|Monday, 07 November 2011 00:00|
Fall in their wealth may have to do with government policy
Given how promoter-run businesses can react far quicker than board-run firms that answer to shareholders in a more direct manner, it’s not surprising that family-run businesses (FB) are important in emerging markets where big opportunities are being thrown up regularly. Sticking-to-knitting-needles works well in stable markets of developed countries, but does not in a country like India where large sectors hitherto reserved for the public sector—airlines, telecom, banks, airports, power plants—suddenly open up to competition. FBs like Reliance and Bharti Airtel do have a large number of shareholders, but the fact that the promoters control the company allows them to take dramatic investment decisions that board-run firms often cannot—both firms, for instance, got into the retail business some years ago when they felt it offered large opportunities, and into mobile telephony a decade before that.
A study by Credit Suisse points out that Asian FBs comprise around half the listed companies in the region and account for a third of market capitalisation—if you remove the share of PSUs, the figure rises, to 66% in the case of India as compared to the 47% Credit Suisse says it is. Given how so many Asian FBs are young—38% were listed after 2000—suggests they have a long way to go and will be able to outrun what could be called the Malthusian law of FBs. Families grow in geometric progression (2 brothers with 2 children each and 2 children for each of them means 8 businesses are required by Gen 3) while businesses grow in arithmetic progression—but the rapid opening up of opportunities in emerging markets means, for a while, businesses can also grow geometrically.
Despite the 2002-03 and 2008-09 crises, Credit Suisse points out, Asian FBs delivered a 261% return in the last decade, higher than the 236% for the MSCI ex-Japan Asia Index. The one exception seems to be India, where FBs under-performed the Sensex—they account for 40% of corporate taxes and half of all corporate hirings. The main reason for this is the much sharper fall in FE’s Policy Sensitive Index, the index of market cap of firms that are sensitive to government policy. Given that large FBs are an important component of the PSI, their market cap has been hit harder—Sunil Mittal was badly hit by A Raja’s decision on 2G spectrum, and both Reliance Group (formerly ADAG) and Tata have been badly hit by the government’s refusal to hike electricity rates. This not only hit the returns FBs give, since they have taken on large debt to get into infrastructure areas, this has also made them more leveraged. Ironic that the firms best positioned to take advantage of government reform actions (opening up the power sector) are also those hit the most by the lack of reforms.