Nobody makes the cut

11 good reasons why

Nobody makes the cut
At the end of every December since Financial Chronicle was born in 2008, the FC Businessman of the Year has been our way of recognising that one person who towered above the rest in the preceding 12 months.

No third-party help, guidance or metrics have been relied upon during this truly independent exercise. Just pure editorial judgement is all we have used, year after year.

In 2008, Malvinder Singh took our salute for exiting Ranbaxy Laboratories for the right price at the right time. The following year saw Ratan Tata standing up to pressure tactics of the British government during the Jaguar-Land Rover debt crisis and the mob at Singur. He was FC Businessman of the Year 2009.

However, for the second year running, we have faced a problem. When editors sat together on New Year’s Eve in 2010, there was hardly anybody who did anything worthwhile to come out as the winner that year.

But at the end, Mukesh Ambani was chosen not because of the world’s costliest private home that he built that year but because he finally emerged out of his father’s shadow eight years after Dhirubhai passed away in July 2002.

Mukesh, in a rare display of magnanimity, publicly forgave his younger brother Anil and also signed an agreement cancelling all the non-compete arrangements between him and his brother Anil’s enterprise, ending a five-year long corporate battle and eliminating any room for future disputes.

The selection of the FC Businessman of the Year 2011 has been even more difficult. The year began with scams and ended with the citizen ombudsman being nipped in the bud.

No businessman did anything miraculous to end the paralytic state of the Indian economy in 2011.

Sunil Bharti Mittal hardly showed the leadership to solve the problems that Bharti Airtel faced at home.

Post NR Narayana Murthy’s retirement, Infosys failed to provide the one leader who could lead the most-loved technology company.

Tata Sons and Ratan Tata disappointed, not by selecting young Cyrus Mistry, but choosing clan over professionals. Under Arun Sawhney, Ranbaxy finally launched generic Lipitor but the price he paid to buy peace with the US was a tad too high.

Vijay Mallya’s flight of fancy nosedived and Kingfisher Airlines’ run appeared to be coming to an end.

Mukesh Ambani did not have an answer to KG Basin’s problems. And there are five more who could have but did not. To know more, read full story below on the 11 reasons why nobody made the cut.

As if in support our decision this year, a study by FC Research Bureau finds that there is no clear leader among India’s 100 large companies: the majority failed to exhibit strong growth in revenues and profits in the 12 months between October last year and September this year.

An accompanying article shows how no businessman worth their share delivered wealth to his/her shareholders in 2011. Most blue-chip stocks in Nifty failed to deliver wealth to investors in an Indian market that was the worst performer in Asia. Even the US market did better…


Wrong number at home and abroad

In June 2010 when Sunil Mittal gave the go-ahead to Bharti Airtel for snapping up Zain’s operations in 15 countries, his company overnight became one of the five largest mobile operators in the world. Mittal was instantly feted as a global telecom czar. Raising $9 billion debt for Zain was a breeze. But he clearly did not anticipate the turn of events in the year to come.

The year 2011 wasn’t his year, to say the least. The first few months were uneventful. But as the year rolled on, regulatory headwinds became too strong and in the final months the negative impact of the rupee depreciation on foreign loans began to be felt in the Bharti’s stock price. There were other distractions. In August, a board proposal to hike Mittal’s salary to Rs 70 crore quickly drew a mountain of flak and the company had to issue an equally-prompt statement that his salary would not increase during the year from the Rs 27.5 crore package he had drawn the previous year.

As the year comes to a close, neither Bharti nor Mittal seems to have answers to operational problems, including the elusive 3G uptake. Bharti has paid over Rs 12,000 crore for costly 3G spectrum. A higher interest outgo and 3G costs have shown up in the financials just about every recent quarter. Bharti went to town back- patting itself when it reached the 50-million subscriber mark in Africa. But at home its mobile net additions have now dropped under a million for two months running. This is galling, especially when smaller companies like Idea Cellular and Uninor have managed to add close to two million subscribers per month without much difficulty.

Its 174 million subscriber base in India provides a solid base to Bharti, but growth in those numbers is turning out to be an issue. In fact, the second largest GSM operator, Vodafone, with which Bharti has made common cause on nagging 3G issues that the government has raked up, appears to have grown faster. Between June 2010 and November this year Vodafone expanded its subscriber base by 35 per cent, when Bharti’s base growth was just 28 per cent. With four companies in India with 100 million plus subscribers each, Bharti, as industry leader, needs to pull up its socks in the New Year. The excessive leverage needed to make aggressive 3G bids and the Zain acquisition have considerably weakened the once rock solid balance sheet. The department of telecom’s decision on 3G intra-circle roaming and the telecom commission’s acceptance of 8 per cent adjusted gross revenue share from telecom players are crushing defeats. The New Year could see more of the same if Mittal does not get his act together.


The Narayana Murthy vacuum

Infosys chairman and chief mentor NR Narayana Murthy turned 65 in August and retired from the company he co-founded with six others in 1981. Sometime in 2001, that is 10 years before he stepped down, Infosys had built the Infosys Leadership Institute with the tacit intent of making it a training ground for future leaders. Since 2001, when the company had 3,000-plus employees, it went on to rapidly add to the employee numbers. So a decade later, one would have imagined an insider would emerge to take over the reins from Narayana Murthy. But that was not to be. Everybody – insider or outsider — was surprised when veteran banker and Narayana Murthy’s close friend KV Kamath was selected for the coveted post of chairman in April. Not one in the 130,000 employee strong Infosys could throw up a leader who could fit the bill. All these years Infosys has always been about just one man — Narayana Murthy. Others were apparently just cogs in the wheel, but good cogs.

In hindsight, one wonders if this push factor rather than the pull factor of the UIDAI is what made Nandan Nilekani decide to move out of Infosys. Like its founders who came from a middle-class background but went on to become the poster boys of India’s 1991 reforms-backed industry, Kamath who ultimately became chairman, and Kris Gopalakrishnan, who became co-chairman, are very middle-class, not given to ruffling too many feathers.

Today Infosys has a chief executive officer and managing director in SD Shibulal who lacks the panache of a Narayana Murthy or the cool of a Kris. Uncomfortable questions still come up about Shibulal quitting Infosys and joining Sun Microsystems in 1991 and staying there for five years before returning and eventually becoming CEO & MD in August this year. It still riles some insiders. Kris too got elevated as co-chairman, apparently in reward of his success in almost doubling Infosys revenues in a period made most difficult by the US economic meltdown. But the fact is the Infosys nomination committee split the chairman’s role into two, as it did not see one clear leader emerging.

Five months after Shibulal’s appointment as the operational head, there is a growing buzz about Infosys slowly frittering away its industry benchmark position.

TCS was always bigger in revenues and market capitalisation, but Infosys was what people wanted to hear about. Now, when both TCS and Infosys have relatively new heads, a comparison always crops up in corporate talk. On the one hand, TCS views are always voiced by one man, the head N Chandrasekaran, who sounds confident about business prospects. On the other, different leaders in Infosys speak in many voices and are increasingly sounding cautious, at times bordering on being apprehensive. It does not help that the company has not been able to find a replacement for TV Mohandas Pai, Infosys’ famed HR head and media face, who so effectively voiced the company’s views.

The growing threat of the Cognizant juggernaut cannot be wished away anymore. After eclipsing Wipro in quarterly revenues from IT services this year, Cognizant is now just about $145 million behind Infosys. That’s not the kind of industry poster boy image one thought Infosys would exude in 2011.


Daiichi’s faulty


Reams have been written about Daiichi Sankyo’s Indian bet, Ranbaxy, that has gone sour. The 2008 acquisition still hurts. Ask Daiichi chairman Takashi Shoda. Annus horribilis truly 2011 was for Ranbaxy and Daiichi. Ranbaxy’s much-hyped generic Lipitor launch and the recent settlement with the US authorities mean that cash from American consumers will go to the American government and not to Daiichi’s balance sheet, a contingency the Japanese company had not foreseen. Instead, some money may flow in the other direction, as Ranbaxy has had to make a $500 million provision for potential liabilities arising out of the legal action by the US authorities.

On the brighter side, the launch of Ranbaxy’s version of the cholesterol drug Lipitor in the US during a six-month exclusivity period and later sales will bring in $400-500 million in profits, going by the most optimistic estimates. In 2008, everybody agreed that Ranbaxy could well capture 40-50 per cent of the generic Lipitor market. But latest data indicate Ranbaxy will be lucky to keep its 30 per cent market share of the world’s largest-selling drug. Moreover, the $500 million Ranbaxy provision will have to be reflected in Daiichi’s books. Accordingly, Daiichi has lowered profit guidance for the year ending March 2012 by almost half. To add insult to injury, it has had to cut directors’ pay for six months.

The Ranbaxy management would like us to believe that all is sorted out, but the consent decree signed with the US authorities gives no timeline for resolving the issues at its Paonta Sahib and Dewas factories. The history of similar decrees that other drug companies have with the US is that the resolution process can take a long time, anywhere between five and eight years.

As with many companies, Ranbaxy too has been weighed down by the fluctuating currencies. Ill-advised bets on long-dated derivative transactions forged in earlier years remain dangerously outstanding. Loans in foreign currencies too are taking their toll and 2011 was a year Ranbaxy would like to forget as a bad dream. Clearly, delivery did not match promise.

Tata Sons

Importance of clan, not professionals

From the talk in the run-up to the selection of a successor, one would have thought the best professional in the global corporate world would step into chairman Ratan Tata’s shoes. Instead, the board of Tata Sons on November 23 chose Cyrus P Mistry as chairman-designate. There was supposed to be a Chinese wall between the selection committee and the holder of the single largest stake (18.4 per cent), Pallonji Shapoorji Mistry, Cyrus’s father.

Appointed deputy chairman of Tata Sons, the promoter firm behind $83 billion Tata group, Cyrus Mistry is supposed to learn the ropes and take over from Ratan Tata when he retires in December 2012. This raises a question: was it clan over professionalism? Truth be told, the selection committee needn’t have bothered to scour the world since ‘All in the family’ seems to have been the spirit in which the candidate was finally chosen. We as Indians should celebrate that the global search for the next Tata chairman ended closer home. But should it have taken the selectors over a year to find a successor who had already been a director of Tata Sons since August 2006?

Mistry, in his last position as managing director of the Shapoorji Pallonji group, would have managed a dozen companies with combined revenue of less than $3 billion. He will now have to oversee the Tata group of over 100 operating companies in seven business sectors across all continents of the globe. He has just a year to ready himself to take over. Can anybody learn the ropes in a group of such magnitude in just 12 months?

Small wonder, the grapevine has it that Mistry’s selection had been meticulously scripted. This was destined to happen. And in all probability the scripting began as early as 2006 when Mistry was brought in as Tata Sons director. His age and name were good calling cards. No one knows for sure, but he may have been groomed as a deputy to Rata Tata all these years out of sight of anyone else. Without prejudging him, Cyrus may well prove to be a deserving successor. But was the charade of a global search for a truly global professional really necessary? After all, the search found only another Parsi to fill Ratan Tata’s large shoes.

Kingfisher Airlines

Bad times for king of good times

Some time ago Gopinath exited the civil aviation industry in a landmark deal that saw his Air Deccan sold to Vijay Mallya. It raised eyebrows: the man who lives life king size getting into the business of the cattle class? At that time doomsday advocates saw no sense in the acquisition, though hordes of Indians were flying on cheap tickets. Others saw it as a protective flank to Mallya’s full-service/ premium airline.

Events in 2011 proved Mallya’s gamble has not worked. Kingfisher itself got a debt-recast package in November last year with public sector banks backing it to the hilt. Nothing seems to have worked. Kingfisher reported a bigger net loss of Rs 469 crore in the last quarter. The year was so bad that the company decided to stop Kingfisher Red (low-fare segment bought over from Gopinath) and cut several unprofitable flights from of the residual Kingfisher in a desperate attempt to reduce losses. Still, Kingfisher’s wings remain clipped and a turnaround is not expected any time soon.

The company has never made a profit and has seen its market share shrink to the fifth place. Its image and business took a beating when in November it grounded numerous flights; pilots left in droves and airports and oil companies intermittently stopped extending credit. Even the taxman became nosy.

Mallya’s famed flamboyance is frayed as the company bleeds in a severe price war made worse by high operating and fuel costs. Kingfisher has only itself to blame. Mallya had tried to position the carrier as a major brand with flight punctuality, decent in-flight catering and entertainment and, above all, pretty airhostesses, going to the ridiculous length of widely publicising the fact that these ladies were chosen personally by Mallya himself.

It may not be time yet to write the epitaph of the airline but, given its shrinking operations, a premature death is a possibility, unless the carrier begins to increase revenue — and fast. Financial bailouts, either from banks or the government, are short-term solutions. It has been seen time and again that these do not work in the long run. Bad times seem to be visiting the king of good times.

SKS Microfinance

Petty banking ends belly up — almost

Vikram Akula’s SKS Microfinance is no more the company that had investors drooling in 2010 when it floated a Rs 1,600 crore share issue. When Akula finally exited the company in November, SKS was a mere shadow of what it was in the beginning. It began with giving small loans of Rs 2,000 to Rs 12,000 to poor women so that they could start and expand simple businesses and increase their incomes. But somewhere down the line, things went bad, as the company became target driven and used strong-arm tactics to recover loans. It began nobly as a social enterprise but was later seen by many to be a loan shark; and the decline began. In 2011 the stock of the company fell from around Rs 640 to Rs 93 — a whopping loss of 85 per cent to anyone who had invested in the SKS promise. Company officials blame the government of Andhra Pradesh, where it first ran into trouble over its questionable recovery methods. In the second quarter this year SKS net losses were Rs 385 crore, mainly because of bad assets and increased provisioning. Having the backing of NR Narayana Murthy or Vinod Khosla was not of no help.

Being the sort of lender SKS is, getting funding is key to SKS existence, and its reliance on debt from banks is still very heavy. Banks gave it money on a priority-sector basis. The company’s crisis in Andhra Pradesh led to a virtual shutdown of this funding window. Banks became wary, fearing rising defaults. So, when the company began talking about raising money from the stock market, no one was surprised. But the stock trading at over 6.5 times its adjusted net worth made SKS the most expensive financial services company in India to buy shares in.

Moreover, issues regarding the sustainability of the micro-finance business model refuse to go away. There is a draft micro-finance bill, which among other things, makes RBI the sole regulator for the sector. But that does not ensure repayments by beneficiaries, as the Andhra Pradesh experience proves. Mass wilful defaults can be engineered by any religious or political leader or organisation. Last heard, SKS was taking a hard and long look at businesses outside micro-finance, like home loans and insurance. The postscript to the SKS is amusing: some sacked employees are believed to be repeating their karma in the avatar of moneylenders themselves. The lesson learnt: making money out of the poor is not easy.

Reliance Industries

The KG Basin gas (balloon)

From around Rs 1,060 at the end of 2010, the stock of the country’s largest public enterprise, Reliance Industries, today stands at less than Rs 700. The year 2011 has been a long winter for Reliance. The index heavyweight has lost nearly 35 per cent of its value in 12 months. The cash rich company is no longer the investor’s darling.

In August, the unthinkable happened. State-run Coal India overtook Reliance for a short period as the largest market-cap company on the Indian stock market. In December Infosys challenged Reliance’s pre-eminence across key domestic indices. On the last trading day of the year, TCS beat Reliance as the country’s largest private sector company in terms of market capitalisation.

The problems Reliance faced in the beginning of the year still dog the company. The Krishna-Godavari basin, made famous by the D-6 block, where Reliance discovered the biggest natural gas reserves in India in 2002, remains problematic, as gas production from the D-6 block declined in 2010 and 2011. A silver lining was seen in Reliance’s telecom ambitions, but gas remains infinitely more important to the fortunes of the company — and by extension its shareholders. Its petrochemicals and chemicals business did well for most of the year. But despite upgrades during the year, exploration and production gave reasons to worry. It became clear that KG-D6 was a disappointment, with production continuing to decline. The absence of new wells going into production and the shutdown of two wells are two factors often cited as justification for the falling production.

The management has been extremely guarded in giving even incremental clarity on the future production profile of D6. British Petroleum (BP), which had earlier in the year bought 30 per cent in D6 and 22 other blocks of Reliance for $7.2 billion, is also in the lurch. Nothing seems to be going right and D6 output has fallen below 40 million standard cubic metres per day from over 60 million in March 2010.

Reliance has been at loggerheads with the government many a time before, and still appears to have not made peace with the directorate-general of hydrocarbons. What has come as a surprise to investors and the company itself is that gas production from KG basin has been declining by 7-8 per cent per quarter, when the normal rate of decline is 7-8 per cent per year. The Mukesh Ambani-controlled giant also faces a challenge of effectively deploying cash and equivalents estimated at over $13 billion. The investment thesis on Reliance Industries continues to remain stuck between inexpensive valuations and absence of positive triggers.


Younger Ambani’s year of discontent

In some circles Anil Ambani is considered a maverick. To be sure he is no Mukesh Ambani but has managed to build a formidable empire spread across infrastructure, financial services, telecom and media. Yet, this was not his year. He did not make much news other than negative, except perhaps at the fag end of the year when the much publicised meeting with his elder brother rekindled much hope — rather, speculation — of the two brothers coming together. The 2G scam caught up with him; his alleged covert investments abroad came to light and his debt problems mounted. With all this, the marathon runner-industrialist managed to paint himself into a corner.

All his listed companies have performed poorly on the stock market. The stock of Reliance Capital slid by 65 per cent during the year. His announcement at the annual general meeting in September that Reliance Capital would explore all possible opportunities to enter the banking sector failed to enthuse investors. His Reliance Communi­cations has lost 52 per cent value this year. In September the company had a gross debt of Rs 33,700 crore, indicating a gross debt/equity of 0.95.

De-leveraging could have improved matters, but he did not press that option. In the 2G scam three of his top executive were jailed. The 3G foray is facing problems and a competitive market as well as a tough regulator has made life difficult for the telecom firm.

Reliance Infrastructure went down by 60 per cent on the stock market. The infrastructure sector itself is continuing to face numerous problems. Among other group firms, Reliance Mediaworks, is down 69 per cent, Reliance Power is down 55 per cent. Some of his companies have often talked about unlocking of business value to generate free cash. But that has not picked up significant pace.


Realty giant builds a debt mountain

Debt has been a major problem for India's biggest real estate developer headed by billionaire Kushal Pal Singh. With a mountain of debt and a subdued pick-up of properties, building India has been difficult for DLF in 2011. The company did complete some asset sales such as DLF Hotels & Hospitality, two plots in Gurgaon, one IT park each in Noida and Pune. However, the high gross debt of over Rs 25,000 crore continues to weigh down the company as well as its stock. In the last quarter DLF witnessed the sharpest increase in net debt in six quarters.

As is evident from its financials, working capital pressures, postponement of non-core asset sales and a sharp rise in interest costs as well as advance tax and dividend payments hit the company hard. Investors have lost over a third of their money in DLF stock this year. The baby steps in debt reduction have done nothing to improve investor confidence. In fact, de-leveraging has been particularly a painful experience. Plus, the bigger steps in reducing debt like selling off Amanresorts and land in Lower Parel are yet to be completed. Experts’ stance on the company is negative because the current stressed operating scenario; they also believe that even if the company manages to achieve its non-core asset sale target of Rs 3,000 crore by March, it has little chance of bringing debt down by a like amount. The core business of real estate has faced severe headwinds, not entirely because credit has been difficult to come by. The downturn in the real estate market has meant that the number of land transactions has significantly gone down. DLF continues to have a pipeline of affordable housing for launch in the future. But regulatory changes under consideration, including a requirement of disclosure of project specifics, have only deepened apprehensions that the approval process will only get longer. This has reduced supply, possibly pushing up realty prices.

A deferment of buying decisions by prospective customers has also meant that DLF's aggressive target of selling 10-12 million sq ft of space this financial year may not be met, judging by the lacklustre half-year performance which saw only a little over 3 million sq ft sold and/or leased. This makes the closure of the Aman deal and a pick-up in new launches increasingly important to DLF in the New Year.


Kirana wins retail game

Tolaram is a happy man. His grocery in one corner of Delhi’s Govindpuri is safe. The government’s latest effort to allow foreign direct investment in multi-brand retail chains has come to naught. Kirana has once again beaten Wal-Mart at its own game. Though the commerce minister and the finance minister have promised to rejuvenate retail reforms next year (read: after the state elections), small stores are unlikely to beat a hasty retreat. International experience shows that the proliferation of mega markets have wiped out small retailers, leading to loss of livelihoods. While the jury is still out on whether foreign investment in retail has the economic benefits claimed by protagonists, Wal-Mart’s August 2007 move to establish a joint venture is still unfinished business.

Raj Jain, president of Wal-Mart India who oversees the American retailer’s joint venture with Bharti Enterprises for wholesale cash-and-carry and back-end supply chain management operations here, never fully believed that the FDI move would be an easy one. Till as recently as last month he said he would wait to see FDI on ground before commenting, that so, even after the Union cabinet surprised everyone with its FDI decision.

Nothing seems to convince the politicians who oppose FDI in retail — neither the logic of better prices to farmers nor the reasoning that consumers will pay less. Kirana owners are voters and political bosses heed them.

Wal-Mart, Tesco and Carrefour and other global retailers still wait in the wings for their elusive slots in India. They are not better placed today than anytime before. The $350 billion Indian retail market may have tremendous potential for both the kiranas and the organised chains, but those who make law in this country don’t see it that way. So long as economic decisions are not insulated from political expediency, kirana will remain king.

Warren Buffett

Indians ignore lessons

‘Give’ is a word mostly alien to Indian industrialists. But it is this word that the Oracle of Omaha, billionaire and philanthropist Warren Buffett, harped on during a three-day trip to India in March. He exhorted Indian businessmen to part with half their wealth in charity. The plan was to help open a new tap of wealth to fund charity in the rapidly developing Indian economy. But rather than new wealth pledges, Buffett’s plea gave new life to the old debate about Indians’ willingness to give to support the hundreds of millions below the poverty line. Unlike in the west, charity in India has always been a personal thing. Buffett was only offering a fresh rationale for large-scale philanthropy.

Two decades of economic boom has propelled India's industrialists and software moguls to the top table of the world’s rich and famous. Even before Buffett came, software czar Azim Premji in 2010 donated $2 billion for education and social projects. It is possible that Buffett was influenced by a study by the consultancy Bain & Co that said that India's billionaires were not as generous as their American counterparts. Data confirm that charity giving in India was just $7.5 billion in 2009, less than 1 per cent of the country’s GDP. In the US, such giving amounts to 2 per cent, but in absolute terms it is a gigantic $300 billion.

That’s only one side of the story. Indian charity goes very far back in time. Early in the 20th century the Tatas, Birlas and later other moguls have generously and regularly given to the needy. Though Buffett’s message did not have the result he wanted, Indian philanthropists continue to give. Buffet came with a message, and went back with bare pockets.


Businessmen almost never

Businessmen almost never really qualify. Newspapers and magazines give awards selectively to those big names which will raise the profile of the publication.

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