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Tata tops global recognition rankings

Tata tops global recognition rankings
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First Published: Wed, Apr 06 2011. 11 58 PM IST

Graphic: Ahmed Raza Khan/Mint
Graphic: Ahmed Raza Khan/Mint
Updated: Wed, Apr 06 2011. 11 58 PM IST
India’s economic surge over the past few years has been fuelled as much by its companies as anything else, with liberalization allowing them to break free of the government controls that used to dictate what they could and couldn’t do.
This has led to overseas investment interest increasing in what is now the fastest growing economy after China, particularly since developed markets have matured and stagnated. For their part, as they have gained in financial muscle and confidence, Indian companies have been venturing overseas in greater numbers, making globally significant acquisitions as scale becomes an essential part of their quest for greater profitability.
“Indian companies have better acceptability compared with Chinese ones in Western countries for multiple reasons, including the fact that companies such as ArcelorMittal and Tata Group have proved they are better at managing assets and one has seen more and more Indian origin people leading big companies abroad,” said Rohit Berry, partner, BMR Advisors.
Around 25 years ago, “the pattern of foreign direct (FDI) investment was highly concentrated, with seven family business groups accounting for at least three quarters of it”, Nirmalya Kumar, professor at the London Business School, wrote in his book India’s Global Powerhouses: How They are Taking on the World, referring to a study of Indian multinationals and the patterns of their FDI.
Graphic: Ahmed Raza Khan/Mint
Many of the companies on the acquisition prowl now didn’t exist back then or weren’t among the Top 20 business houses. While large Indian enterprises may have captured the headlines, mid-cap ones too have been shopping overseas, expanding their operations across continents from Africa to Australia.
Last year witnessed a resurgence in outbound deals after the lull of 2009. According to Grant Thornton, outbound mergers and acquisitions (M&A) deals from India in 2010 stood at 198 valued at $22.5 billion, compared with 2009’s 82 deals worth $1.38 billion, a difference accentuated by the global slump.
The two-way exchange of investment, essential to any economy aspiring to become a significant part of the global economy, is set to expand, but the speed at which it does so will be dictated to a large degree by perceptions. In that respect, Indian companies still have some distance to go, according to the findings of a survey conducted by American research firm, Penn Schoen Berland (PSB), which is just entering the Indian market. “From a global perspective, India’s economy is heading in the right direction with the IT/ITeS (information technology-enabled services) industry leading the way in the near future,” PSB said.
The Most Recognized and Respected Indian Multinationals survey was conducted among 600 respondents (134 from the US, 133 from the European Union (EU), 134 from the Asia-Pacific and 200 from India) in March.
The Tata group led the company rankings, followed by Sun Pharmaceutical Industries Ltd, Air India, Jet Airways (India) Ltd and TVS Motor Co. Among heads of large conglomerates, Ratan Tata was ranked highest, followed by Mukesh Ambani and Kumar Mangalam Birla. Among the most recognized and respected company leaders, Vinita Bali of Britannia Industries Ltd was ranked at three and Chanda Kochhar of ICICI Bank Ltd at five.
While the high-profile nature of the Tata group’s acquisitions and ownership of the Taj hotels would be a key reason for its ranking, the visibility of airlines overseas makes for recall value, something that Air India can take heart from despite its ongoing woes. Still, overseas presence isn’t everything. Only two IT companies were in the Top 25—Infosys Technologies Ltd at 20 and HCL at 23. India’s banks make a better showing—State Bank of India led at 6, followed by Axis Bank (9), ICICI Bank (11) and HDFC Bank (13).
Among energy and metals companies, Oil and Natural Gas Corp. Ltd was ranked highest (7), followed by Indian Oil Corp. Ltd (8), Jindal Steel and Power Ltd (12), Steel Authority of India Ltd (15), Bharat Forge Ltd (18) and Bharat Petroleum Corp. Ltd (20).
“Indian companies are considered to be good investments and have strong futures, but are challenged in communicating effectively,” PSB said. “As a result, Indian companies suffer from low awareness levels and are perceived to be dependent on low operational and labour costs as well as government support and limits on foreign competition to achieve success.”
Corporate governance standards are regarded favourably by 67% of global respondents, but significantly lower by US participants at 54%. The earnings fraud at Satyam Computer Services Ltd and the spate of scandals that has surfaced since last year over spectrum allocation and preparations for the Commonwealth Games, among others, may have added to concerns.
The relative cost advantage that India has, in terms of lower costs for materials and employees, were seen as an advantage by 45% of respondents across the world and 51% of those in the EU, according to the study.
“Indian multinationals will have to overcome the US and EU perception of India’s competitive advantage relying on low operating costs and government limitations on foreign competition,” PSB said. There was a dichotomy between overseas and domestic perceptions—globally, 25% felt that India exhibited a more entrepreneurial spirit than other nations, while the score was 42% among local respondents in the PSB study.
There was a sharp variance between overseas and domestic rankings for some companies. Those that did well overseas, but were ranked lower by local respondents were Sun Pharmaceuticals, Air India, TVS Motor, Sterlite Industries (I) Ltd and Bharat Forge. Firms ranked better locally than overseas included Dr Reddy’s Laboratories Ltd, Larsen and Toubro Ltd, Reliance Industries Ltd, the Godrej Group and Wipro Ltd, PSB said.
Respondents worldwide felt that “Indian companies are too new to the market (18%)” and are “not as well known or respected for business (18%),” while the corresponding scores were 11% and 9%, respectively among locals. As many as 75% of global respondents said India’s economy was heading in the right direction. Indian companies were considered good investments by 89% of respondents and 91% said they have strong futures, while only 77% said they communicate effectively.
Following in the footsteps of the IT sector in outbound M&A are natural resources, auto and telecom companies. The outcome, measured by overseas revenue, is positive. A study by the McKinsey Asia Center of McKinsey and Co. shows that since 2009 about 30% of the revenue of the top 100 companies in India comes from overseas, and this figure is poised to grow further. This is almost double what it was in 2002 when 17% of revenue for these companies came from outside India.
Outbound M&A momentum has been building up over the past five years. Some of the bigger deals:
• Tata Steel bought Corus for $12.2 billion in 2007
• Tata Motors bought Jaguar Land Rover (JLR) for $2.5 billion in 2008
• Bharti Airtel bought Zain’s Africa operations for $10.7 billion in 2010
• Hindalco bought Novelis for $6 billion in 2007
The reason behind acquisitions vary across sectors. The auto sector, for instance, is seeking to move up the value chain, such as Tata Motors gaining an entrée into luxury cars with JLR.
Realizing the value of an acquisition can take time, said Sharad Verma, partner, Boston Consulting Group.
“Once an acquisition is done in auto, it takes a good five to six years for the parties involved to fully realize the value of the acquisition,” Verma said. “The combined entities’ product life cycle itself takes a good three to five years for full impact.”
The Tata group has followed the philosophy of “light governance models”. Although shareholding has changed, the Tata group has retained the management structure of the acquired company, allowing it to keep identity and culture intact. Their acquisitions have not posed a threat to jobs. The Tata Steel-Corus acquisition faced a setback not because of a push to scrap jobs, but because of the impact the global recession had on the automobile industry, thereby drying up demand for steel. Tata Steel and Corus, for instance, have collaborated on areas such as research and development (R&D), but made no changes in plant operations.
When it comes to banks, expansion abroad is largely aimed at strengthening India-linked opportunities, said Alok Kshirsagar, director, McKinsey and Co.
“In addition to remittances and non-resident Indians (NRIs), banks also support Indian corporate clients overseas as they go in search of new markets or acquisitions,” he said. “Even within the SME (small- and medium-enterprise) space there is significant business for Indian banks that helps these clients with their trade flows to foreign markets and also the other way—non-Indian SMEs who need support in the Indian market.”
Such business-to-business opportunities persuaded banks such as HDFC to form partnerships in Africa to assist existing corporate clients.
For the natural resources sector, diversified overseas expansion could be a question of survival. Companies want to be at the lower end of the cost curve to protect themselves from volatility in global prices. “With natural resources, you make a margin when you” subtract costs from global prices, said Rohit Vohra, partner at Boston Consulting Group. “In order to reduce your weighted average cost, you have to develop the asset in different parts of the world.”
Sterlite Industries has scored well in this area because of its global strategy. With its 2010 acquisition of the zinc assets of Anglo American Plc, the company has about 10-12% of the global market in the metal. The firm had previously acquired copper mines in Australia and the Konkola Copper Mines in Zambia. In comparison, power company Adani Group’s strategy has been one of backward integration—acquiring coal mines in Indonesia and Australia.
“Outbound FDI flows are now higher than those of many developed countries, having averaged more than $15 billion over the last few years,” said the McKinsey Asia Center report. The caveat for Indian companies is not to overlook fundamental choices. These decisions have been characterized by the report as, “acquisition-led vs largely organic growth; a granular approach to the market; upgraded capabilities to manage unfamiliar risks; a sound organization design to manage increased organizational complexity; and a meritocratic system to attract and retain global talent”
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First Published: Wed, Apr 06 2011. 11 58 PM IST