The Adani Group’s foray into media — through a 49 per cent acquisition in the business news platform BQ Prime and, now, a 29.18 per cent indirect stake in New Delhi Television Ltd — underlines the return of the old model of conglomerate diversification or “horizontal control” in India.
In this model, a business group leverages its entrepreneurial reputation to enter into as many industries, often quite unrelated, as it can. Adani’s businesses span ports, airports, coal mining and trading, thermal power generation, electricity transmission and distribution, natural gas supply, renewable energy, solar photovoltaic devices manufacture, edible oils and foods, grain handling, fruit marketing, road and rail infrastructure, data centres and — more recently — cement, fertilisers and media.
Horizontal control is contrasted with what, in business literature, is called “vertical integration” — where firms remain focused on their existing businesses, while forging backward and forward linkages across the production value chain.
Vertical integration is best exemplified by Reliance Industries, which, under Dhirubhai Ambani, started by making polyester fabric under the ‘Vimal’ brand. The first step in “backward” integration was to manufacture polyester filament yarn and staple fibre, and then their intermediates PTA (purified terephthalic acid) and MEG (mono ethylene glycol). Reliance went on to even produce the raw materials for PTA (paraxylene) and MEG (ethylene) from the basic feedstock (naphtha) supplied by petroleum refineries. The culmination was building its own refinery (the world’s largest) and moving further “upstream” into oil and gas production-cum-exploration. Naphtha cracking and reforming also resulted in other petrochemical products — from plastics, synthetic rubber and linear alkyl benzene used in detergents, to advanced composite materials.
Reliance, no doubt, has diversified horizontally as well into telecom, retail and media. The first two — and its proposed green energy ventures — may even end up bigger than the original petrochemicals and oil and gas businesses. But the extent of its horizontal diversification isn’t comparable to Adani’s. The latter today is closer to the Tata Group, having interests in steel, auto, information technology, power, jewelry, retail, beverages, chemicals, telecom, airlines, hotels, home appliances and aerospace and defence, among other things.
The bulk of Indian corporate houses are, however, focused and big in not more than 3-4 industries. Take Mahindra (auto, IT and finance), JSW (steel, power and cement), Vedanta (non-ferrous metals, iron ore and steel), Bharti (telecom and insurance), Bajaj (auto, finance and insurance), TVS (two-wheelers and auto components), Hero (two-wheelers), Murugappa (fertilisers, finance, sugar and engineering materials) or Infosys, HCL Technologies and Wipro (IT) and Sun Pharma, Aurobindo Pharma, Dr Reddy’s Labs, Cipla and Lupin (pharmaceuticals). Even the much-diversified Aditya Birla Group has exited fertilisers, petroleum refining and palm oil, and almost done so in telecom. Its turnover now comes mostly from a few key businesses: Aluminium, cement, copper, financial services, viscose, branded apparel, caustic soda and carbon black.
The Adani case is interesting, both for the sheer breadth of industries it operates in and how fast this group — unlike the venerable “salt-to-software” Tata conglomerate — has grown. From setting up the Mundra Port at Gujarat that commenced operations in October 1998, to becoming the world’s third richest man, Gautam Adani’s rise is more spectacular than even that of Dhirubhai Ambani. The latter began with ‘Vimal’ in the late 1960s and, by 1990, had turned Reliance into India’s third biggest house after Tata and Birla. But Reliance, as already noted, isn’t as diversified as Adani.
The only parallel one can draw for Adani is with Ramkrishna Dalmia. This near-forgotten industrialist’s maiden venture was a sugar mill at Bihta (Bihar) in 1933. By the decade-end, he had taken over the Bharat Insurance Company and established five cement factories to take on the monopoly ACC combine, besides a paper and chemical plant. This was followed by forays into banking (Bharat Bank), coal mining, vanaspati and biscuit-making, and purchases of the Dehri-Rohtas Light Railway, three Andrew Yule jute mills and the motor vehicles firm Allen Berry from their British managing agencies.
The real big-ticket acquisitions — of Bennett, Coleman (publisher of The Times of India), Govan Brothers (owner of India’s second largest aviation concern after Tata Airlines, the soda ash producer DCW and six other companies), Punjab National Bank, Lahore Electric Supply Company, the Sir Shapurji Broacha and Madhowji Dharamsi textile mills, and Delhi’s Edward Keventer Dairy — happened after World War II. At the time of Independence, Dalmia was bigger than everybody, save Tata and Birla.
There are four possible underlying drivers of such horizontal diversification. The first is the running out of growth possibilities in existing businesses that are cash-generating. The second is leverage or the ability to mobilise external capital, both debt and equity, on the strength of not just a firm’s balance sheet, but also the promoter’s reputation.
A third driver is the political connections enjoyed by certain groups. In the pre-reform era, these enabled a favoured few to bag public contracts, access scarce bank credit and foreign exchange, corner licences and start one industry after another behind high tariff walls. “Crony capitalism” has survived liberalisation, especially in areas where there’s still scope for executive discretion.
Conglomerate diversification in the thirties and forties, however, had little to do with the licence raj or favourable government treatment. Here, it was a fourth driver — “animal spirits” — that spurred the likes of Dalmia (even the Birlas, Singhanias and Bangurs) to invest in multiple unconnected industries. They were also encouraged by the profits made during the war and the overall environment before Independence, which led many old expatriate agency houses to pack up and sell out. Lax regulation — whether on insider trading or use of banks and insurance companies as captive fund pools by promoters — gave added impetus to these animal spirits.
Times have, of course, changed since then. The regulatory architecture has improved; so has scrutiny by independent analysts and rating agencies. Concerns about overleveraging, voiced even in Adani’s case (https://bit.ly/3AwX1Xj), have made reckless diversification somewhat more difficult.
Management gurus in the West have generally frowned upon diversified business groups — incidentally dominant even in Japan (the so-called keiretsu that include Mitsui, Mitsubishi, Fuyo and Toyota) and Korea (the chaebol: Samsung, Hyundai, LG, SK and Lotte). But these largely family-run conglomerates continue to thrive.
The horizontal control model, even if back, cannot be like during the time of Dalmia and others. Every enterprise would need a reason for being, and sufficient promoter equity infusion, to justify funding from outside. The ultimate restraining force is, perhaps, the share prices of group companies. While keeping these high is central to raising finance, over-borrowing has its own price and inevitable moment of reckoning.