Tuesday, February 8, 2011

The Top Unlisted



It's 145 years old and is the biggest agribusiness firm in the US. The Minnesota-headquartered Cargill Inc has sales of $107 billion, a presence in 66 countries and—wait for this—is not listed on any stock exchange in the world. The Cargill-MacMillan families own 85% of the company—the employees hold the rest. The family has a presence on the board but the company is managed by professionals. “The leaders of Cargill are all employees, including Chairman Greg Page,” says Cargill India Chairman Siraj A Chaudhry. The bulk of the conglomerate’s growth has come from re-investment of its earnings, including those of the primary shareholders. “We have to earn our growth,” says Chaudhry. And yes, they have. Had Cargill listed, it would rank among the top 10 in the Fortune 500 global list. Instead, it’s a rarer-than-rare case of a larger corporation staying away from the glory of the bourse, the place where wealth multiplies and is acknowledged.

"Size [growth]and listing go hand-in-hand, except for government companies, where capital is not a constraint."—Rajeev Gupta, MD, Carlyle India
Unfortunately, at a time when foreign funds are ready to pump in billions into the Indian capital market, several Indian companies are choosing the same path. Many of the most profitable companies in India remain in the private domain and, contrary to intuitive logic, they aren’t all family businesses. Take a peek at who’s missing from the stock exchange rosters: Star India, the leading television network; Bennett, Coleman (BCCL), the largest print media house; Bharat Sanchar Nigam (BSNL) and Vodafone Essar, the largest telecom companies; Life Insurance Corporation and General Insurance Corporation, the biggest insurer and reinsurer in India; Citibank, the largest foreign bank; and top car-makers like Hyundai, General Motors, Ford and Mercedes. That’s just a sample: the list runs into thousands. But just how profitable are these companies? And how well are they run compared to their listed peers who are constantly under the scanner?
In this special issue, Outlook Business offers you a glimpse into several unlisted companies. Many of these aren’t just large and well-known; they’re also good at what they do and make a lot of money, making them candidates of choice for potential investors. (There are also many firms that you and I think are great companies, but their financial performance is far from impressive.) Bring just a handful of them on the bourses and see the marketcap of the country shoot up by more than O2.5 lakh crore (See: page 28, What If They Were Listed?). So why don’t they list?

Perhaps the more appropriate question is, why should they list? Is there a case for these companies to go public at all? Is it a favourable proposition for owners to list their companies?

For older firms, the markets are the go-to place for funds when banks hesitate to lend for “risky” projects.
Why Go Public?
In a word, money. The foremost reason for tapping public markets for any company is to raise capital. So while PE firms have poured in $38 billion since January 2004 into private Indian companies, in keeping with that business model, much of the listing that happened in the past few years has been to help them exit their investments. According to data from Venture Intelligence, since January 2007, there have been 59 PE-backed IPOs, between them raising $5.5 billion. This includes companies from areas such as technology (Genpact, Firstsource); engineering and construction (IRB Infrastructure, Ramki Infrastructure, IL&FS Transportation Network); manufacturing and energy (Titagarh Wagons, Adani Power, Orient Green Power); and financial services (Motilal Oswal, Edelweiss and now (in)famous SKS Microfinance). Says Arun Natarajan, founder of this PE research firm, “Not every company can go for an IPO within four or five years [of PE taking a stake]. The fact that 59 companies went public reinforces to international investors that India is a robust growth story.”
This is also why older companies list: to raise capital for growth or boost their brand presence—like TCS and DLF. For them, the markets are also the go-to place for funds when banks are reluctant to lend for “risky” projects. BCCL, for instance, keeps its cash-cow print media business private, but tapped the markets for its cash-burning radio business, Entertainment Network. Of course, those in a thriving business may use their internal reserves for such projects and avoid the markets. Indian subsidiaries of MNCs are good examples: even if domestic operations aren’t profitable, the parents are usually generous with handouts.

Marrying business decisions with shareholder expectations is a constant challenge for listed firms.
But funding isn’t the only criterion for listing. Avinash Gupta, National Leader for Deloitte’s financial advisory practice, believes that only companies that can deliver returns to shareholders should list. Of course, most owners believe in their company’s ability to churn out decent returns and will be up in arms at being considered value destroyers. So, irrespective of whether they can make money for shareholders, Gupta has a five-point tick-box on why a company goes for a public offer: to raise capital; to provide exit to investors; to create liquidity for employee stock options (ESOPs); requires currency for an acquisition; and/ or wants the prestige associated with being listed on a big stock exchange. Saurabh Mukherjea, Director, Institutional Equities, Ambit Capital, echoes the same view. “The biggest benefit of listing is visibility. It provides credibility, which makes it easier to get clients, finance as well as talent.”
The IT experience bears out that theory. The current giants, including bellwether Infosys and Wipro, listed to create liquidity for ESOPs and build a robust brand name to attract global clients. The strategy paid off. “Once you are listed on the New York Stock Exchange or Nasdaq, investor and client interest goes up manifold as corporate governance is assured,” adds Deloitte’s Gupta. The ESOPs have helped attract and retain the best talent while the transparency that comes with being on the bourses helped bag international clients. The same is true of DLF, India Infoline and several other companies.
The Flip Side
Listing has its challenges too. Atul Phadnis, CEO, What’s On India, points out that unlisted companies such as Star India and Multi Screen Media (better known as Sony) aren’t accountable for their spends and so have the freedom to splurge on content, which could help raise ratings and bring in advertising revenues. Shows like Kaun Banega Crorepati and Bigg Boss cost these channels O1.5 to 2 crore an episode. In contrast, he says, “A listed company such as Zee, which is answerable to investors, will never spend on such expensive content. It has to focus on profitability or else it will lose investor confidence.”

A listed company such as Zee will never spend on exorbitant content unlike other private channels.—Atul Phadnis, CEO, What’s On India
For its part, the Zee group is the most profitable listed media company in India—it earned a net profit of O634 crore on a topline of O2,200 crore last fiscal. Atul Das, EVP, Corporate Strategy, Zee Group, says that the biggest advantage of being listed is the focus on financial discipline. “We were among the few media companies that actually did well during the downturn. We realised that advertising revenues would drop due to the slowdown. Therefore, we cut down on original programming as well as production costs by almost 15%. As a result, we had good overall margins,” he adds.
Unfortunately, Zee is the exception than the rule: media companies have a miserable financial track record. Consider Television Eighteen: in FY09-10, it posted sales of O520 crore and a net loss of O117 crore. NDTV is worse off: on revenues of O529 crore, it made an operating loss of O163 crore. In FY09, NDTV made an operating loss of O450 crore on sales of O472 crore. Media’s more flamboyant sibling, the entertainment industry, also suffers from the same ills. “Markets don’t like businesses where earnings predictability is not very high. In the movie business, the hit and miss nature of content is a concern for market investors,” says Salil Pitale, Executive Director, Investment Banking, Enam Securities.
Also, businesses with long gestation periods aren’t suitable for public markets: investors seek instant gratification; to provide that, business owners often give in to short-term temptations rather than focusing on longer-term objectives. Marrying business decisions with shareholder expectations is a constant challenge. In private companies, that isn’t an issue. “The question of corporate governance does not arise in an unlisted firm,” adds Rajeev Gupta, MD, Carlyle India. He believes being unlisted is a natural barrier to growth: “To grow, companies need capital. Size and listing go hand in hand, except for government companies, where capital is not a constraint.”
Problems Of State
Government entities are a different ballgame altogether. The decision to list or not to list isn’t in their hands—divesture of stake is decided by Parliament. Now that it has decided to sell minority stakes in public sector undertakings, the bourses will see more participation from this sector, but it need not necessarily be the selection it wants listed.

Most MNCs listed on Indian bourses have established parallel private companies that do new business.
Consider Hindustan Aeronautics (HAL), the country’s largest aerospace firm, for instance. The O11,810-crore government company is aiming for a $4 billion topline by 2015—which shouldn’t be difficult since its order book for the next six years is worth O80,000 crore. But there are no plans to share this wealth with investors, according to Ashok Nayak, Chairman, HAL. All HAL’s projects are government-funded or to meet requirements of civil and defence aerospace manufacturers. “Our vision is to become a global player in the aerospace industry. Getting listed is not a priority even though we follow all the parameters of a listed company,” he says.
It’s a different story with Airports Authority of India (AAI), the largest airport operator in the country and also a PSU. Its Chairman V P Agarwal believes listing will bring more transparency and reduce the cost of operations; and that is the key to AAI’s expansion plans. The hitch? AAI is governed by an Act of Parliament and any corporatisation plan requires an amendment of the act. That process has been inited, but nobody’s willing to set a deadline for AAI’s listing. In 2010, KPMG valued AAI at O20,000 crore, a figure the PSU’s brass rejected. “Given our assets and our technical capabilities, we feel we should be valued at around O1 lakh crore,” says Agarwal.
The MNC Story
If PSUs have no say over their listing status, surely multinationals must be at the other end of the spectrum? Not true—a government diktat in 1978 made listing mandatory for all multinationals that wished to be present in India. That law has since been repealed, and many companies did delist, at times against the wishes of their minority investors. Especially in the past few years, there have been several instances of MNCs delisting—Carrier Aircon, Kodak India, Otis Elevator, Philips India and Reckitt Benckiser are few examples. Waiting in the wings are Oracle and Goodyear, which have been trying to delist with little success. Those that remain—like Procter & Gamble, Pfizer and Monsanto—have established parallel private companies that do new business. The listed arm of P&G, for example, has only Vicks and Whisper under its fold; all its other businesses are under its unlisted peer.

"Listing gives visibility and provides credibility, which makes it easier to get clients, finance and talent."—Saurabh Mukherjea, Director, Institutional Equities, Ambit Capital
The benefits of being unlisted far outweigh any gains from listing. Foremost, MNCs leverage their global operations for investment and expansion in markets like India, according to Rakesh Batra, Partner and National Leader-Automotive Practice, Ernst & Young. “We don’t find raising money an issue. Even globally we don’t find raising money an issue,” says Mercedes-Benz India’s MD and CEO Wilfred Aulbur. Similarly, Honda Motorcycles & Scooter India (HMSI), a 100% subsidiary of Japan’s Honda Motors, gets partial funding from its parent. “We can also utilise HMSI’ internal accruals and, if there is any further need, we will use borrowings,” says HMSI Sales and Marketing Head NK Rattan.
In fact, with the exception of Standard Chartered Bank, which listed its shares (IDRs) for greater visibility in India, global companies have largely stayed away from Indian bourses. Says Samaresh Parida, Director-strategy at Vodafone Essar, “The decision to go to public is for the shareholders to make.” For most multinationals not listed in India, a major deterrent in going for an IPO is compliance with regulatory procedures, says Jehil Thakkar, partner, KPMG. “Going public means complying with various Indian laws, which require them to ring-fence their Indian operations from those of their parents. This means restrictions will apply on several fronts such as taxation, repatriation of proceeds, etc.” For MNCs, the decision to list or not is linked to their desire to make the most of their presence in India, rather than wanting to share the gains with other investors. Regulation mandates a minimum 25% threshold level of public holding for all listed companies, which is not desirable for them. Adds Ambit Capital's Mukherjea, “Regulatory direction is contrary to the aspirations of MNCs. India is one of the key global opportunities for them. They want to invest more and raise their stake, rather than lower it to 75%.” That apart, which company wants to answer questions raised by minority shareholders?
What Now?
No doubt, for capital markets to grow, large, credible companies need to list. And right now, there isn’t much choice available for investors on Dalal Street. At the same time, there’s no overwhelming reason for business owners to come to the bourses—unless they need the money or want to make it to the wealth toppers’ lists.
For the businesses themselves, being unlisted is neither an advantage nor a disadvantage. It’s just a way of doing business—quietly and swiftly. What really matters is the role of promoters—larger companies, where promoters have stayed away from active management, are best placed to navigate the economic landscape, irrespective of their being listed or unlisted. "With the current, fast pace of economic growth and integration with the global economy, it will be difficult to provide greater expertise as well as continued access to capital without professional, incentivised management, including through equity participation," says Mukherjea. That may require listing. Or, employees willing, the Cargill way may yet work in India

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