Tomorrow's goliaths

NINE YEARS AFTER it first made it to the Fortune Global 500, IndianOil’s loneliness came to an end when three other Indian companies—Reliance Industries, Bharat Petroleum, and Hindustan Petroleum—joined the list in 2004. By 2006, there were two more on the list of the world’s largest corporations—Oil and Natural Gas Corporation (2005) and State Bank of India. By 2010, another two joined—Tata Steel (2008) and Tata Motors—taking the tally to eight.

This may seem impressive, a 700% rise in 15 years. But it’s still small beer, considering the number of companies (46) from China, the neighbour India always compares itself with.The good news is that over the next few years, the eight may find new companions from back home.

In the 2010 global rankings, the smallest outfit was Dai Nippon Printing, with a turnover of $17 billion (Rs 76,500 crore). Since 1995, when Fortune first compiled a consolidated list of the world’s largest service and manufacturing companies, the size of the 500th company has moved up by 5.31% on an annual basis. For the record, the largest has moved up 5.78%.

As the Fortune India 500 shows, there is a handful of companies close to the Rs 76,500 crore figure. Leading the pack is Hindalco, at Rs 64,000 crore; then there’s ICICI Bank (Rs 59,600 crore), followed by Coal India, National Thermal Power Corporation (NTPC), Larsen & Toubro (L&T), and Bharti Airtel. As analysts, consultants, and CEOs say, the next bunch of entrants into the global league tables could well be any of these or even the ones ranked slightly lower—Maruti Suzuki, Essar Oil, or Mahindra & Mahindra.

There is no foolproof way to determine the next entrant, though. One can look at historical growth rates and make projections. Or gauge how proposed projects could scale up. But, as in the past, one big acquisition (such as Corus for Tata Steel) can tip the scales. However, a reasonable assumption is that any Indian company with revenue between Rs 36,000 crore and Rs 40,000 crore has a fair chance of making it in the next few years.

Besides size, these companies have a few other things in common. They are largely market leaders, and most of them are from the private sector, unlike the first wave, which was dominated by state-owned corporations. This means, in some ways, they will have far more freedom to realise their dreams. They are all listed, are sitting on cash, generate strong cash flows, have tremendous management depth, do business globally and, above all, are extremely hungry.

Indeed, being counted in the global 500 list is a milestone in itself. Hindalco managing director Debu Bhattacharya says it “is a destination that keeps us moving”.

Even a decade ago, a comment like that would have raised eyebrows. No more. Buoyed by seven years of a 6%-plus economic surge and the confidence that comes from managing rapidly growing businesses, CEOs believe they can take big bets and win. In 2007, Hindalco didn’t flinch from buying Novelis, even though the Canadian company was twice its size and made 10 times as much aluminium. (Some of Hindalco’s revenue also comes from copper.) A year earlier, it was the same with Tata Steel’s buyout of Corus, which made four times more steel. As Bhattacharya says, the moment a company succeeds globally, it becomes an inspiration for others. “Confidence here is contagious.”

Growth will not be easy. As the numbers show (see lists), the slowdown has hurt companies. But as growth begins to make a comeback, at least in the emerging economies, the big question is: What will it take for these companies to scale up further? McKinsey Asia Centre director and leader Alok Kshirsagar’s advice: “Aim to be leaders (in market share, growth, profitability, and reputation) in the sectors you play in. Size is just an output of that leadership.”

Given that these companies are already leaders at home, a more interesting follow-up poser is: leadership where? If there’s one insight that India’s CEOs share, it’s that the Indian economy alone will never be large enough to support a very large number of Fortune Global 500 companies, at least in the near future. For Indian companies to scale up, it’ll take a combination of local and global strategies, with the blend varying from company to company. (This strategy applies largely to private players and not state-owned ones such as NTPC and Coal India, which are near-monopolies and are, therefore, driven by different considerations.) China’s largest auto maker, Dongfeng Motors, which does business mostly at home, has a turnover of $39 billion. In comparison, Tata Motors made the list only after it acquired Jaguar Land Rover.

Seen from another perspective, this means that for Maruti (ranked 21 on the Fortune India 500), the chance of making it to the global list in the next few years is low, given that its growth will be driven by India (size of the market, rate of growth, and competition), unless Suzuki would like to significantly ramp up exports.

Maruti is an exception (and the only company of foreign parentage in the top 30). For others such as Hindalco, ICICI, and Bharti Airtel, which have the opportunity of adding size in India and venturing abroad, being among their global peers is almost a shoo-in.

HINDALCO’S BHATTACHARYA SPENT 28 years at Hindustan Unilever, ending up on the board, before Kumar Mangalam Birla brought him over to the Aditya Birla group. The Novelis buyout, which Bhattacharya spearheaded, is exactly the kind of move that’ll allow India’s commodity companies to add heft—earn better realisations by moving up the value chain while using scale and geographical diversity (produce in low-cost economies) to reduce cost of production. “What Novelis gave us was really three things—proximity to the market, high levels of brand equity, and existing capacity. To that extent, it was the right fit,” says Bhattacharya.

Novelis didn’t come cheap. It cost the Birlas Rs 27,000 crore, but turned Hindalco into the world’s fifth-largest aluminium company. Moreover, Novelis brought along with it customers such as Coca-Cola, Ford Motor, and General Motors. Hindalco has already announced an expansion plan that’ll increase capacity from the present 3.8 million tonnes a year to 5.5 million by fiscal 2013. The capacity of the world’s largest aluminium company, Rio Tinto, is 5 million tonnes.

Novelis allows Hindalco to do one more thing —bet on other emerging markets. For example, it’s investing $300 million at its 220 kilo­tonne production and recycling plant at Pindamonhangaba, 160 km from São Paulo in Brazil. So far, Brazil was growing about 5% year-on-year, and 9% in the first quarter of 2010. Now that it is getting ready to host the 2014 FIFA World Cup and the 2016 Olympics, that will change. “The economy will go through the roof,” says Bhattacharya. “I do not believe in investing in a country. I invest in opportunities.”

It’s the kind of talk that gets the folks at Bharti all keyed up.

NEW DELHI, NOVEMBER 18, 2010. At the Oberoi hotel, at a packed press conference, Bharti Airtel’s brass, including CEO Sanjay Kapoor and chairman Sunil Bharti Mittal, unveil the company’s new logo, a swirly red A without the belly-bar. While the reactions to the logo are mixed, the new jingle is a hit. Composed by A.R. Rahman, it layers the earlier jingle (also by him) with a peppy Afro rhythm. The underlying message: Africa, here we come.

In about a decade and a half, Bharti has entered almost every page of the telecom and convergence story, from mobile communication to wireless broadband, the tower infrastructure business, IP television, and direct-to-home service.

While India’s growth has helped Bharti reach Rs 43,052 crore (growing 51% annually for the last eight years), its recent overseas buyout should add far more scale. Earlier this year, it acquired Kuwait-based Zain Telecom’s entire Africa business for $10.7 billion. This operation has a cellular footprint across 17 countries, including some of the continent’s biggest economies such as Nigeria, Kenya, and South Africa. Between 2007 and 2009, Zain’s Africa business grew 20% to $3.6 billion, with 42 million subscribers. (In India, this statistic stands at 143.29 million.)

In June, at the time of sealing the deal, Bharti announced it was expecting $13 billion in revenue from the combined Bharti-Zain entity (Bharti’s 2009-10 results do not reflect Zain’s revenue). Phani Sekhar, fund manager at Angel Broking, a Mumbai brokerage and wealth management company, says the big plus in telecom is that it’s not cyclical and that “makes Bharti buying Zain an attractive proposition”. Bharti officials weren’t available for comment.

It is widely expected that Bharti will follow the same strategy in Africa that it followed here—introduce a range of affordable tariff plans that will hook a large population with low telecom density. Back-of-the-envelope calculations show that if the combined entity grows at 15% from now on based on historical rates of growth, Bharti may cross the finish line in two years.

“The situation (for Indian companies) is similar to what Japan saw in the mid-1980s: the availability of currency, funding and the appetite to execute large overseas transactions,” says McKinsey’s Kshirsagar.

The consultancy’s analysis shows that in 2002, 16% of the revenue of the top 10 listed companies came from a

broad. By 2009, that had risen to 30%. More interestingly, if outbound mergers and acquisitions (M&A) totalled $4.5 billion in 2005, by the following year it had jumped to $22 billion. This year, till end-October, outbound deals worth $25.7 billion have been concluded.

Not everyone, however, is building a business abroad through M&A. Chanda Kochhar, ICICI’s managing director and CEO, plans on growing the bank 2.5 times by sales, three times by profits and 3.5 times by market capitalisation in the next five years. “I eat, sleep, and drink these numbers,” Kochhar told Fortune India.

There is an overseas aspect to this expansion, but differently engineered. Initiated by Kochhar’s predecessor K.V. Kamath, it’s about following the Indian diaspora around the world. ICICI is present in 18 countries and some 600,000 non-resident Indians bank with it. For Kochhar, this proportion will stay, but obviously, as the balance sheet grows, international revenues will increase in absolute terms.

What’s happening at home is more important for her. “See what’s happened to the Chinese banks. They have become globally relevant not because they spread themselves in 100 countries. It was China’s growth that helped them to get to their present size.” Kochhar maintains that her plan for growth is based on India’s economic momentum. ICICI is betting that India will hit a double-digit growth rate, which is in line with what the government expects.

This May she picked up the Rs 1,507 crore Bank of Rajasthan, adding 460 branches to ICICI’s 2,040. “We can now do in two years what would have otherwise taken us three,” says Kochhar. The Bank of Rajasthan is ICICI’s third acquisition after Bank of Madura (2001) and Sangli Bank (2006), and the first since Kochhar took over in May 2009.

Analysts expect some of ICICI’s subsidiaries to add to the bank’s size. “The growth will be driven from the expected value unlocking in the subsidiaries,” says Jigar Shah, senior vice president and head of research, Kim Eng Securities, a Singapore-headquartered pan Asian brokerage. This includes the life insurance, general insurance, asset management, and equities businesses. “To be among the top 20 globally, the subsidiaries have to play their role,” says Kochhar.

She won’t be alone in betting on India’s growth. Here’s Essar Oil’s managing director Naresh Nayyar’s take on how the current fiscal is looking: “We should be able to close the year with revenues of about $10 billion.”

A lot has changed at Essar since commercial production began in May 2008. By the end of fiscal 2010, it hit revenues of Rs 38,500 crore, up from Rs 600 crore two years earlier. Nayyar says there are many reasons for the spike in Essar’s revenue. “Petrol consumption has increased by 14% while the automobile industry has registered double-digit growth rates. Diesel, too, has witnessed a growth of 10%.”

The company cannot afford to ignore operations in India if it has to scale up. But despite that, it’s not letting go of opportunities abroad. And like Hindalco and Bharti, it is betting on other emerging markets. In 2009 it acquired a 50% stake in Kenyan Petroleum Refineries, which has a 4 million tonne refinery in Mombasa. “The opportunity is immense,” says Nayyar without elaborating on plans. Kenya has a demand of about 5 million tonnes of petroleum products and produces barely 1.5 million tonnes.
It’s a similar story at L&T. The company is sitting on an order book of Rs 1 lakh crore, which includes infrastructure and power projects. These will be completed in anywhere between 18 months and five years, though the average time taken is 2.5 years. As L&T’s chief financial officer Y.M. Deosthalee says, 6% of the company’s order book comes from abroad, but it plans to increase that to 15% in the next three years. “It is important to understand the risks overseas.”

Not that it’s stopping Indian managers, including Deosthalee. For them, size does matter.