Dial D for diversification

Check out the speed. After charting out a high-octane growth curve, India Inc is changing gears and getting into a diversification mode, spotting the booming business domains. In fact, in an aggressive hunt for growth areas, many Indian companies of various sizes and scales have made a serious attempt to join the bandwagon and branch out to new businesses.

The hot and happening sectors are a few in numbers. Backed by encouraging government policies and strong future outlook, sectors such as telecom, power, roads, financial services, retail and education have taken a lead in India's new chapter on diversification. Already, the companies with sound track records in raising capital both from equity and debt markets, have spotted those buzzing sectors which in turn may help their top-line to grow on a sustained basis at least for a few more years.

The realty players' foray into the infrastructure space is a classic example of the new twist to the diversification story. None of the companies such as Unitech, Omaxe and Parsvnath, which have recently unveiled ambitious plans to enter the telecom, road and other infrastructure space, were big names in corporate India until recently. Another realty major Ansal API has stated its ambitions to explore in education sector.

Says Sanjay Chandra, MD, Unitech, "The potential in India's economy is phenomenal. Every sector is seeing double digit growth and especially the infrastructure sector is booming. It is expected to be on a high for a few decades. It is, therefore, obvious for established industry players to diversify into such sectors."

In fact, new players of corporate India are moving towards sectors with a better future outlook. As the defence sector is expected to place orders worth $120 billion in the next 10 to 15 years, several bigwigs such as L&T, M&M, Ashok Leyland, Bharat Forge and Godrej are making a serious bid to receive a fair portion of the pie.

Similarly, big boys of India Inc — RIL, Bharti, and Aditya Birla Group— have entered into retail space which is expected to grow at 35% a year. Whereas pharma company Ranbaxy entered into the business of financial services, Indiabulls which began as a financial services company, made a foray into the booming realty sector.

Prior to the liberalisation process of 1991, diversification was largely limited to big players, as they could operate in multiple segments. The recent trend has shown that players with various sizes have diversified, thanks to their availability of raising requisite fund.

Frank Hancock, MD, corporate finance, ABN AMRO Asia, argues that diversification can make a big difference to the top-line of a company. "The rapid growth in a sector can ensure good returns which were previously not exploited. It can be effective in terms of balancing the risk of a downturn in a particular sector," he says.

PricewaterhouseCooper's executive director and leader in advisory services in India Ashwani Puri argues that most companies diversify not because of risk mitigation or for pure hedging, but for seizing business opportunities in emerging sectors. "The boom areas today include knowledge industries, telecom and related services, infrastructure, financial services etc. Most players diversify not because of risk mitigation, but for seizing new business opportunities," says Puri.

Anil Kumar, founder and managing director of Virtus Global Partners, a US-based investment banking firm, says that diversification strategies are being used by Indian firms to expand their operations by adding markets, products, services, or stages of production to the existing business.