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Amit Mitra

Mumbai, Nov. 20 The Indian manufacturing sector is estimated to command a market capitalisation of $520 billion by 2014-15, as against $272 billion as on September 30, 2007, said a study on the sector by the Confederation of Indian Industry and the Boston Consulting Group.

The core manufacturing sector comprises engineering and construction, industrial manufacturing, materials and commodities, chemicals and plastics and automotive. The projection assumes that the ratio of market capitalisation to manufacturing GDP remains at the current levels. “The sector thus has the potential to create additional shareholder wealth up to the extent of $250 billion by 2014-15,” the study believes.

An analysis of Total Shareholder Return (TSR) in the study has shown the top three value creating segments — engineering & construction, industrial manufacturing and materials & commodities — have been from the manufacturing sector during the last five years. These segments are followed by telecom and banking.

This goes against the public perception that the top value creating segments are the new knowledge economy or service sectors. TSR includes both the return from share price change and dividend income — this index measures the change in a company’s stock price and dividend yield over a period of time.

Some of the companies in this sector that dished out high shareholder returns during the last five years included Praj Industries with sales climbing about $150 million from $60 million in the last two years; Bharat Forge, whose sales touched almost $1,000 million from about $700 million; and Crompton Greaves.

Companies, the study points out, are also increasingly going through the process of “internationalisation” through different models. The models include globalisation of brands, like Mahindra & Mahindra, which has emerged as one of the top five tractor manufacturers of the world and market multiplication, like VSNL and Reliance with their global acquisitions.

Mergers and acquisitions are also transforming this sector. The total number and value of M&A deals in India across all segments have gone up from 200 and $7.1 billion in 2000 to 540 and $50.9 billion in the first half of 2007. “M&As in the manufacturing sector account for almost half of the overall deal value,” according to the study.

The M&As are an upshot of different strategic reasons — acquiring new capabilities, like L&T’s acquisition of Malaysia-based Tamco Holdings, improvement of market position (Crompton Greaves’ several mid-sized acquisitions in select market segments) and lowering of costs (Tata Chemical’s acquisition to gain access to low-cost raw materials source for its fertilisers).

“With growing global aspirations and a premium on size and leadership, this trend is only likely to grow stronger. However, one would need to navigate challenges at all stages be it in aligning the M&A with overall corporate strategy, target search, valuation and realising value through a successful integration,” the study noted.

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