India Inc's global dreams: So near, yet so far

Many of India's top companies now rival their global peers in scale of operations, but remain pygmies on key financial parameters

For nearly a decade, from FY04 to FY12, India was the world's second fastest growing economy, with average GDP growth of over 8 per cent per year. The boom translated into double-digit growth in revenues and profits for India Inc. For many companies the growth was truly transformational and they are now many times bigger, with more financial firepower than ever before.

For example, the revenues of ITC - India largest consumer goods company - have jumped five times in the last ten years and more than doubled since the 2008 global financial crisis. The rise in its market capitalisation has been even more spectacular. The Kolkata-based tobacco-to-food major is now ten times more valuable than in FY03, and its market cap has tripled since the 2008 financial crisis. TCS on the other hand has nearly tripled in terms of revenues, and is nearly five times more valuable than on the eve of the 2008 financial crisis.

A similar transformation is visible in Tata Motors following its acquisition of Jaguar Land Rover in 2008. The auto major's revenues have tripled in the last five years to Rs 1.92 lakh crore in FY13, four times the revenues of its nearest peer in India. Tata Motors is also the most valuable automaker in India, with a market cap nearly twice that of its nearest Indian competitor. Sun Pharma, India's most valuable and financially successful pharmaceutical company, is another behemoth in the making. In the last ten years, its revenues and profits have jumped by more than ten times, and its market cap now exceeds the combined market cap of its next three competitors in India.

Economic growth and the rising prosperity of Indian consumers has been a boon for businesses, but has it enabled the big boys of corporate India to close the gap between themselves and their global peers?

The numbers provide an encouraging picture. Many of India's top companies now rival their global peers in terms of scale of operations - sales volumes and number of customers served. This is especially true in high-volume, low-ticket industries like mobile telephony, two-wheelers and cement, among others. Bharti Airtel for instance is now the world's fourth largest mobile operator with nearly 260 million subscribers, close behind America Movil and ahead of American giants such as Verizon Wireless and AT&T Mobility.

In two-wheelers, current market leader Hero MotoCorp is now the world's third largest two-wheeler maker, close behind Japan's Yamaha Motor Co, while Bajaj Auto is ranked fourth in terms of sales volumes ahead of Suzuki Motor Co. India's largest cement maker, UltraTech Cement, is now among the world's top ten cement makers.

The experts say that this provides Indian companies with the critical mass to compete effectively with global majors in the domestic market and build a platform to go global in future. "Most large Indian companies now have the scale and size to survive price competition from MNCs in India. Market leadership in India also gives them the ability to invest in new products and technology to take on MNCs," says Anoop Bhaskar, head, equity, at UTI Asset Management Company.

This is clearly visible in the two-wheeler industry, where Indian companies are now on an equal footing with their global peers. Though still smaller in terms of revenues, both Hero MotoCorp and Bajaj Auto are more profitable and valuable than Yamaha, and not very far from Suzuki. At its current stock price, Hero MotoCorp's market cap is 50 per cent higher than that of Yamaha, while Bajaj Auto's market capitalisation is twice that of Yamaha.

Outside two-wheelers, however, Indian companies are still pygmies compared to their global peers on key financial parameters such as revenues, profits and market capitalisation. For example, Bharti Airtel is a distant 17th in terms of revenues, and one-fifth the size of Verizon Wireless - US' largest operator - despite serving more twice as many subscribers. In terms of market capitalisation, it's even smaller. Bharti Airtel's current market capitalisation of nearly $20 billion is one-seventh that of Verizon. UltraTech Cement, the market leader in India, is one-sixth the size of Holcim in terms of revenues and one-third in terms of market capitalisation. This limits their financial firepower and makes them vulnerable to competition from the global majors.

"There are three elements to acquiring a global size - revenues, geographical footprint and market capitalisation. A few of the large Indian companies have acquired a bit of the first or the second attribute, but they are a long way away from becoming a truly potent competitor on the global scale," says Sivarama Krishnan, partner and head, risk advisory services, at PricewaterhousCoopers (PwC).

The largest of Indian companies remain vulnerable to hostile take-overs by global majors, given their low market capitalisation and lack of resources to make large overseas acquisitions. Tata Motors' market capitalisation is still one-tenth that of Toyota while ITC is one-sixth as valuable as Nestle, the world's largest consumer goods and packaged foods company. "The cost of acquiring a large Indian company is still loose change for global majors," Krishnan says.

Analysts attribute this to a mix of fierce competition and low per capita income in India. Consumers in India do not have the ability to match the spending power of their counterparts in Europe, North America, Japan or even China. This translates into lower revenue realisations for Indian companies. Bharti Airtel's average revenue per user (ARPU) is less than one-tenth that of Verizon and AT&T Mobilty, and one-third that of Vodafone, America Movil and China Mobile.

"Call rates in India are some of the lowest in India and Indian customers are paying lower than what she should pay. This leads to a mismatch between the Indian operators' scale of operations and their revenues and profitability," says Sobhit Khare, telecom analyst at Motilal Oswal Securities. A similar trend is visible in sectors such as automobiles, FMCG and pharma, where Indian companies mostly produce low-end products that yield much lower revenue per unit than their global peers.

The good news is that the gap between Indian companies and their global counterparts has narrowed in recent years. And in sectors such as IT services and pharmaceuticals, where India enjoys competitive advantage, market leaders such as TCS and Sun Pharma are not very far from the global leaders now. TCS' revenues are now just one-eighth that of IBM compared to one-twentieth in 2008, and its market capitalisation is just one-third that of the latter, compared to less than a fifth in 2008. Sun Pharma on the other hand seems on course to becoming one the world's top generic pharma makers, with its net profits in FY13 a third of Teva's; it is 60 per cent as valuable as the latter. A similar trend is visible in the case of UltraTech Cement.

Experts say that the gap will close further once economic growth in India recovers. "If GDP growth in India goes back to the pre-crisis level of 7 per cent or higher, it will translate into faster revenue and profit growth for India Inc and the gap could vanish in many sectors, as has happened in the case of Chinese companies," says UTI's Bhaskar.

Others however say that growth alone won't be enough and Indian companies will have to change their product mix and move up the value chain. "Indian companies are not strictly comparable to their global peers. Foreign companies have more diversified revenue streams and offer high-value products and services. In the auto segment for instance, Indian companies are either in low-end categories or they are niche players in narrow segments such as two-wheelers, trucks, farm equipment, SUVs or small cars," says G Chokkalingam, an independent analyst.

Others advocate a growth strategy that de-risks their growth trajectory from business cycles in India. "Some of the world's largest companies - be it Samsung, Ericcsson or Nestle - get the bulk of their revenues from outside their home markets. Indian corporates and policymakers need to aspire to that rather than depend on the Indian market to drive their topline," says Krishnan.

This will create a virtuous cycle that will help companies grow faster in both India and outside, he notes. Some companies seem to have got the message. Tata Motors now earns two-thirds of its revenues and 90 per cent of its profits from JLR, and is now using this to make a comeback in the domestic market. Sun Pharma is on a similar course.

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