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Corporate Oct 15, 2012

Biyani, Mallya, Suzlon, DLF: Easy money screwed up India Inc

By Vivek Kaul

George Orwell, author of masterpieces like 1984 and Animal Farm, once said "whoever is winning at the moment will always seem to be invincible". The big Indian businessmen went through this phase between 2003 and 2008. They were invincible and the world seemed to be at their feet.

One impact of this was diversification - a scenario where entrepreneurs mindlessly ventured into areas unrelated to their main business, an extreme version of the old adage of not putting all your eggs in one basket. And so Indian entrepreneurs went on a diversification spree.

Vijay Mallya thought running an airline, a cricket team and an F1 team was just the same as selling alcohol. DLF thought running hotels, generating wind power, selling insurance and mutual funds would be a cakewalk after they had created India's biggest real estate company. Deccan Chronicle saw great synergy in selling newspapers and running a cricket team and a chain of bookshops. Hotel Leela thought running a business park would be similar to running a hotel.

Kishore Biyani thought that once he got people inside his Big Bazaars and Pantaloon shops, he could sell them anything from mobile phone connections to life and general insurance. Bharti Telecom thought that mutual funds, insurance and retail were similar to running a successful telecom business.

Banks were more than happy to lend money to finance these expansions. And if money couldn't be raised domestically it could always be raised internationally by issuing foreign currency convertible bonds (FCCBs). The beauty of these bonds was that the rate of interest was almost close to zero. (The lure for investors was that their bonds would get converted into shares at a discount to the market value). Hence, companies raising money through this route did not see their profits fall because of interest payments.

So everybody lived happily ever after. Or at least that's how it looked till a few years back.

In the prevailing euphoria, these entrepreneurs did not realise that all the money they were raising in the form of debt would have to be returned. Even if they did, they were confident that all these expansions into unrelated territories would soon start making money and would generate enough profits to pay off the debt.

DLF raised a lot of debt to build a land bank.So during the boom, businesses just expanded into related and unrelated areas. Reuters

Other than unrelated diversifications, companies also borrowed to fund their expansion into core areas at a very rapid pace. As Nirmalya Kumar, a professor of marketing at the London School of Business, explained to me in an interview I did for the Daily News and Analysis a few years back, "capacity never comes online at the same time as demand because you have to add capacity in chunks, whereas demand goes up as a smooth function. Capacity comes in chunks and people generally add capacity at the top of the cycle, rather than at the bottom of the cycle because at the bottom of the cycle, everybody is hurt and nobody knows when things will turn around. I cannot set up a cement plant every time there is 100-tonnes more demand in the country, because when I set up a cement plant, I set up a 2 million tonne cement plant. There will be times when there will be a shortage and there will be time when there will be lots, right? So this boom and bust always takes place." (You can read the complete interview here).

Telecom companies raised a lot of debt to establish their presence all over the country only to realise that the consumer had too much choice leading to telecom companies having to cut calling and sms rates to ridiculously low levels (I have an sms pack which costs Rs 25 and gives me 15,000 messages free per month. If I exhaust that limit, one sms costs one paisa). At one point of time the Mumbai circle had a dozen-and-odd odd operators competing.

The wind energy company Suzlon raised a lot of money through the FCCB route to expand at a very past pace and became the darling of the stock market. DLF raised a lot of debt to build a land bank.

So during the boom, businesses just expanded into related and unrelated areas. NDTV, a premier English news channel, tried getting into the entertainment channel business with NDTV Imagine (see disclosure below). It lost a lot of money on it and finally sold out. Even the selling out did not help and the channel has since been shutdown. Peter Mukherjea, a successful manager launched News X, which he had to sell off. Satyam, an IT company, tried to diversify into real estate and infrastructure as Maytas (Satyam spelt backwards).

With all the easy money going around Biyani soon had major competition in the organised retail space with the Tata group, Birla group, Ambani group and even Sunil Bharti Mittal deciding to enter the space. Then there was also Subhiksha, which expanded so fast that it soon had 1,500 stores all over the country. This was also the era when media companies got into the real estate business. They also wanted to set up power and cement plants, and buy coal mines.

And most of this expansion was funded by companies by taking on more and more debt. Banks also got caught in to the euphoria that prevailed and gave out loans left, right and centre. The boom period has now run out. What we are seeing right now is the bust.

Businessmen now seem to be coming around to the realisation that they have ended up raising too much debt too fast and need to bring it down. Some of them like Subhiksha and Kingfisher have had to shut down their operations. Others are facing huge losses. As Sreenivasan Jain wrote in a recent column in DNA: "Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha, which at one time had almost 1,500 outlets," writes Jain. (You can read the complete article here)

Thanks to the bust, businessmen have realised that they need to sell some of what they are now calling "non-core assets". Deccan Chronicle recently tried selling its Deccan Chargers IPL team but found no buyers willing to pay more than Rs 900 crore. Over the weekend, the Board of Control for Cricket in India (BCCI) cancelled its franchise. So all the debt that was raised to get the cricket team up and going has now gone down the drain. There are next to no assets to sell against it.

DLF, sitting on top of more than Rs 25,000 crore debt, has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts, its foray into the luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai's Lower Parel area to Lodha Developers for Rs 2,750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore.

Hotel Leela has been trying to sell its business park. Vijay Mallya managed to sell a stake in his F1 team to Sahara. Media reports suggest that Mallya has been in talks with the British company Diageo to sell a stake in United Spirits, the company that makes Officer's Choice, the largest selling whiskey brand in India. There are also rumours that he is trying to sell real estate that he owns in Bangalore to pay off all the debt on Kingfisher Airlines. In the meanwhile, no one seems to be interested in buying Kingfisher Airlines even though the government has allowed up to 49 percent foreign direct investment in the aviation sector.

Kishore Biyani managed to sell off chunks of Pantaloons and Future Capital in order to pare down his debt. The Bharti group got out of the education business by selling Centum Learning to Everonn education. Also some of the big companies that had got into organised retail have either closed their stores or scaled down the level of their operations.

Suzlon is in major trouble. Its FCCB loans amounting to $221million(Rs 1,160 crore) are set to mature later this month and the company is in no position to repay. Its request to extend the repayment has been rejected by bondholders. It is now being speculated that the company will default on these loans and go in for liquidation.

The learning out of all this is that it is easy to expand when the money is easily available and the going is good. But selling out when the tide turns around is not so easy.

But what businesses should have hopefully learnt more than anything is that in this day and age it pays to focus on a few businesses instead of trying to do everything under the sun just because money to expand is easily available.

In the past, things did not change much in business. An interesting example is that of the Ambassador car. The car had the same engine as of the original Morris Oxford which was made in 1944. And this engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.

Given this lack of change, businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.

Look at the newer businesses some of the big, older companies have got into over the years. The retail business of Ambani hasn't gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Maybe, they will still get it right.

Hence it's becoming more and more essential for businesses to focus on what they know best. To conclude, in the movie English Vinglish, one of the characters who goes by the name of Salman Khan says "entrepreneur, shabd na hua, poori ghazal ho gayi". For Indian entrepreneurs, the expansions they thought would be as soulful as ghazals have turned into headache inducing heavy metal. Hopefully they have learnt their lessons.

Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com

(Disclosure: Network 18 Group, publisher of Firstpost and several news and entertainment channels though TV18 Broadcast, competes with NDTV in many spaces. The views expressed in this article are those of the author and do not reflect the views on Network18 or its owners).

by Vivek Kaul

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