Reliance Communications
Sun TV
Suzlon Energy
Punj LLoyd
Take India's first global-scale, wholly export-oriented oil refinery, add to it India's only pan-Indian CDMA telephony service provider, throw in India's only, and one of the world's largest-and few-integrated wind energy players, bring on one of India's most diversified engineering and construction companies, top it with India's largest regional broadcaster with an international presence, and what do you have? Other than a very long sentence, you get an instant flavour of the new entrants that have pole-vaulted straight into the BT top 100. You also get a feel of the uniqueness of the business model of each of these companies-Reliance Petroleum (#15 on the BT 500), Reliance Communications (#9), Suzlon Energy (#11), Sun TV (#50) and Punj Lloyd (#75), just in case you haven't figured out yet-that listed on the stock exchanges in 2005-06. These five companies also illustrate how entrepreneurially-driven Indian business families are creating tonnes of shareholder wealth by aggressively growing in sectors few of their predecessors have ventured before. As per the BT 500, these five companies have collectively added a market cap of Rs 1,11,006.29 crore to the listing, whilst all the new entrants-29 in all-have chipped in with a market cap of Rs 1,35,060.23 crore.
Their uniqueness aside, the new entrants to the Top 100 list are also getting younger. Reliance Communications, for instance, began life in mid-2003 (as Reliance Infocomm, which was then a part of Mukesh Ambani's Reliance group. Now, after a family settlement and a demerger from Reliance Industries, it is headed by Anil Ambani). Reliance Petroleum too is a greenfield refinery project, on which work is under way. Now contrast this with TCS, a company that was set up in 1968 and entered the bt 500 list in 2004 at #2; or with Maruti, which commenced production of its cars in 1983, and entered the BT 100 at #18 in 2003 after listing on the domestic bourses.
The other entrants to the top 100 may not be as high-profile as the Ambanis, but don't let that take anything away from their pride of place in the BT 500. Any doubts about their stature can be quickly dispelled by their market cap figures-Tulsi Tanti, Chairman & Founder, Suzlon Energy, has managed to create a giant with a market value of Rs 32,000 crore in just two years. In 2004, Citigroup and ChrysCapital had invested Rs 50 crore each in Suzlon for a 9.6 and a 7.1 per cent stake, valuing the company at Rs 522 crore and Rs 707 crore, respectively. Says Ashish Dhawan, Managing Director, ChrysCapital: "Tulsi Tanti is a tiger, an extremely dynamic entrepreneur who dreams very big...he has traits similar to Mukesh Ambani. His burning ambition to play on the global stage, coupled with the fact that he is a hands-on leader, will see the company realise its dream of being among the top three players in the world."
That essentially is what Tanti has in mind for his company. He is sure that the increasing oil and gas prices coupled with concerns about global warming will present him an opportunity to grab a quarter of the global market for wind energy by 2010; this year, Suzlon's share is expected to touch 12 per cent. Tanti is setting up manufacturing bases in India, China and the US, and ramping up capacities at existing bases at an investment of about Rs 2,500 crore. "Besides, with the acquisition of Hansen (a Belgian maker of gearboxes, which are a key component in wind turbines, for m465 million, or Rs 2,697 crore, we should be able to grow more than the industry's compounded average growth rate of 25 per cent," says Tanti.
If Suzlon's business model is global, Kalanithi Maran's Sun TV is touted as a regional play, focussed on Tamil Nadu and Kerala (the Andhra Pradesh and Karnataka parts don't belong to the listed entity). Yet, this second-largest listed broadcaster (after Zee Telefilms) with a BT 500 market cap of Rs 8,000-odd crore, is fascinatingly global with its reach. As Maran, Managing Director, Sun TV, puts it: "We are a regional language television broadcaster, which is present across the UK, the us, Australia, New Zealand, South Africa, Malaysia, Singapore, Sri Lanka and the Middle East. And we are constantly endeavouring to spread our reach into new areas of operations in media." The Sun Network runs 14 TV channels, four fm radio stations, two daily newspapers and four magazines. Maran aims to make Sun TV the number one media company in India in five years. The company became a national player, Maran says, after obtaining fm radio licences for 45 cities across India.
Ambition and passion clearly aren't in short supply for the new entrants. Atul Punj, Chairman, Punj Lloyd says: "We have the potential to be a $10 billion (Rs 46,000 crore) top line company in 10 years." This year, he expects revenues to touch $1 billion (Rs 4,600 crore). Only three years ago, this appeared unlikely. The company was saddled with borrowings, and the debt-equity ratio was over four times. That's when the company raised Rs 225 crore by offloading a 28 per cent stake to Standard Chartered Private Equity, Temasek and New York Life. That's gone a long way in helping Punj Lloyd emerge at #75 on the BT 500 listings.
Investors, including the private equity tribe, have adequate reason for putting their money where the Indian promoter's mouth is. There's plenty of potential locked in these companies, and investors in turn expect plenty. This is reflected in the price-earnings multiples (P-Es) of the recently-listed bandwagon, which are in the 25-40 vicinity on forward earnings. The forward P-E for the 30-stock Sensex on the Bombay Stock Exchange, in comparison, is just 22.
That many of these companies are in high-growth sectors is for the great expectations from them. The telecom sector, for instance is growing at over 30 per cent, and Reliance Communications, in spite of being a late entrant in the Indian telecom space, gained size quickly and emerged as one of the dominant players by end 2003 (in less than a year from the launch) with a market share of a little over 20 per cent. "This was possible, in part, because of huge upfront investments which gave the company a wide coverage, as well as aggressive marketing and pricing (tariffs and handset bundling)," says Hitesh Kuvelkar, Associate Director, First Global. Besides the wireless market, the company established a strong presence across the enterprise services market and long distance telephony, he adds.
Reliance Communications may be largely an India consumption story (at least as of today), but Suzlon, for its part, has a hybrid model, centred as it is around the country's cost-competitive manufacturing base, yet targeting virtually the entire globe. Currently 40 per cent of Suzlon's revenues come from international markets. The company has an end-to-end integrated strategy: Not only does it make, market and install wind-generating equipment, it is also investing in pre-installation services like wind-mapping and post-installation activities like payment realisation from utilities. Says V.K. Sharma, Director & Head of Research, Anagram Stock Broking: "Two things going for this industry are that it is renewable energy and is pollution-free. Any player in this industry with these advantages, coupled with scale, will be able to pre-empt competition to a large extent." Adds Dhawan of ChrysCapital, which still holds a 3 per cent stake in the company: "Suzlon has made the right bet-backward integration has ensured supply of raw material (casting materials, forging materials, gearbox and bearings) in a business where the supply chain is creaking."
Another build-in-India-sell-overseas model is that of Reliance Petroleum, which is a pure play on the shortfall in global refining capacity. Reliance Industries, which operates the world's third largest single-location refinery in the world at Jamnagar, Gujarat (with a capacity of 33 million tonnes per annum), has embarked on setting up India's first export-oriented refinery through a subsidiary, Reliance Petroleum, at a cost of Rs 27,000 crore. The refinery will have a capacity of 29 million tonnes, and will be operational by December 2008. This high complexity refinery (measured on the Nelson complexity index at 14.0) will be among the top 10 refineries globally by capacity, and will enjoy enormous flexibility in use of raw material and product output. It will import crude and export to the West, where underinvestment in refining capacity over the last two decades has created a growing gap between demand for refined products and refining capacity. Remarkably, the company enjoys a market capitalisation of about $6.5 billion (Rs 29,900 crore)-not bad for an entity that is still in the project execution mode. Despite a high premium-the IPO was priced at Rs 60-the Reliance Petroleum issue was oversubscribed 53 times, mobilising $31 billion (Rs 1,42,600 crore). Interestingly, the world's largest company by market cap is from the energy sector-Exxon Mobil Corp., which at the time of writing had a market value of roughly $425 billion (Rs 19.55 lakh crore)!
Going global may be the buzzword, but it isn't as if the potential in the country-or even in just one of its regions-is saturated. Far from it. Consider Sun TV, which is riding high on its southern language broadcasting channels. These include Sun TV, KTV, Sun News, Sun Music (all in Tamil), Surya TV and Kiran TV (in Malayalam), which together dominate Tamil Nadu and Kerala television viewership. This is a clear delight for advertisers. Sun TV is today viewed as a great media platform, which will benefit from increasing ad spends-the ad spend to GDP ratio in India is at 0.39 per cent as against a world average of 0.98 per cent, according to the 2006 FICCI report on the Indian Entertainment and Media Industry. Higher subscription revenue will also have a role to play-currently 58 per cent of the satellite TV industry's revenues come from users; the figure is expected to increase to over 70 per cent by 2010. The best part for Sun, however, is that it's carved out a huge niche of its own. Says Phani Sekhar, a research analyst at the Mumbai-based Angel Broking: "Sun TV has shown consistent growth, a clean balance sheet and very good return ratios. Compare it with the national players, Star, Zee and Sony, who are all embroiled in a slugfest and have all sorts of programming issues. Sun has no competition in the areas it operates in, and that's an advantage in terms of cornering the advertising pie."
Consumer-oriented growth is one prong of a booming domestic economy. The other trigger is infrastructure-creation, and Punj Lloyd has earned its spurs in the engineering and construction space. Analysts consider it one of the few engineering and construction companies with a strong track record in the hydrocarbons space, especially pipelines. Says Vinod Nair, a research analyst who tracks the company at Brics Securities, "Punj Lloyd could be the best construction company going forward. It is best diversified and in my opinion comes second only to L&T." Its customer list includes global majors such as British Petroleum, Cairn, Saipem and Petronas and also Indian oil companies such as Reliance, Gas Authority of India and Indian Oil Corp. The company clearly hopes to make huge gains by tapping into the orders for an estimated 22,000 km of crude and oil pipelines which are likely to be built over the next five years. Punj Lloyd is also geographically well diversified, implementing projects across India, South East Asia and Middle East. Says Atul Punj: "The acquisition of Sembcorp e&c (a Singapore-based company) in June this year added to our verticals. Sembcorp has built the Changi airport, industrial parks, special economic zones, which are all areas that Punj Lloyd was never into; also its UK subsidiary Simon Carves has strong capabilities in the petrochemicals space." Punj Lloyd, however, didn't have an impressive report card to show shareholders at the end of March 2006, with margins coming under pressure. But that might have been an aberration. Adds Nair: "2005-06 was not so great in numbers because a major Rs 1,000 crore road project in the East was halted and that impacted margins. But the project is now under way and the fourth quarter of the ongoing year should bring some positive news."
They're all great companies doubtless-at least most of the 29 would be-but the slump of Punj Lloyd last year begs the question: How sustainable is the growth of these companies? Adds Prithvi Haldia, Managing Director, Prime Database: "One cannot break into the Top 100 unless you have a strong fundamental growth story. The valuations they have got are on strong fundamentals and the future outlook of their respective industries."
A list of companies that broke into the BT 100 in the recent years suggests Haldia may not be off the mark. All except three of the 13 new entrants over the last three years remain in our Top 100 this year. HT Media and J&K Bank may have slipped, but are not too badly off at #133 and #151 respectively. Nimesh Kampani, Chairman, JM Morgan Stanley, says, "Private companies today are very profitable and well managed and their valuations reflect that. As long as they maintain a good track record and profitability in this competitive scenario, they will do well and it will reflect in their market cap."
Yet, there are sceptics. Reliance Communications, for instance, will have to contend with, at some point, a slowdown in subscriber growth and continued intense competition for subscribers, which may impact margins. Then there's also the proposed foray into the GSM space. "The company has applied for GSM spectrum in 21 circles. We believe the strategy would entail huge investments and considering the already cluttered market place, it may be difficult for the company to generate adequate returns to justify these investments," says Kuvelkar of First Global. Suzlon, meanwhile, is dependent on policy support to wind energy. In India, 70 per cent of the industry's customers looked at depreciation benefit as a key criteria for investing. The regional nature of Sun TV's business makes it susceptible to swings in its relatively small markets. Shrinking crude refining margins (usually dependent on availability of surplus refining capacity and uncontrollable global factors) may impact the profit margins of Reliance Petroleum. And Punj Lloyd will need to manage the cyclicality of its business and high execution risks. Promoters of these businesses aren't exactly ignorant of such risks. But if these risks didn't exist, there would be few entry barriers to these businesses, which would negate their distinctiveness-and with it their valuations.