Apples and oranges

Why are smaller companies investing in unrelated diversifications? the strategist looks at a few case studies.

What do gerberas and carnations have in common with infotech? Here's a hint: the same link exists between restaurants and footwear, batteries and mosquito coils, and fairness cream and bio-diesel.

Give up? These are all instances of unrelated diversifications, when companies have ventured out into a market that is not related to their core competency.

And if you thought forays into unconnected businesses was a strategy restricted to giants such as Bharti, Reliance, the UB Group and ITC, think again. Smaller Indian companies, too, are expanding their portfolios.

Consider these: edible oils company Amrit Banaspati's foray into education; switches manufacturer Anchor's successful entry into the toothpaste market; electrical cable manufacturer Nicco Corporation's Rs 15 crore investment in its bio-technology subsidiary; adhesive manufacturer Pidilite Industries launching a sweet snack under the Chikkers brand; footwear manufacturer Action's new healthcare facility.... The list is long and still growing.

Why are so many small companies venturing into unfamiliar territories? Is it indicative of a growing appetite for risk-taking or are they simply hedging their bets? Consultants believe the answer probably lies somewhere in between. Most of all, though, the trend is indicative of the health of the Indian economy.

"Market risk and chances of failure are high in developed markets where businesses are growing at 4-5 per cent," says Arvind Mahajan, executive director, KPMG Advisory Services. "Most markets in India are growing at 20-30 per cent, which makes it easier to enter a market and garner shares."

The companies may be small, but they have large ambitions and entering a sunrise industry may be the quickest way of fulfilling them. But is an unrelated diversification really as simple as that?

Gimme growth
The most obvious reason for companies looking around is their natural ambition to grow. Prashant Mishra, professor of marketing at the Indian Institute of Management, Calcutta, gives a textbook definition: "A company looks at diversification when diversification opportunities promise greater profitability than expansion opportunities."

The Rs 732-crore Eveready Industries India is a case in point. The brand may be well-known but Eveready is certainly not lighting up the Rs 1,000-crore flashlight and battery market "" it suffered a Rs 13.42 crore net loss in 2006-07. "You can't expect an annual growth of 20 per cent in such a saturated market," defends Suvamoy Saha, director, Eveready.

Instead, Eveready is turning its sights to other businesses. In the next three years, it wants half its targeted Rs 2,000-crore revenues to come from non-core businesses. It made a start three years ago, launching packaged tea under the Jago, Tez and Premium Gold brands (revenues: Rs 100 crore).

Last year, it branched out further with Eveready Poweron mosquito repellent coil and CFL lamps. Eveready claims to have already netted 5 per cent of the Rs 430-crore mosquito coils market.

Growing eight-fold in three years "" and that too, across diverse segments like utility and different consumer goods "" is ambitious.

Eveready is counting on its extensive distribution network to bring in the required volumes "" the company claims to cover 3.5 million retail outlets across the country. "With a distribution network like that, we can sell anything," declares Saha.

Still, Eveready is being cautious. It has adopted a low-risk model, outsourcing the entire product manufacturing and packing functions. Product promotion is also low-key, restricted to outdoors and regional print, concentrating instead on retailer-customer interaction and point-of-sale promotions.

Consultants think Eveready's gameplan "" seek fresh avenues of growth, given that the main line of business is flagging "" makes sense. Says Devinder Chawla, partner, business advisory services, Ernst & Young, "Such a move gives you an opportunity to address a wider demand and eye a larger share of the consumer's pocket."

Shining through
If some companies diversify to bring in much-needed growth, others are keen to hitch their wagons to new gravy trains. With the economy on the upswing, there are several sunrise industries offering huge potential. Which explains electrical cables manufacturer Nicco Corporation's foray into the biotechnology sector.

Interestingly, Nicco's entry isn't what you would call traditional. In the first phase, it has set up an education centre at Kalyani, West Bengal, which will offer a one-year post-graduate diploma in biotechnology management. The second phase, which will be implemented in the coming months, involves the manufacture and marketing of neutraceuticals, cosmoceuticals and pharmaceuticals.

"Biotechnology is a high-growth area and has a promising future. We are confident this will create wealth for our shareholders," says Rajive Kaul, chairman and managing director, Nicco Corporation.

The Rs 1,500-crore Emami group's foray into green fuel was fuelled by the same insight. It has set up a 100,000 tpa plant at Haldia to manufacture biodiesel and is also growing jatropha, the basic raw material for the fuel, on 10,000 acres in Balasore and Siuri. The group has already invested Rs 150 crore in the project and is targeting a turnover of Rs 300 crore in the next few years.

The sunrise strategy of unrelated diversifications works best if you spot an opportunity before others. Ask Anchor. The switches manufacturer decided to enter the booming FMCG market in 2002 with a toothpaste. Trouble was, the segment was dominated by multinationals.

Anchor promoted its offering as "pure vegetarian" and, in the process, created an entirely new category. Says Atul Shah, managing director, Anchor Electricals, "Based on consumer insights, we and made the vegetarian ingredients the toothpaste's differentiator."

Many eggs, many baskets
For many companies, though, a new business is just another way of spreading out the risk. As Aditya Agarwal, director, Emami Group points out, "You never know when the tide will turn and your sector will underperform."

To ensure that income stream would remain unaffected by cyclical turns in the personal care products industry, the Emami first diversified into paper. Next came ballpoint pen tips manufacturing, an entry into the healthcare segment with a hospital and pharmacies, followed by real estate, cement and recently in April, bio-diesel. Now, Emami is also considering entering the fruit juices segment of the FMCG market.

Emami's decision to enter new markets is based on a fairly simple principle: the pricing and profits must be governed by international markets and growth prospects must be uniformly positive.

The strategy appears to be working: non-FMCG initiatives already account for nearly 35 per cent of group turnover. "Diversifying into different sectors means losses in one segment are taken care of and you are not pushed against the wall," says Agarwal.

That is a view seconded by Ernst & Young's Chawla: "You can cushion the blow of the down-turn of one industry cycle if you are present in another that is looking more optimistic."

There's a caveat "" don't spread yourself out too thinly. A portfolio of sectors shouldn't become unwieldy and all diversifications should dovetail with the parent company's goals.

Agarwal understands that. Four years ago, Emami entered the software business by acquiring a 27 per cent stake in Data Processing System, a software and solution provider. It made an exit last year.

"Perhaps we didn't invest enough time and the right kind of people in the venture," mulls Agarwal, adding, "But it was bleeding us, so we bowed out."

The takeaways
Is there a right and wrong way of diversifying to unrelated areas? Not really, say the experts. But there are some pointers that could help in making that crucial decision.

First, cautions Chawla, "Don't get too experimental. Stick to your strengths." Which means if you have an unmatched distribution network, ensure your new venture leverages that.

Do your homework. Eveready burnt its fingers four years ago with mobile phone batteries. It took the company six months to realise there was no market for its product "" people preferred to change mobiles rather than batteries; even when they did, they went with the original equipment manufacturer's product.

Good fences make good neighbours. Company heads and industry experts agree that it isn't wise to mix the management of unrelated businesses. Get the right people, with the right skills and the right focus "" and then back off and let them get on with their job.

Take the brand call early. Should the new venture carry the old, unrelated brandname or should it be something new? Eveready's new ventures emphasise the brandname; Pidilite didn't use the Fevicol connection anywhere with its Chikkers brand.

"First, gauge the possible impact of the diversification," advises IIM's Mishra. "If you are convinced it will work and you have the resources, play up the brand."

Know when to let go. You don't usually start a new venture with an exit route in mind, but it's probably not a bad idea. Emami, for instance, believes that a business is permitted to suffer only as much annual loss as the investment that went into it.

QUICKBITE: Blossoming interests

Diversifying is only for brave hearts," says Prashant Mishra, professor of marketing, Indian Institute of Management, Calcutta. "Getting into a sector that is different from your core competency requires substantially different knowledge, thinking, skills and processes."

Sometimes, though, all it takes is passion. In early June, Kolkata-based hardware and network solutions provider company Micro Solus sowed the seeds of floriculture with Vikdas Green House. The Rs 9-crore company's first lot of gerberas has already bloomed and it now plans to branch out into carnations. Tissue culture and greenhouses are also planned.

The gerberas greenhouse has cost the company Rs 5 crore, and the tissue culture laboratory means an additional investment of Rs 1.25 crore. The future looks rosy to Gautam Chatterjee, managing director, Micro Solus.

"The current harvest means 5,40,000 gerberas "" 2,000 a day "" which we are selling at Rs 3.50-4 a stick," he says. That's about Rs 20 lakh from one harvest alone. Chatterjee plans to begin exports once output increases to 20,000 flowers a day. Next in line is the endeavour to produce disease-resistant potatoes.

The link between IT and floriculture? None, admits Chatterjee, "Except that I love flowers and research showed there is money to be made from it, too."

Besides, the Vikdas initiative will be managed by experts in the field, leaving Chatterjee to continue running his first business. "Once I am ready to export the flowers, I can easily trade online, thanks to my IT arm," he adds.

If Chatterjee's love of flowers led him to greenhouses, Partha Roy Burman's interest in people took him away from his footwear business.

The founder of the Khadims footwear retail chain has set up a separate company, Kantian Food and Hospitality India, to open a string of restaurants and take-away joints across West Bengal. "I am addressing my passion for interacting with people through this new company," he says.