set up a semiconductor unit in Sanand, Gujarat. CG Power and Industrial Solutions, a subsidiary of Murugappa Group firm Tube Investments of India, will invest ₹7,600 crore to build and operate an outsourced semiconductor assembly and test facility, in technology tie-ups with Japanese giant Renesas Electronics and Thailand-based Stars Microelectronics. The engineering and financial services conglomerate, the Murugappa Group, which holds 92.3% stake in the joint venture through CG Power, will now compete with Tata Group, Larsen and Toubro (L&T) and HCL in the semiconductor space.

Tata Electronics, meanwhile, has invested ₹27,000 crore in Jagiroad, Assam, to build the assembly and testing of semiconductor chips for applications across automotive, mobile devices and artificial intelligence (AI), among others. Assembly and test is a critical part of the semiconductor value chain where wafers manufactured by semiconductor fabrication plants are assembled, packaged and tested before they are finally used in the desired product.

Indian conglomerates are in an opportunity hunt, and are looking to diversify into lucrative emerging sectors, besides entering consumer businesses which offer larger space for organised players. For companies, their mainstay businesses generate ample cash flow, which necessitates deployment of accrued cash into new opportunities. In its recent report, McKinsey & Company puts diversification as one of the key differentiators for the soaring operational performance of family-led businesses in India, which contribute over 75% of national GDP.

Among sectors, nuclear has attracted a lot of interest from private conglomerates in recent times. When the Central government wanted $26 billion investment to build 11,000MW of nuclear power plants, the Prime Minister’s Office (PMO) dialled Tata Group, Reliance Industries (RIL), Adani Group and Vedanta to initiate talks with the Department of Atomic Energy. The rights to build and run nuclear power stations and fuel management rest with the Nuclear Power Corp. of India (NPCIL), according to law. Post discussions, the government followed up with the announcement of partnering with the private sector to develop small modular reactors (SMRs) in the recent Union Budget.

Nuclear energy is seen as a viable alternative option for carbon-emitting thermal power plants. Sensing the business opportunity, Tata Group chairman N. Chandrasekaran was the first to react to the government’s offer, expressing Tata Power’s interest in building SMRs. During Chandrasekaran’s term as chairman, Tata Group has diversified (including the projects on the drawing board) into a wide range of businesses, including aircraft manufacturing and defence, electric vehicle, FMCG, precision engineering, SuperApp, payments, battery manufacturing, 5G technology/infrastructure and hyperloop transportation.

For homegrown companies, India is a bright spot in a turbulent global economy. “Geopolitical shifts are reshaping supply chains, while energy security and transition gain momentum. Artificial Intelligence (AI) is moving into the mainstream, boosting productivity and opening doors to novel product possibilities,” Chandrasekaran said in Tata Consumer Products’ annual report. India is expected to become the third-largest economy in the world, with a GDP of $5 trillion, by 2027.

Mukesh Ambani-led Reliance Industries Ltd. (RIL), India’s largest company by market value, is building a fourth vertical — renewable energy — after petroleum, telecom and retail. The group will spend around ₹75,000 crore to build five Giga factories for manufacturing solar energy panels and storage batteries in Jamnagar. Ambani has forayed into NBFC and FMCG businesses as an extension of the retail business. The group listed Jio Financial Services as a separate entity in August 2023.

Shapoorji Pallonji Group is branching out across the real estate sector, from luxury to affordable housing, besides foraying into new overseas markets. The group diversified into development and operation and maintenance of floating production storage and offloading (FPSO) unit a decade back. FPSO unit is used by the offshore oil and gas industry for production and processing of hydrocarbons, and for the storage of oil. The business is now reshaping as the energy vertical of the group.

Kumar Mangalam Birla, meanwhile, entered paint manufacturing with three Birla Opus Paints plants at Panipat (Haryana), Ludhiana (Punjab) and Cheyyar (Tamil Nadu) in February. Birla also announced his foray into B2B e-commerce for building materials, direct-to-customer (D2C) digital platform for branded apparel and branded jewellery retailing.

The Godrej Group, which recently split the business between cousins Adi Godrej and Jamshyd Godrej, entered the NBFC space with Godrej Capital. Primarily a home financing company, Godrej Capital is now diversifying into micro credit and supply chain finance as well.

Sajjan Jindal’s JSW Group, meanwhile, has picked up a 35% stake in MG Motor India and forayed into electric car manufacturing. The JV company, JSW MG India, wants to manufacture new energy vehicles, says Jindal. It will introduce a new car every three to six months. Jindal had earlier diversified into cement and paints manufacturing. Similarly, the Adani Group also entered the cement sector in September 2022 with the acquisition of a controlling stake in Ambuja Cements from Swiss firm Holcim for cash proceeds of $6.4 billion. Ambuja Cement owns 51% stake in ACC Ltd.

Firms are betting mainly on new-age businesses or sectors that are becoming organised. Nuclear, electric vehicle, semiconductor and solar module manufacturing are new areas, while jewellery and lending are sectors becoming organised.

“Sectoral technologies and business metrics are changing with the advent of data analytics, machine learning and artificial intelligence. For instance, in renewables, we see a lot of enthusiasm from big corporates to adopt latest technologies. They see multiple advantages, including better risk management, superior margins and carbon emission reduction,” says Rakesh Kalsi, MD, Infrastructure Practice at TruBoard Partners, an asset management firm.

Staying relevant for decades is important for corporates. The fall of Modi Enterprises and the Thapars and Mafatlals, who failed to transform their businesses with the turn of the economy, has highlighted the need for rejig and relook.

What Lies Ahead?

The trend of diversification is like a tidal surge. It goes flat with the retrieval of economies. During the economic boom in the mid-2000s, business groups tried rampant diversifications. The likes of Jaypee, GVK, Anil Ambani’s Reliance Group, Lanco and Essar diversified into multiple businesses and eventually ended up with humongous debt and faced bankruptcy.

“Conglomerates learned from their mistakes in 2008 when they got into unrelated diversifications. Currently, companies are largely diversifying for forward or backward integration of existing businesses. It opens up new avenues of cash flow as well,” says Deven Choksey, MD, DR Choksey FinServ.

Wadias lost their aviation business, Go First, to bankruptcy due to losses incurred during Covid-19. Venugopal Dhoot, who founded India’s first home-grown consumer durables company, Videocon, lost his assets because of the costly diversification into telecom services and oil exploration. Anil Ambani unsuccessfully diversified into ship building, defence, cement and financial services. The Ruias of Essar Group lost steel and oil refining businesses to bankruptcy.

“Conglomerates need to understand the market first. There should be blueprints for rolling out businesses. They should refrain from overloading balance sheets with liabilities. However, capital should never be a problem until the new business gains a foothold in the market,” says a senior executive.

In addition, business houses should also step back at one point in time and consolidate and rationalise the new business. For instance, Reliance Retail is streamlining its store footprint to enhance margins. In the June quarter, the retailer closed around 230 stores. Companies should also be ready to exit or sell a business, if it doesn’t fit into the portfolio. That’s the reason why Tata Sons sold its upstream oil and gas company, Tata Petrodyne in 2019, despite the size and scale of the sector.