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For Indian conglomerates, bulk is not a hazard.

Summary: They are even more intent on going against conventional wisdom to put on more size

The birth of Alphabet, Google's new holding company, prompted much talk of a conglomerate renaissance.

Taken with Warren Buffett's Berkshire Hathaway and General Electric, the search group's new structure posed an intriguing question: are diversified businesses, often viewed as relics in the industrialised world, not such a bad idea after all?

In Asia, this question seems redundant. Conglomerates in countries such as South Korea and India never lost their dominant positions. And despite predictions to the contrary from visiting business school professors, large business groups in India appear to be becoming more sprawling, not less.

Billionaire Mukesh Ambani, India's richest man, provides one obvious example. This month, Ambani's Reliance Industries conglomerate will launch Reliance Jio, a telecoms data business. For lesser tycoons, this $16 billion investment might be considered potentially ruinous.

For Ambani, whose fortune weighs in at $21 billion, it is merely a very expensive gamble.

A few years back, investors hoped Ambani would narrow his gaze, building on Reliance's strengths in refining and petrochemicals to create an energy major to rival Shell or BP.

Doing so might allow him to shed the conglomerate discount assumed to be built into Reliance's stock price. Instead, the billionaire became ever more expansive. As well as telecoms, Reliance is now pushing into retail while also dabbling in media.

Much the same is true for Tata, India's largest conglomerate by revenue. The group's structure is bewildering, with 100 or more business lines. When he took over in 2012, wise heads predicted that chairman Cyrus Mistry would begin decluttering by shutting much of Tata's long tail of weaker operations to focus on profitable entities, such as carmaker Jaguar Land Rover.

Yet Mistry has done nothing of the sort and is now slowly spreading into new areas from housing to eCommerce.

Nor do the debt woes of many big Indian industrial groups seem to have prompted an organisational rethink. Many analysts thought the country's numerous overleveraged tycoons would be forced to streamline and sell assets.

This has happened in a handful of cases. But many more business owners are merrily diversifying despite their weak balance-sheets, including Ambani's younger brother, Anil Ambani, whose branch of the family's Reliance empire is launching new divisions in sectors such as solar energy and defence.

The same pattern shows up in India's digital economy. Online retailers such as Snapdeal and Flipkart now sell everything from cars to apartments. It cannot be long before they begin to move into even more adventurous territories, as Amazon has done with its drones.

PayTM, a payments and mobile commerce business, now wants to open a banking arm, much like Chinese eCommerce group Alibaba, its main investor. "Our aim is to become an internet conglomerate," says founder Vijay Sharma.

India's growing consumer economy helps explain the push by industrial groups such as Tata and Reliance into areas like retail. But Anand Mahindra, head of the Mahindra group, claims a broader trend is also at play.

Predictions that conglomerates would wither have always been mistaken, he argues. Instead, diversified "federations" succeed because they spur innovation via the cross-fertilisation of ideas.

"Google just discovered what we have known for ages," he says. "Value creation comes where different businesses collide, not within businesses themselves."

There is a more pessimistic explanation. In the mid-1990s, Harvard Business School academic Tarun Khanna wrote that conglomerates persisted in emerging markets because weak regulation and poor contract enforcement made it safer to keep business connections in-house.

When capital was expensive, it also made sense to shift money around internally, rather than borrowing.

Predictions that conglomerates would decline in India are generally predicated on changes in these underlying conditions. If the business environment improves, companies ought to adapt.

Unfortunately, despite the efforts of Narendra Modi, the Prime Minister, India's regulatory environment remains highly unreliable, its courts lethargic and its capital costly. Until all that changes, the country's era of conglomerate dominance has a long way left to run.

Financial Times

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Publication:Gulf News (United Arab Emirates)
Geographic Code:9INDI
Date:Nov 11, 2015
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