Opinion | Titan’s success casts doubt on the conglomerate model

Photo: Mint
Photo: Mint

Titan’s present market cap at 90,000 crore outweighs that of revenue giants like Tata Steel & Motors

In a $110 billion group, comprising 30 companies scattered across such diverse areas as steel and software, who would have thought that a small watch company would emerge as the second largest in terms of market capitalization and the fastest growing over the last three years?

Yet, this week, as a Business Standard story pointed out on Monday, Titan’s market cap scaled 90,000 crore, well below that of software heavyweight Tata Consultancy Services (TCS), but nearly 60% more than that of revenue giants Tata Steel and Tata Motors.

Titan’s success is the story of steady and sterling leadership by two men, Xerxes Desai and Bhaskar Bhat, who helmed the company for all its 34 years in business. Desai, the man who wanted to be an Oxford don but came back at J.R.D. Tata’s bidding to set up a watch company, presided over the company’s first decade and a half of growth, in which time it established itself as India’s leading watch brand. Under Desai, the humble watch—till then symbolized by public sector entity HMT’s mechanical products or imports from abroad—became a fashion statement, a symbol of class best exemplified by its signature tune, an excerpt from Mozart’s 25th Symphony, personally picked by Desai.

However, by the end of the last century, as the watch business slowed, the company’s diversification into the jewellery business in 1995 was weighing heavily on its overall performance, already dragged down by debts following an ill-advised blitz into several European markets.

Enter Bhaskar Bhat as managing director in 2002. Tasked with engineering a turnaround of sorts, he faced a baptism by fire as a large-scale layoff was followed by a lockout at the company’s plant. After dousing those early fires, Bhat proceeded to execute a well-honed strategy of entering unorganized segments of the Indian market and gentrifying them. With this came crafted watches, jewellery, youth accessories such as bags and belts, eyecare products and, later, fragrances and saris.

The results have been spectacular. Titan is today one of the two jewels in the Tata crown. And, therein lies the problem, since its continuing success casts a questioning shadow over many of the other companies that are a part of India’s largest conglomerate and have, for years, been sucking up resources without really delivering results.

The conglomerate model, as rolled out by the likes of Harold Geneen and Jack Welch, was a consequence of the low interest rate regimes in the US following the Second World War, which in turn, helped finance a spate of leveraged buyouts. Conglomerates made sense till such time as capital markets lacked the depth and sophistication needed to back businesses at various stages of evolution and growth. They lost steam once those markets evolved to serve all comers.

Through the 1960s, Geneen made hundreds of acquisitions across a diverse collection of businesses ranging from telegraph equipment to insurance and hotels, to build International Telephone and Telegraph Corp., the company he headed, into a $17 billion conglomerate by 1970. Today, some four decades later, all that remains of that diversified portfolio colossus is a $2.5 billion business making specialty components for the aerospace, transportation, energy and industrial markets.

By the 1990s, most US corporations had come around to reaffirming their faith in specialization and focus, prompted in large measure by the teachings of management gurus like the late Coimbatore Krishnarao Prahalad, who in 1990 co-authored an article for the Harvard Business Review titled The Core Competence Of The Corporation, in which he urged executives to identify their organization’s core competencies that could foster growth.

It wasn’t as if the conglomerate idea fell off the cliff overnight. A 1994 study showed that for each of the years 1985, 1989 and 1992, over two-thirds of the Fortune 500 companies were active in at least five distinct lines of business.

Late last year, United Technologies, one of the best known industrial conglomerates after its acquisition of Otis Elevator in 1976 and Carrier Refrigeration in 1979, announced that it would spin off both those divisions into separate companies and focus on its core aerospace business.

This, coupled with the struggles of General Electric—once the world’s largest industrial conglomerate—as it looks to sell off pieces of its operations indicates that the era of conglomerates seems to have ended in the US.

In India though, conglomerates still rule the roost, accounting for nearly 50% of the corporate sector’s revenues. Yet, the success of focused companies in newer businesses such as IT, telecom, banking, auto, aviation and e-commerce shows that the conglomerate premium may be declining even in India. A study by Bain and Co. last year concluded: “Conglomerates in India and Southeast Asia no longer hold an advantage in total shareholder returns over pure plays and have begun to underperform in revenue growth and margin improvement."

Significantly, the study’s list of conglomerates in the region that have continued to thrive despite the odds had a number of Indian groups, including Bajaj, Wadia, Murugappa, Lalbhai, Godrej, Emami and Torrent, but not Tata.

Sundeep Khanna is an executive editor at Mint and oversees the newsroom’s corporate coverage.

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