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Unrelated diversification the new mantra

Anil Sasi

According to analysts, hedging the risks involved with being present in just one or two businesses seems to be the primary motive behind companies mapping into new areas with potential for growth.

New Delhi , Aug 4

VENTURING into unrelated business areas seems the latest mantra for India Inc with a slew of companies foraying into unchartered territories totally disparate from their core businesses.

For instance, the Rs 1,700-crore soaps and detergents major Nirma Ltd is planning entry into the cement business, with a proposed 1.2 million tonnes per annum plant in Gujarat. The Rs 2,300-crore polyester major Indo Rama Synthetics is getting into the food and grocery business, while the leading transport fleet operator Patel Roadways already runs an offshore hedge fund, aptly named Wall Street Global Investment Opportunities Fund.

In the trend towards diversification, there are even instances of companies rushing to enter sectors where the potential is yet to be mapped.

For instance, the fledgling power trading sector, which was opened up to competition following the passage of the Electricity Act 2003, is seeing a slew of companies with no prior exposure in the power sector — including construction major DLF Ltd, steel producer Ispat Ltd and Ahmedabad-based trading major, the Adani Group — applying for trading licences.

Education seems to be yet another hot sector that has caught the fancy of a number of players. The Rs 600-crore food processing and packaging major Amrit Banaspati has marked its foray into language education, with its subsidiary (Amrit Learning Foundation) being appointed by `Inlingua International' — the international chain of language schools — as its master franchisee. Nirma, too, has entered the education business and has set up the Nirma Institute of Management (NIM) in Ahmedabad.

Restrictive Government policies are also among the reasons for companies to explore entering new unrelated areas. For instance, India's biggest tobacco player - ITC - has diversified into sectors as varied as branded apparel, IT, packaged foods and greeting cards. According to the company, the operating environment for cigarettes continues to pose an increasing order of challenge, prompting the diversification.

According to analysts, hedging the risks involved with being present in just one or two businesses seems to be the primary motive behind companies mapping into new areas with potential for growth. They predict that more such ventures are likely in the future since the entry and exit barriers, which broadly define the cost and effort that a company has to invest to enter or exit a new area of business, have come down significantly across Indian industry during the last few years.

"The education sector presented a clear business opportunity for us, especially with the services sectors in the economy growing much faster than manufacturing or agriculture, and consequently the need for people training," said Mr Vikram Bajaj, Director, Inlingua.

On the decision to enter the grocery business, the Indo Rama top brass said that there were major lacunas in the food processing business at present, which, in turn, provide opportunities for new players to enter the sunrise sector. In other words, across sectors companies with core businesses are looking at non-core areas as distinct growth engines.

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