Blood is thicker than BSE 200

Family businesses outperform the broader index over 10 years

Family-owned businesses (FOBs) might have their own follies but they often tend to be good investments. A collection of 86 family businesses outperformed the BSE 200 index over the past decade, according to a seminal report by Ambit Capital titled 'Succession Planning by Family-Owned Businesses in India.' While these firms seemed to walk hand-in-hand with the broader index in the initial years of this period, they pulled ahead after the collapse of Lehman Brothers, with significant outperformance coming in the past two years.

The Mumbai-based brokerage has constructed India Family Firm Index (IFFI) out of listed companies, with promoter and promoter group holding of 25 per cent or more. Out of the broader BSE 200, it has filtered out financial sector firms and multinational corporations. It also excluded companies that were acquired or delisted such as Essar Ports and Ranbaxy.

Since 2006, the IFFI grew at a compounded annual growth rate (CAGR) of 12.2 per cent, against BSE 200 index (ex- BFSI), which clocked 9.1 per cent. The family-owned companies accounted for Rs 18.8 lakh crore in revenue in FY16 and employed over 1.3 million or 60 per cent of the total headcount of the BSE 200 universe. They accounted for 53 per cent of both profits and market value of the universe.

Ambit analysts attribute the success of these companies to focus on long-term and access to large pools of capital. But they warn that to keep their advantage in the changing environment, they have to put premium on merit, when it comes to succession.

"Indian FOBs now face three challenges: First, the 1991 entrepreneur is nearing retirement; second, the new era of political resets threatens the crony capitalist FOB model; and third, these changes will increase the cost of capital for capital-intensive FOBs. Thus, for the FOBs to succeed in this altered world, promoters need to choose their successors - family or professionals - on merit, instead of bloodline," the report said.

IFFI companies lagged the overall index in key capital utilisation parameters such as return on capital employed (ROCE) and return on equity (ROE). This reflected the impact of large capital outlay by FOBs like Reliance Industries (telecom venture), Bharti Airtel (Zain acquisition and network expansion) and overseas acquisitions by Tata Steel and Tata Motors. These large expansions dragged down the overall average ROCEs, from around 30 per cent in FY06 to about 11 per cent in FY15.

The attack on crony capitalism, triggered by the Comptroller and Auditor General reports on allocation of telecom spectrum, coal and other key contracts, followed by "resets triggered by Modi and Rajan", has also contributed to poor return on capex for the family businesses, the brokerage said.

Succession planning is key to the success of such companies in the long-term, since the company's lifecycle tends to track that of promoter. Asian Paints and Marico are prominent companies that managed succession well. Apollo Tyres, Ranbaxy, Bajaj Auto and Reliance are cited as examples of bad succession management, which, in some cases, turned ugly.

Ambit said timely planning, hiring professionals early and striking a balance between ownership and management could make succession planning click. It has flagged off Wipro, HCL Technologies, Mahindra & Mahindra, Hero MotoCorp, Godrej Consumer and Dabur as family businesses, where the impending change in command will play a key role in future.