Electric vehicles to paint: How JSW group plans to diversify and reinvent

The Infra major has bold plans for electric cars and paints; mindset and execution will be the key

It's the billion-dollar question every growing business house asks at some point. How much diversification is good without jeopardizing the group? That's the inflection point that the $15 billion infra major JSW Group is at and judging by its moves, future plays are consumer-driven businesses with a common thread that loops back to its core, like electric cars.

Sajjan Jindal, chairman of the group says "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 will include both passenger and commercial vehicles, and the company has already appointed former General Motors executive Sergio Rocha COO – EV, Passenger Vehicles. Proposed capex for the venture is at Rs 65 billion crores over the next three years, and JSW Energy which will oversee the business has signed MOUs with Gujarat and Maharashtra government for manufacturing units. 

JSW Group already invests some Rs 130 billion back into its businesses annually and Jindal adds that he doesn't see a problem in raising that sort of money for automobiles. "We will bring electric cars to the roads in three years," he adds, specifying that production is expected to start with 100,000 cars and will scale up to the factory's maximum capacity of 250,000 cars a year.

Then there's a paints business that includes both decorative and industrial products, which Parth Jindal, managing director of JSW Cement says will be launched later this year. These businesses do have some synergy with steel. Cars need steel and paint. JSW's CRM 2 unit in Vijaynagar works can make ultra high strength steel classified as DP 780, 980, that contribute to light-weighting and are supplied commercially to car makers in India. In theory, each business can feed off each other but the trick is execution, and in the past, many conglomerates have had to write off businesses that made sense on paper. Essar with interests in telecom, steel, refining and power, exited telecom early enough but then had to divest the oil business to Rosneft to slash debt that got out of control. The Jaiprakash Group did the same with its cement business, and the Tatas, who have never had a problem in raising cash got out of a telecom venture.

Historically, analysts would cite "a conglomerate discount" to big business houses when evaluating their performance because of the risk of being unable to deploy capital efficiently and the possibility of one non-performing business slowing down holding company profits. In emerging markets, there's no doubt that an established business house 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 deal-making capability. 

Sharad Varma, senior partner at the Boston Consulting Group says that there are a number of companies with core stable business generating a lot of cash that can't be absorbed by the existing business. "If a house looks 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 adds, saying that in cars, for example, taking a five-year product platform view, common platforms, building an auto component ecosystem is a brand new game. Apart from being financially being able to support new businesses.

Seshagiri Rao, JSW's CFO, says that each of its current companies in energy, steel, cement and infrastructure can handle acquisitions on their own. The JSW Group reports group revenues of Rs 720 billion as of 2017 with Rs 170 billion in ebitda, Rs 600 billion in market cap and Rs 46 billion in profits. While group debt stands at Rs 580 billion, their ratios are more stable than most. "More importantly, JSW Group understands financial discipline and risk and over the last 17 years, JSW Steel has led Rs 660 billion in investments and of the half a dozen groups that set up major steel capacity between 1996 and 2000 are one of the only ones standing," Rao says.

JSW does also pull the plug when necessary. Parth Jindal tried his luck with an IT business called J-Soft that sold ERP software but shut it down when it was going nowhere. There have been others. Parth Jindal points to the 2008 timeframe when steel was in a super cycle and JSW bought three steel businesses in America for nearly a billion dollars, and iron ore venture in Chile for $300 million and coal mines in Virginia for around $250 million. "The experience had been painful and we learned a lot," he says. The Chile mines were shut down in 2015.

At present, JSW is well positioned. Rao indicates that the market cap for the steel firm is Rs 600 billion of which the promoter owns 41%; the market cap of JSW Energy is Rs 100 billion of which the promoter owns 75%.

"Our cost discipline has benefited us, and the big difference today in the whole group is how we changed in capital allocation which is done in far more thoughtful and impactful way," Parth Jindal adds.