Swinging from crisis to disaster

The Tatas, the numero uno business group in India, saw the turnover of the group companies falling by over 5 per cent to Rs 26,670 crore during the year ended March 1998. The Nandas, which control Escorts and a clutch of companies, saw their group turnover shrinking by 11 per cent to Rs 1,690 crore. The Kirloskars, which first introduced diesel engines in India, witnessed their turnover dropping by over 5 per cent to Rs 1,140 crore.

Apart from the slowdown, mismanagement and huge interest burden have taken a toll on many houses. The JK Singhania group saw their losses mounting from Rs 9 crore to Rs 72 crore. Lloyds Group of the Guptas reported a loss of over Rs 12 crore (as against a profit of Rs 51 crore in the previous year). The RP Goenka and BK Birla groups also suffered losses of Rs 97 crore and Rs 42 crore respectively as against profits of Rs 109 crore and Rs 82 crore respectively. However, the Ambanis, the Aditya Birla group and the Mahindras were among thegroups which did well on the financial front.

The poor performance of business families, which are slow in embracing new technologies and discarding inefficiencies, was not restricted to their finances. It was spilled over to the stock markets with share prices of their leading companies touching rock-bottom levels. Share prices of companies controlled by business families like Telco, Tisco, Grasim, Century and so on fell to their 52-week lows. Investors who burnt their fingers in the new issue boom of 1994-96 are keeping away from the shares of these companies also.

In fact, market capitalisation (total market value of all listed shares) of leading groups witnessed a massive erosion. A study by The Indian Express has revealed that the market cap of the Tatas has fallen from Rs 29,000 crore to Rs 24,000 crore last year. While the market cap of the Mahindras declined from Rs 4,100 crore to Rs 2,400 crore, the Essar group market cap fell from Rs 1,810 crore to Rs 1,330 crore, BK Birla group from Rs 1,155crore to Rs 770 crore, and the Aditya Birla group from Rs 11,200 crore to Rs 7,300 crore. “You can see that while share prices and market cap of Indian business groups declined, many multinational groups have gained ground. However, market caps of companies like ITC and Hindustan Lever have shot up last year,” said a senior stock broker.

In fact, the track record of business groups in India is not very bright. Looking back, it can be seen that many groups like the Walchand Hirachand, the DCM group and the Modis split in the eighties and are controlled by various splinter groups. Others like the Mafatlals and the Oswals also split and no longer hog the limelight in terms of making business strides.

Stock markets, on the other hand, are enamoured by professionally-run multinational companies which built brands and took competition to the family-owned business groups. This is now reflected in the relatively higher share prices of such multinational companies which focussed on building brands. There is nowonder that market cap of companies like ITC and Hindustan Lever had gone up steeply.

Adding to the woes, heavy financial burden has started showing strains on several business families. With project implementation schedules going haywire, several mega projects are stuck. Financial institutions have started acting tough with business groups like the Mittals and the Rajinder Steel group. Institutions, which have Rs 350 crore exposure to Rajinder Steel, have decided to give two months time to prove the viability of the company. If the company fails in proving its viability, institutions will call back the loans. Similarly, institutions have decided not to fund non-steel projects of the Mittals of the Ispat group.

With the possibility of capsizing in choppy waters staring at them, many business groups are now restructuring and downsizing their operations. Apart from hiving off unviable units, they are looking at mergers, closure of units and sale of units to survive in the business. What is in store for thecorporate sector in the new year? The waves of demand recession, falling prices, rise in input materials and tough overseas competition are still continuing. The industrial growth continues to be around a measly 3.6 per cent as against over six per cent last year. Exports are showing negative growth rate.

If 1998 was a year of restructuring, the new year will prove to be a year of consolidation for business groups. Many business groups like the Mesco group and Rajinder Steel have realised the folly of going in for unbridled expansion and diversification. Be that as it may, Indian industry is known for its resilience. “The recent moves of giving a greater thrust to information technology, stepping-up government spending on infrastructure, proposal to make amends to the policy on telecommunication, etc. are some of the steps in the right direction. The Prime Minister’s Advisory Councils have also made some useful recommendations, which need to be acted upon speedily. It is hoped that, as a result of thesemeasures, there will be a pick-up in investment in the economy and we would see improved business environment at least in the later half of the year,” says S D Kulkarni, managing director, Larsen & Toubro.

When it comes to corporate governance, Indian business groups are still lagging behind. Funds raised from the capital market and financial institutions are blatantly misused and even diverted for other purposes. This situation needs to be corrected. There should be more professionalism in companies promoted by Indian business groups. Otherwise global competition and overseas rivals will make life difficult for them.