India, Inc. looks to chart new avenues

MUMBAI: At the recent annual general meeting of Reliance Energy (REL), chairman Anil Ambani was candid about his foray into the urban transport sector with the Mumbai metro rail project.

“We propose to use this project as a stepping stone for numerous other opportunities in the urban transport sector in the country.

The project would also provide Reliance-ADAG an opportunity to serve the city of Mumbai, with which we have had a long emotional relationship,” he said.

His dream project — India’s first public-private partnership (PPP) in urban transport was flagged off last week with pomp and pageantry. It is once again diversifying time for India Inc, joining the trend are dozens of Indian corporates. Cash-rich companies are getting into seemingly unrelated sectors with a vengeance.

Power utility (REL) into metro rail, oil refinery (RIL) into retail and special economic zones (SEZs), oil explorer (ONGC) into wind power and SEZ, engineering major (L&T) into dredging and ship-building, telecom giant (Bharti) into retail and the list is still growing.

According to senior management consultant Shailesh Haribhakti, three factors are driving the trend. “Indian companies are increasingly cash rich. Secondly, there are many new sectors that have emerged in the recent past, such as retail, real estate, SEZ and food processing that are extremely profitable and booming.

On the other hand, Indian corporates are developing the ‘abundance mentality’ and are ready to experiment, invest and expand their existing businesses exponentially,” says Mr Haribhakti. Days before REL’s metro project was flagged off in Mumbai, Anil’s elder brother Mukesh Ambani announced his mega special economic zone (SEZ) project involving Rs 40,000-crore investment in Haryana.

His Reliance Industries (RIL) is expected to invest Rs 25,000 crore in the project and seek investments from third parties to make it India’s largest SEZ, complete with a cargo airport and a power plant. The two partners, Reliance Ventures, a subsidiary of RIL, and Haryana State Industrial and Infrastructure Development Corporation (HSIIDC), have set the ball rolling. Analysts say the trend is also quite evident in midcap companies.

GHCL recently acquired UK’s largest home textiles retail chain and is looking to buy a few more in Europe. The fundamental role of diversification is to create value for stockholders. “But in some cases at least, diversification strategies have failed to create any additional value through synergetic integration of a new business into the existing one.

In such cases, the very aim to improve core process execution, and/or to enhance a business unit’s structural position has been defeated,” said one analyst. The diversification trend is getting stronger after a gap of a couple of years.

In early ‘00, many companies, which forayed into independent or unrelated sectors, had subsequently pulled out to focus on core activities. Among the A-group companies, engineering major Larsen & Toubro (L&T) is involved in a wide range of diversification activities.

It has stepped into the dredging business by acquiring a majority stake in the Indian entity, International Seaport Dredging (ISDPL), promoted by Belgian Dredging International NV. L&T acquired a 61% stake in ISDPL for an undisclosed sum, while DI holds the remaining stake.

L&T officials say the move is in line with the plan to strengthen its position in ports and harbours. L&T has constructed several public and private ports in India, including Nhavasheva, Chennai, Mundra, Gangavaram, Hazira, Hazira and Ballard Pier in Mumbai. L&T has also stepped into another booming sector — ship-building.

According to AM Naik, chairman & MD, ship-building would significantly expand L&T’s high technology manufacturing capabilities, and represents another major step forward in meeting L&T’s strategic growth objectives. The company has won a foreign contract to construct 4 ships valued at Rs 440 crore from Zadeko Ship Management of Netherlands.

The vessels will be built at a new shipyard that will form part of the company’s engineering complex at Hazira, and work is expected to commence in July. The Bharti Group’s proposed entry into retail sector is another instance of diversification.

While chairman and group managing director Sunil Mittal is insistent that they are in talks with several international retail giants for the joint foray, Tesco, the world’s third-largest retailer, is believed to be finalising an agreement with his company.

After initial hesitation, the oil ministry has cleared the proposals of ONGC to venture into sectors such as SEZ and wind power. According to a director, ONGC’s decision to diversify into the renewable energy sector stemmed from the stagnation in oil and gas production. The plan is to set up two 25MW windmills in Karnataka and Gujarat.

However, the investments in this sector would be insignificant. ONGC has also ventured into power generation and is setting up a gas-based power plant in Tripura jointly with the state government and IL&FS. ONGC’s other move hovers around the SEZ sector.

It has already formed the Mangalore SEZ Company, with an equity contribution from its subsidiary Mangalore Refinery Petrochemicals. On the flip side, India Inc’s vertical diversification plans are in full swing as well. The integration here is along the existing value chain.

Concor and Shipping Corporation of India (SCI)have moved into container terminal operations.SCI and ONGC have set up a company to own and operate offshore vessels and tugs.