On January 3, ending months of speculation, one of India’s leading private sector companies, Reliance Industries, announced a major foray into the media and entertainment sector. Reliance has entered into a complex and multi-tiered deal that has the potential to eventually result in the firm having a significant stake in two of the leading media conglomerates in the country –the Network18 Group, which operates a host of television channels, print and new media businesses, and the Hyderabad-based Eenadu Group, which owns newspapers and pan-India vernacular channels.

Such a move by Reliance chairman and managing director Mukesh Ambani needs to be seen in the context of his telecom venture. In June 2010, a few hours after a small company called Infotel Broadband emerged as the only winner of a pan-India broadband wireless spectrum license, Ambani acquired a 95% stake in the firm. The company, renamed Reliance Infotel, has 4G licenses for all 22 telecom circles (contiguous regions) in the country and is expected to start rolling out its service by the end of this year. The Network18-Eenadu deal will give Reliance Infotel a huge boost by allowing it preferential access to the media groups’ content.

There are other pieces to Ambani’s strategy: Jehil Thakkar,executive director for media and entertainment at consulting firm KPMG told Business Standard that “the broadcasting industry is in for consolidation. This deal would trigger broadcasters building a national portfolio, backed by a strong network of regional channels. This [is] the beginning of many such deals to come.” He added: “For Ambani, given the 4G rollout expected soon, this could assist him to integrate the business further.”

More importantly, the recent move by Reliance — and similar expansions by Hindustan Unilever and youth-oriented Indian television network Channel [V] are reflective of a fresh chapter in a larger trend of diversification among India’s large conglomerates, observers say. But will the new crop of strategic growth deals succeed where past efforts have failed?

A few months ago, Channel [V], which is part of Rupert Murdoch-owned media company Star India, branched out into the offline food and beverage business with [V] Spot Café Bar, a restaurant in New Delhi. Research had shown that Channel [V]’s youth audience spends considerable time and money “hanging out” at eateries. Moreover, the youth numbers in the country are very attractive: Around 50% of India’s 1.2 billion people are 25 years of age or younger. This number is expected to increase to 55% by 2015. “We are a youth entertainment brand and want to reach out to every aspect patronized by the segment,” says Prem Kamath, executive vice president of Channel [V].

In a bid to position [V] Spot as the next hip hangout for youngsters, the restaurant features funky décor and youth-centric attractions, including a quirky iPad-based menu and a video booth. The channel plans to roll out five outlets in the next six months and around 40 over three years. It wants to leverage the cafes to drive interactive content for the channel, including auditions, events and shoots. “We want to extend the brand on the ground and place it where people can interact,” notes Kamath. This initiative comes at a time when Channel [V] is trying to cement the network’s dominance with its target audience. Channel [V] trailed Viacom-owned MTV and local music channel 9XM in viewers until three months ago, but is now at the top of the genre, according to weekly rating agency TAM Media. More importantly, with music becoming increasingly accessible via mobile phones, music channels are no longer a big priority for the youth. These channels now also have to compete with a host of other entertainment options.

When Hindustan Unilever launched its first Bru World Café last year at Juhu, the plush suburb in north Mumbai, it was not just another brand extension. With this move into the café market, the Indian arm of Anglo-Dutch consumer goods giant Unilever diversified into one of the most dynamic retail sectors in the country. Estimated to be over US$185 million, the market has also been attracting the likes of other global giants, including Starbucks and Dunkin’ Donuts. Like Channel [V], their target is India’s growing youth segment. Unilever’s earlier out-of-home sorties were Lipton and Bru kiosks that served as tea and coffee vending machines for institutions. The new Bru cafés, which also serve snacks and an assortment of in-house food products like Knorr soups, are a big leap beyond.

Shifting Gears

Diversification is not new to Indian companies. But today there is more thought and planning behind the moves. Before the Indian economy opened up in 1991, Indian firms diversified primarily based on the licenses that they were able to obtain from the government. But even in that protected environment, success was not assured. The Tatas, for instance, had to exit textiles, consumer goods and printing. The Nusli Wadia Group’s flagship firm, Bombay Dyeing, once the country’s largest maker of dimethyl terephthalate (a key ingredient in polyester), sold the loss-making business to competitor Reliance Industries. The Arvind Mafatlal Group sold off NOCIL, its chemicals business.

The post-liberalization era saw companies make a beeline for high growth sectors, including information technology, film production, retail, private equity, real estate and telecommunications. A 2007 boom period spawned a fresh wave of diversifications: Players including the Aditya Birla Group, Reliance Industries and Bharti entered retail. Others like engineering giant Larsen & Toubro, auto major Mahindra & Mahindra and forging heavyweight Bharat Forge pursued huge potential in the defense market. And real estate companies paid big money to secure telecom licenses, a sector which is currently embroiled in a corruption scandal. With ample financing on hand, moving cautiously was not a requirement.

The current diversification strategies are better planned, observers note: The deals are about hedging risks, expanding geographical reach, maximizing assets, reviving brands, and backward and forward integration. Some traces of the earlier herd mentality — where companies of all types entered the “hot” market of the moment — are still evident. But by and large, companies today are driven more by the need to make a difference to their revenues and profits, rather than just making a quick buck. “Now there are many more opportunities for companies to redeploy their assets to more productive use,” says Saikat Chaudhuri, a Wharton management professor. Devinder Chawla, partner-advisory services at consulting firm Ernst & Young, adds: “Today, a lot of the diversification is based on resources and vision. Companies want to de-risk from declining sectors and enter sunrise sectors like renewable energy and infrastructure with a long-term view.”

Sectors such as media, retail, financial services, health care, education and renewable energy continue to be the favorites. There is also a penchant for food, transportation, environment protection and environment-friendly ventures. Tata Realty and Infrastructure, for example, focuses on roads, logistics and special economic zone projects. The firm is now expanding into new areas like urban transport and airports. At the same time, the company is scaling up the real estate business by acquiring land and office properties and developing high street retail projects. Sanjay Ubale, managing director and chief executive of Tata Realty, has said that the company will invest around US$146 million in the assorted ventures and is targeting an order book of over US$6 billion by 2015.

With drug discovery being a long and often tedious process, and given cutthroat competition in the generics business, pharmaceutical companies are looking to other dynamic sectors. Dilip Shanghvi, chairman of Sun Pharmaceuticals, is setting up a 1,000 megawatt power plant with an outlay upwards of US$100 million. Hyderabad-based Dr. Reddy’s Laboratories is reportedly exploring potential investment in the hospitality business, while the Ajay Piramal Group has sold its formulations business to Abbott to diversify into a host of sectors including financial services.

Other firms on the diversification track include GAIL and auto major Mahindra & Mahindra who are eyeing investments in the energy sector; Sanjiv Goenka of RPG Enterprises who has moved into health care and Mumbai-based real estate company Hiranandani, which has forayed into energy and hotels.

Moving Up The Value Chain

Experts see Hindustan Unilever’s entrance into retail as a move to boost sales of the company’s coffee powder business and other food products. Roasted coffee bean prices are at an all-time high — around US$7 per kilogram, up 60% since last year. Over the years, stiff competition coupled with increasing raw material costs have put pressure on Unilever to maintain margins in its core businesses of food and beverages, personal care and oral care. Moreover, the company has been working hard to increase the revenue contribution of foods to its overall portfolio, which is only 19.4% compared to 50% for most Unilever companies globally.

“People in India resonate a lot with brands,” says Sidharth Punshi, managing director of investment banking at JPMorgan in India. “If you can tap the consumer, then you grow with him.” JPMorgan itself has diversified into corporate and retail banking. “The margins are higher as you go further up the value chain,” notes Ernst & Young’s Chawla. Shipping companies expending into the dredging business to enhance revenues are on a similar track. According to the Indian National Shipowners’ Association (INSA), there are over a dozen Indian dredging companies today compared to just three a decade ago. More are on the horizon: Mercator Lines, Jaisu Shipping and Shipping Corporation of India, which were earlier concentrated only on shipping, all are now set to start dredging operations.

Some companies are tapping new geographies to boost earnings. Bharti Airtel’s foray into Africa by acquiring the sub-Saharan assets of the Kuwait-based Zain Group is one of the most striking moves in recent times. Meanwhile, Hero MotoCorp, India’s largest producer of motorcycles and scooters, is investing around US$1 billion to expand into Southeast Asia, Africa, and Central and Latin America. The global spread will include exports and local production. At present, Hero MotoCorp sells around 2% of its two-wheelers in the international market. Managing director Pawan Munjal wants to increase this to 10%. Indian Hotels Company, part of the Tata Group, already has a clutch of global properties, but is on the lookout to add more.

Better asset utilization is another diversification mantra. In the past few years, many big corporations, including the Tatas and Godrej, that were sitting on sprawling landholdings have entered into housing and real estate development, or have disposed of the excess land. For instance, Bombay Dyeing sold its prime south Mumbai property to Axis Bank for US$170 million in 2010. Real estate developers expect growth in the retail sector to push demand. Meanwhile, those sitting on idle land banks have forayed into education and health care, both of which require large tracts of property. “The [real estate] sector in India has become so large that people have the wherewithal to do forward integration in these verticals,” notes Ambar Maheshwari, managing director for corporate finance at global real estate services firm Jones Lang LaSalle.

Offsetting Risk

Many of the big Indian conglomerates have ventured into new growth areas to offset any possible slowdown in their existing businesses. In March 2011, Reliance Industries, which is focused on the oil & gas and exploration business, textiles and retail, entered the financial services sector by forming a joint venture with the D.E. Shaw Group. It is now also looking at the digital and consumer space, such as home care and personal care products.

Around a year ago, Reliance acquired a 14.8% stake in East India Hotels (EIH), which owns the Oberoi chain, to stave off a takeover threat from Kolkata-based tobacco giant ITC, which also owns hotels and has a similar stake in EIH. Even though Reliance’s EIH stake began as a friendly investment for company chairman Ambani — the maintenance and housekeeping duties of Ambani’s state-of-the-art, 27-story, US$2 billion South Mumbai home, Antilla, which has been touted as the world’s most expensive residence, has been entrusted to Oberoi hotel — he appears to have gotten more serious since then. In November 2011, Ambani’s wife, Nita, and his childhood friend, Manoj Modi, joined the EIH board. Since then, Reliance has announced plans to jointly develop hotels with Oberoi. Ambani is also building a hotel in Kenya with friend Jayadev Mody. He is also working on significant investment plans in the coal, hydroelectric and nuclear power sectors.

Another cash-rich corporation, the Ajay Piramal Group, which sold its core pharmaceutical formulations business to Abbott for US$3.7 billion a few months ago, has identified financial services as a growth area. Chairman Piramal is eyeing opportunities in lending and fund management for infrastructure and allied sectors. He also has a health care-focused private equity firm called India Venture Advisors. Piramal has also picked up a 5.5% stake in Vodafone Essar, although experts say that deal is more a strategic use of surplus cash, rather than a diversification.

Earlier, another big generic drug maker, New Delhi-based Ranbaxy Laboratories, divested the business to Japan’s Daiichi Sankyo to become a financial powerhouse branded Religare Enterprises. According to Bombay Stock Exchange officials, Religare is now the eighth largest share broking company in India. With the backing of erstwhile Ranbaxy leaders Malvinder and Shivinder Singh, it is transforming itself into an India-based emerging markets firm.

New Delhi-based serial entrepreneur Analjit Singh inherited the Max India operations after a family business split in the late eighties. Since then, Singh divested his shareholding in telecom company Max Touch to Hong Kong-based real estate tycoon Li Ka-shing, and then ventured into health care and insurance. He is now foraying into new businesses, including hospitality, medical education, integrated pharmaceuticals and senior homes, none of which will nestle under the Max India umbrella.

Moving into different growth sectors is a natural hedge for companies.“It can be effective in terms of balancing the risk of a downturn in a particular sector,” Wharton’s Chaudhuri points out. Some diversification opportunities also enable companies to forward their corporate social responsibility initiatives. Arvind Mills’ foray into organic food is a case in point: Arvind Mills, a leading global denim producer, has been in the business of contract cotton farming in the Vidarbha district of the western India state of Maharashtra for some time. But soaring prices of cotton seeds and the crop having a life span of just one year has been putting pressure on farmers. With 30,000 acres under organic cotton farming, Arvind will now alternate with organic food crops like lentils, wheat, soya and sunflower; spices like chili, turmeric and ginger, and value-added products like chickpea and wheat flour. Organic crops fetch a better price and chairman Sanjay Lalbhai believes that the group’s foray into organic farming can help farmers have a sustained livelihood.

On the Wrong Track

Diversification has its share of failures, too. Take Vijay Mallya’s aviation venture. The flamboyant spirits maker diversified into aviation with Kingfisher Airlines in 2003. Today, Kingfisher is leading the turbulence in the Indian aviation industry. A severe cash crunch forced Kingfisher to cancel flights, lay off staff, withhold salaries and put new aircraft purchases on hold. Though Mallya himself is confident that he can tide through this crisis, the question mark over the feasibility of this venture remains.

According to Chaudhuri, Kingfisher’s current dilemma is a result of “overextending” the brand. Other experts say that the aviation business doesn’t offer big returns, the main reason why other big conglomerates have stayed away from the sector. Talking to India Knowledge at Wharton for an earlier article, Rajesh Chakrabarti, an assistant professor of finance at the Hyderabad-based Indian School of Business noted that “aviation is a high fixed cost sector, very sensitive to small margin changes for its survival. What we are seeing here is not unprecedented. In most downturns in the U.S., aviation companies make a beeline for Chapter 11.”

In 2009, Bangalore-based mid-sized software services company MindTree decided to get into the manufacturing of mobile handsets and acquired the Indian facility of Japanese wireless products developer Kyocera Wireless. MindTree was to launch an Android-based handset with an initial investment of US$11 million. But the steep fall in smartphone prices, frequent technology changes and constant capital infusion impacted MindTree’s fortunes. The company was forced to call off its mobile venture.

Kishore Biyani’s US$2.4 billion Future Group, which began a decade ago as a retail business and frenetically diversified into a host of verticals sprawled over 15.5 million square feet across the country, has been courting foreign players for a possible sell out. Over the years, Biyani gained a toehold in financial services, insurance, venture capital, supply chain and media. He also wanted to take a crack at the multiplex business. In the pursuit of growth, Biyani’s debt pile today is US$1.6 billion forcing him to pare his portfolio. Recent developments include selling off Future Capital Holdings to Deccan Chronicle, the south India-based media group. Biyani is also partially divesting its insurance business with Future Generali to Mumbai-based Industrial Investment Trust, and is also looking at another buyer. “At times companies can go too far without having a right strategy,” notes JPMorgan’s Punshi.