Family- owned businesses: India
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Family firms
After the liberalisation of 1991
1991 was a turning point for the Indian economy. It was also a wake-up call for family-owned businesses. Not everyone made the Big Leap. Sunday Times finds out why
Change, they say, is the only constant in life and businesses are no exception. India’s growth story shows that those who embraced change post-1991 have not only survived but excelled. Those who resisted simply fell behind.
Take Bajaj Auto, scooter manufacturer, and Hindustan Motors, who make the Ambassador car. Both are family-owned; both enjoyed near monopoly on the domestic market before globalization. Those were the days of queues and a five-year wait for a Bajaj scooter. But economic liberalization brought in global players like Honda, TVS and Suzuki. The competition forced Bajaj to change tack and venture into the fast-growing motorcycle segment. It finally abandoned scooter-production, once the sum and substance of its identity. Today, Bajaj is India’s second largest two-wheeler maker, after Hero Honda.
Not so Hindustan Motors of the C K Birla Group, which continued to flog its old car model and eventually lost the race to newer, racier entrants.
Girish Vanvari, executive director of global consultancy firm KPMG, says family ownership can give a company the unique opportunity to be quick to adopt change and it is this that counts in a competitive, globalized environment. Vanvari cites the Malvinder-Shivinder Singh Group as an example. The group was Ranbaxy’s original promoter but exited the family business. The Singhs sold their stakes in Ranbaxy to focus on healthcare, a manpower-dependent sector in which India is believed to have a natural advantage. The moral of the story? Decisions must be made on the basis of “available opportunities”, not emotional attachment, says Vanvari.
Azim Premji is another worthy example. He decided to shift focus to software development even as his flagship family firm, Wipro Ltd, busily produced vegetable oil and electric gadgets. His decision transformed Wipro into a world-class software company.
Richard Rekhy, advisory head of KPMG in India says business success requires long-term strategic focus rather than a short-term, operational, result-driven approach. Indian family-owned businesses are doing well in the globalized environment, he says because they generally have the flexibility to adopt alternative strategies relatively quickly. Family management also makes for commitment and continuity.
Interestingly, a 2007 Citigroup report pointed out that investors place a premium on firms in which family insiders wield significant, but not absolute, control. So why have some family firms failed? Consultants, who refuse to be quoted on this, say it’s a mix of short-term strategies and get-rich-quick schemes. Groups such as the Modis and the Usha group of Vinai Rai flourished before the advent of globalization. They formed a number of joint ventures with foreign partners, but hardly any of them survive.
Exceptions apart, globalization has generally helped India’s family-owned companies to flourish — particularly those where control systems are in place and day-to-day activities are allowed to be managed by professionals. One of the best examples of this is the Bharti group. At Bharti Airtel, the management, which is controlled by promoter Sunil Mittal, encourages independent directors to meet separately outside board meetings. The company also appoints a lead independent director who represents and acts as spokesperson for independent directors as a group. These processes ensure transparency and greater involvement of independent directors in the company’s decision-making process. It also ensures that independent directors act in a coordinated manner to challenge management decisions that are not in line with longterm shareholder interests. Today, Bharti Airtel is one of Asia’s largest telecommunication companies.
Year-wise statistics
2017: India has 3rd highest in the world
India has 108 publicly-listed family-owned businesses, third highest in the world, while China tops the tally with 167 such companies followed by the US which has 121, says a Credit Suisse report. As per the Credit Suisse Research Institute's (CSRI) latest "CS Family 1000" report, with an average market capitalisation of $ 6.5 billion, India ranks 5th in Asia Pacific excluding Japan, and 22nd globally, in terms of average m-cap.
Besides China, the US and India, the top 10 countries in terms of number of family-owned companies include France (4th place), Hong Kong (5th), Korea (6th), Malaysia (7th), Thailand (8th), Indonesia (9th), Mexico (10th).
However, in terms of average size, the ranking changes much more in favour of developed markets, the report said.
Average market capitalisation of family-owned companies is greatest in Spain ($ 30 billion), the Netherlands ($ 30 billion), Japan ($ 24 billion) and Switzerland ($ 22 billion), the report that covered close to 1,000 family-owned, publicly-listed companies by region, sector and size said.
It further said Indian companies surveyed are more mature, with 60 per cent of family businesses in their third generation compared to 30 per cent of Chinese companies.
According to Credit Suisse, the financial performance of family-owned companies is also superior to that of non- family-owned peers. Furthermore, family businesses appear to focus more on long-term growth and they have outperformed peers in terms of share price returns.
"At country-level, Chinese, Indian and Indonesian family-owned companies appear to be the most expensive, trading at high absolute multiples, with a 12-month median price to earnings (P/E) of 15-16 times, compared to around 10 -13 times P/E multiples of companies in Korea, Hong Kong and Singapore," the report said.
The definition used for the database of family or founder-owned companies is a minimum shareholding of 20 per cent and/or minimum voting rights of 20 per cent.
In terms of key concerns and challenges, Chinese family- owned companies rank succession planning as their least important issue and do not envisage a reduction in ownership.
However, they tend to worry much more about the threat of technological disruption (30 per cent said this was very concerning) which may be driven by China's overall greater exposure to disruptive technologies globally and its state of economic development.
On the other hand, challenges seen as most prominent in India include succession planning, followed by greater competition and talent retention.
"Overall, our findings indicate that our Indian family-owned businesses appear to be more optimistic with regard to future revenue growth and have a slightly more conservative approach to funding that growth," the report said.
More than half of the Indian and Chinese family companies that Credit Suisse surveyed generate revenues in excess of $ 500 million, with the majority of these businesses located across sectors of IT, financials and industrials.
India lags slightly behind China not just on the adoption of environment related issues, but also on social issues, with 35 per cent of companies implementing policies in relation to this compared to 65 per cent for China.
"Our research seems to suggest that investors are not too concerned about the level of ownership but rather how involved the family owners are in the daily running of the business. This seems to be at the core of the success of family-owned companies in our view," Eugene Klerk, Head Analyst of Thematic Investments at Credit Suisse and the report's lead author, said.
2018: India remains no.3
India ranks 3rd on family-owned biz list, September 15, 2018: The Times of India
From: India ranks 3rd on family-owned biz list, September 15, 2018: The Times of India
India ranks third globally in terms of number of family-owned businesses with 111 companies having a total market capitalisation of $839 billion. India closely follows China with 159 firms and the US with 121firms, says a report.
According to the ‘Credit Suisse Family 1000 in 2018’ study, published by the Credit Suisse Research Institute (CSRI), in terms of number of family-owned businesses within the non-Japan Asian region, the list is dominated by China, India and Hong Kong. These three jurisdictions together account for around 65% of the non-Japan Asian section of CSRI’s database, and have a combined market capitalisation of $2.8 trillion (or 71%) of the market share.
Korea came in fourth place, with 43 companies ($434-billion market capitalisation), followed by Indonesia, Malaysia, the Philippines and Thailand, each with 26 companies. The report covered 11markets in the non-Japan Asian region, which continue to dominate and represent a 53% share of the universe, with a total market capitalisation of over $4 trillion.
The report further noted that in 2017 alone, non-Japan-Asia-based family-owned companies generated 25.6% greater cash flow return on investment (CFROI) than their non-familyowned counterparts, and delivered a 4.2% outperformance in annual average share price return since 2006.
Credit Suisse head analyst (thematic investments) and the report’s lead author Eugene Klerk said, “This year, we find family-owned businesses are continuing to outperform their peers in every region, every sector, whatever their size. We believe this is down to the longer-term outlook of family-owned businesses relying less on external funding and investing more in research and development.”
Indian family-owned companies generated a 13.9% annual average share price return since 2006, compared to 6% recorded by their non-family-owned peers, the report said. Further, out of the top 50 most profitable companies globally, 24 were from Asia, with a total market capitalisation of $748 billion. The list included 12 Indian family-owned companies with a total market capitalisation of $192 billion.
Additionally, in non-Japan Asia, more than 50% of the top 30 best performing companies are from India, followed by onethird from China. Malaysia occupies third place with three companies, while Korea and Indonesia each have one, the report added.
