Big business groups' diversification game amid slowing growth, rising risks

Slowing growth and volatile earnings are pushing India Inc. to diversify aggressively-even as weak R&D spending raises concerns about long-term competitiveness

India’s gross domestic product (GDP) on average grew at a slower pace from FY15 to FY25 compared to the previous decade. Although a coordinated monetary and fiscal response by policymakers following the pandemic led to a global boom in corporate earnings and equity markets, the euphoria was short-lived. Corporate India has been battling low single-digit growth and earnings volatility for nearly three years now. This has happened despite a relatively better growth in the country’s headline GDP and growth-boosting measures by policymakers (the Reserve Bank of India has cut interest rates and the government has reduced direct and indirect taxes). 

The slowdown — and opportunities in other sectors — is driving conglomerates to devise new growth strategies. The balance sheets of BS1000 companies suggest that the largest companies are diversifying horizontally, including into unrelated sectors. This strategy is most visible at large and already-diversified business groups such as the Tatas, Mukesh Ambani-led Reliance, Adani and JSW, among others. 

This year’s cover story reviews the strategy and its long-term implications for companies and the India growth story itself. Numbers suggest that diversification has paid off in terms of revenues and asset growth, but for many companies it has yet to result in financial gains. Most companies continue to cross-subsidise new ventures with cash flows from old and profitable businesses.  The second story looks at Indian companies’ modest investments in research & development (R&D). In FY25, BS1000 companies invested just 0.36 per cent of their net sales in R&D, down from 0.56 per cent in FY15 and a fraction of investments by their global peers. Low spending is worrying for the information technology services industry — India’s biggest exporter and the biggest employer in the corporate sector — as artificial intelligence models replace the low- and mid-level tasks it performs for others.

 

The edition tracks India’s top unlisted companies, many of which happen to be subsidiaries of multinationals. 

Reliance Industries once again topped the BS1000 league with revenues of around ₹9.98 trillion, followed by Indian Oil (₹7.66 trillion) and Oil & Natural Gas Corporation (₹6.25 trillion). The combined net sales of BS1000 companies were up 7.2 per cent and their net profit was up 10.4 per cent in FY25, over the year-ago period. 

Size, however, does not always mean superior financial performance. Tata Consultancy Services (ranked 8th) topped the financial sustainability index (FSI), thanks to its debt-free balance sheet, high free cash flows, low working capital and higher dividend payout. It is followed by Force Motors (ranked 214) and Colgate Palmolive (ranked 271). A higher FSI rank indicates that such companies are likely to weather an economic headwind better than their lower-ranked peers and also outperform on the bourses.