How JSW group plans to diversify and reinvent
Th eS ajjanJi nd al-led group is looking aggressive ly at electric vehicles and paints
It is the billion-dollar question every growing business house asks at some point. How much can one diversify without jeopardising the group? That’s the inflection point that the $15-billion infrastructure major JSW group is at and judging by its moves, future plays are consumerdriven businesses with a common thread that loops back to its core.
The first is electric cars. Sajjan Jindal, chairman of the group said, “We are fairly serious about electric mobility and it’s not easy, but we will be doing it all, the platform, the body, the integration.” JSW’s electric vehicles (EVs) will include both passenger and commercial vehicles. The firm has already appointed former General Motors executive Sergio Rocha as chief operating officer to drive the EV business.
The proposed capex in the EV venture, a subsidiary of JSW Energy, is at ~65 billion over the next three years. JSW will manufacture EVs and energy storage systems, and also set up charging infrastructure. The two listed firms JSW Steel and JSW Energy generated combined cash profit of over ~100 billion in FY17. Jindal doesn't see a problem in raising money for automobiles.
“We will bring electric cars to the roads in three years,” he said. According to Jindal, production is expected to start with a 100,000 cars and will later scale up to the factory’s maximum capacity of 250,000 cars a year.
Then there’s a paints business that Parth Jindal, managing director of JSW Cement, said will be launched later this year. There is some synergy in the group’s diversification as both steel and paints are used in cars. JSW Steel can make ultra-high strength, light-weight steel, which is supplied commercially to car makers in India.
However, diversification for business houses can be risky. In the past many had to write off or exit businesses that made sense on paper. Essar group ended up exiting its oil, business process outsourcing and telecom businesses, while its steel business is going through the bankruptcy process. The Jaiprakash group sold cement and its Jaypee Infratech is facing insolvency proceedings. Even Tatas had to exit telecom, and as Tata Steel’s Corus acquisition didn’t work out, steel plants in the UK were sold and ThyssenKrupp was brought in as a partner in Tata Steel Europe. That’s why analysts are uncomfortable when business houses diversify, as they worry whether the group will be able to deploy capital efficiently and there is the possibility of the management’s attention being diverted into new ventures at the expense of the existing ones.
On the positive side, there’s no doubt that an established business house in a country like India has the advantage of being able to extend brand recognition, existing access to capital and talent, market intelligence, familiarity with regulations and policy all culminating in superior dealmaking and execution capability.
Sharad Varma, senior partner at Boston Consulting Group, said there are a number of firms with core stable business generatinga lot of cash that can’ t be absorbed by the existing business. “If a house wants to diversify that’s fine, but the operating mindset has to change and that doesn’t just mean hiring a new team. The promoter mentality has to shift as well to suit the new business,” he said, adding that in cars, for example,
bn Reported group revenues of the JSW group as of March 2017 ~720
taking a five-year product platform view, common platforms and building an auto component ecosystem will be a brand new game. Besides, groups will have to be able to support new businesses financially.
Seshagiri Rao, JSW’s chief financial officer, said each of its current firms in energy, steel, cement and infrastructure can handle acquisitions on their own.
The JSW group reported group revenues of ~720 billion as of March 2017. The group had debt of ~580 billion in the last financial year but ratios are stable. “More importantly, JSW group understands financial discipline and risk and over the past 17 years, JSW Steel has led ~660 billion in investments. And, of the half a dozen groups that set up major steel capacity between 1996 and 2000, we are one of the only ones standing,” Rao said.
JSW does also pull the plug when necessary. Parth Jindal tried his luck with an information technology business called JSoft that sold enterprise resource planning software but shut it down when it was going nowhere. There have been other mistakes. Parth Jindal said when steel was in a super cycle till 2008, JSW bought three steel businesses in the US for $1 billion, and an iron ore venture in Chile for $300 million and coal mines in Virginia for $250 million.
“The experience had been painful and we learned a lot,” he said. The Chile mines were shut in 2015.