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This article is more than 1 month old.

Bottomline: Big business is betting on the future

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The sands are shifting as the biggest in India Inc takes berths in future businesses. And here lies the real opportunity.

Bottomline: Big business is betting on the future
Tata Group companies are getting into new-age businesses. That is what Tata Sons' Director Bhaskar Bhat told CNBC-TV18 in an exclusive conversation. While the statement itself doesn't seem like much, read a little deeper into it and you start to get the true import. Tatas are betting big on the businesses of the future. And the recent $9 billion valuations accorded with a $1 billion infusion into Tata Motors' electric vehicles arm, is getting people to sit up and take notice.
There has been a gradual shift underway at two of India's biggest business houses — Reliance and Tata. Both these conglomerates are leading the shift away from traditional capital-heavy businesses to high-margin, capital-light emerging businesses, with investments in technology and science. Both realize, that the future belongs to the innovators, to the visionaries, to those willing to venture into virgin territories, to those willing to take well-calculated risks. And they are both pulling out all stops to realize their goals swiftly.
A new surge of energy
Reliance's recent acquisitions of REC (solar gear) and a big slice of Sterling & Wilson (solar EPC), besides the agreement with Stiesdal (for hydrogen electrolyser) and earlier investment in Ambri (grid-level storage), have caught people by surprise with the speed of the moves. Suddenly, what was seen to be a plan on paper seems to be springing to life. And this is sending analysts back to the drawing board to rework their math on valuation.
Similarly, Tata Motors' EV plans seen as only a promising future business, with little immediate significance has grabbed attention with the big investment in the business by TPG Rise Climate and ADQ. This business now seems to have acquired tangible value.
These are both important events to mark a push forward in the new age journeys of these mega-corporations, but they capture only a small slice of the big shift underway.
The big value shift
Twenty years ago, Tata was more about wheels on the ground and steel out of mills, and Reliance about oil and chemicals. Not anymore. Today, information technology, communications, consumer brands and green businesses account for a bulk of the business. Similarly, for Reliance, there are digital and communications and omnichannel retail that are big new businesses accounting for a significant share of its value.
If we use the recent fundraise by Reliance for Jio Platforms and its retail business as a basis for valuation, we would have the two together accounting for about Rs 7-8 lakh crore of market capitalization (ex-minority interest). Now, if you assume the proposed Rs 75,000 crore capex in new energy over three years yields a higher revenue per rupee invested than its traditional businesses, say 2-3x, we could end up with potential revenue of about Rs 2.25 lakh crore in about 4-5 years. If we assume a reasonable “new age business” valuation (not start-up valuation) of about 2x sales, we could end up with a present value of about Rs 3 lakh crore (discounted at 10%). That would imply that all other businesses, including the O2C (oil to chemicals), are valued at about Rs 6 lakh crore, which is just about 35% of the total value.
For Tatas too, the bulk of the value of listed entities are accounted for by technology and new age-focused businesses—TCS, Tata Elxsi, Tata Power, Tata Chemicals, Tata Communications, and Nelco—that account for about 66 percent of the total market capitalization of group companies.
The underlying transormation
The significant shift in value hasn't happened overnight, but it is becoming more visible now. For Tata Motors, just the recent EV business valuation implies an over 25 percent contribution to market its capitalization of Rs 1.65 lakh crore. But looking beyond the numbers, the businesses too are evolving. Tata Chemicals, for instance, is seeing significant growth in its soda ash business on the back of demand for solar panels, replacement of plastic containers, and lithium extraction. It is also leveraging its chemistry strength to develop patented nutrition products and high-grade silica. And that’s not it, after venturing into recycling of lithium ion batteries, it is now set to produce lithium-ion cells.
Even Tata Power has evolved from a power generator to an asset-light distributor of power and a significant players in renewables. Today, revenues from its distribution and renewables business at Rs 22,000 crore exceeds the near Rs 13,000 crore it earns from power generation. In fact renewables, rooftop solar and EV charging infrastructure businesses clock revenues of over Rs 6000 crore and generate profits before interest and tax in excess of Rs 1,500 crore. This change in revenue shares is likely to only accelerate with India’s push towards renewables.
There's also lots happening in the Tata group outside of the listed entities. Tata Digital for instance has picked up stakes in BigBasket, 1MG and Curefit in its journey to "build digital businesses that will address the needs of Indian consumers as well as businesses". Reliance too has been on the prowl, picking up several entities, like Netmeds (healthtech) and Embibe (edutech), in its endeavor to offer a complete suite of services. In fact, it is going beyond the basic building blocks to develop "expertise in deep analytics, big data analytics, deep learning algorithms, AR/VR technologies, AI-based education solutions, healthcare, chatbots, speech and language processing, supercomputing, and vision-oriented fleet management, among others". Besides, it is also working in areas like life sciences that are not much in focus.
A lot of such initiatives that are not closely tracked or reported, could well be future value unlock opportunities.
A future promise and cash
At a time when several unicorns are tapping the market to raise funds at seemingly stratospheric valuations, it is important to note that several of the businesses these start-up heroes are involved in are also being pursued by the big conglomerates, through their various arms. It is important to note here that the unicorns enjoy high brand recall, but most of these businesses are still burning cash. In contrast, the businesses of the two big stables offer a promise of growth, along with the comfort of strong cash flow generation.
For instance, 6 of the Tata companies focused on new-age businesses (mentioned above) generated operating cash flows of about Rs 53,000 crore last fiscal, implying an operating cash flow to a combined market cap yield of about 3.5 percent. And if you remove TCS from the picture, the yield more than doubles. In a similar vein, Reliance posted a cash profit of about Rs 22,000 crore last quarter. On an annualized basis, this implies a cash profit to market capitalization yield of over 5 percent.
Given how the equation sets up—a start-up promise versus a promise and cash flows—I would be inclined to bet on growth with cash.
Disclosure: Network18, the parent company of CNBCTV18.com, is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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