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STRATEGY

Prashant Mittal, [email protected]: +91 22 3043 3218

Research Analyst:

Succession planning by family owned businesses in India

July 2016

Anupam Gupta

[email protected]

Consultant:

Anoop [email protected]

Subject Matter Expert

Strategy

July 18, 2016 Ambit Capital Pvt. Ltd.

CONTENTS

Succession planning by family owned businesses in India……………………… 3

Section 1: The success of family-owned businesses (FOBs)……………………. 4

Section 2: The challenges faced by FOBs…………………………………………12

Section 3: How to succeed at succession………………………………………… 16

Section 4: The Succession Checklist……………………………………………….18

Appendix 1: Lifecycle of an FOB, its problems, and solutions…………………22

Appendix 2: Case studies of FOBs and succession planning…………………. 32

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Succession planning by family owned businesses in India

Family owned businesses (FOBs) in India tend to be good investments. Our Indian Family Firm Index (IFFI) has outperformed the BSE200 by 3% points p.a. over the past decade. However, FOBs also face unique challenges. The Modi and Rajan resets threaten the future of those FOBs whose main advantages were easy access to capital and political connections. Further, promoters must choose their successors carefully to ensure their FOB survives in the new, more competitive economy. We flag Wipro, HCL Tech, M&M, Hero Moto, Godrej Consumer, and Dabur as FOBs where succession planning will play a key role.

Ambit’s IFFI has outperformed the benchmark FOBs in the BSE200 employ more than 1m people and account for 34% of its market capitalization. FOBs are also compelling investments. Ambit’s Indian Family Firm Index (IFFI) has outperformed the broader BSE200 index by 3% points on a CAGR basis over the past decade. IFFI companies have outpaced the revenue and operating profit growth of the broader index but lag in terms of capital efficiencies (specifically on RoCEs). FOBs face a three-pronged challenge The success of FOBs is due to well-known factors such as focus on the long-term, access to large pools of capital, etc. However, 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 FOB to succeed in this altered world, promoters need to choose their successors - family or professionals - on merit, instead of bloodline.

Succeeding at succession The lifecycle of an FOB tracks the lifecycle of the promoter (Appendix 1). Thus, the transition to the next generation becomes a key turning point. The key to a smooth transition, as insights from our case studies (Appendix 2 containing Asian Paints and Marico, Apollo Tyres and Ranbaxy, Reliance Industries and Bajaj Auto) show, lies with the promoter a) planning for succession in advance, b) employing professionals from an early stage and allowing them to lead the FOB, and c) ensuring an optimum balance between ownership and management.

A succession checklist for investors Clarity on the successor and their acceptance within the organization is important in ensuring that the FOB survives to the next generation. We provide a checklist for investors to gauge an FOBs vulnerability to succession planning issues. Among large FOBs, we flag off Wipro, HCL Tech, M&M, Hero Moto, GCPL, and Dabur where a change in command will play a key role in the future.

THEMATIC July 18, 2016

Strategy

Succession planning - companies to watch out for

Wipro Our stance: SELL

Mcap (US$ bn): 21.2 ADV - 6m (US$ mn): 12.4

HCL Tech Our stance: BUY


M&M Our stance: SELL


Hero Motocorp Our stance: SELL


Dabur Our stance: SELL


Godrej Consumer Our stance: SELL


Tech Mahindra Our stance: BUY


Zee Entert. Our stance: SELL


Supreme Ind. Our stance: BUY


AIA Engineering Our stance: BUY


VA Tech Wabag Our stance: BUY


Mayur Uniquoters Our stance: NR


Source: Bloomberg, Ambit Capital research

Research Analyst

Prashant Mittal, CFA +91 22 3043 3218 [email protected] Consultant

Anupam Gupta [email protected] Subject Matter Expert

Anoop Hoon [email protected]

Ambit’s IFFI has outperformed the BSE200


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mailto:[email protected]


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Section 1: The success of family-owned businesses (FOBs) “A man who doesn’t spend time with his family can never be a real man”

- Don Corleone in Francis Ford Coppola’s movie (1972) based on Mario Puzo’s bestselling book, ‘The Godfather’ (1969)

FOBs are big everywhere Family-owned businesses (FOBs) are among the oldest forms of trade, commerce, and industry in the world. The Global Family Business Index compiled by the Center for Family Business at the University of St. Gallen, Switzerland, and Ernst and Young, lists the top 500 family firms in the world. As of 4th Feb 20161, these top 500 family firms generated sales of US$6.5tn (as an economy it would rank third after the US and China) and employed 21 million people. The website names Takenaka Corporation (Japan), which has been around since 1610, as the oldest firm.

Compared to the US/Europe, Asia has a rich culture of FOBs stemming from the prevalence of family values (eg: Chaebols in South Korea, Keirestu in Japan). In its April 2015 special issue on FOBs, The Economist magazine wrote2, “Family companies were at the heart of the development of capitalism in Asia. Family names acted as a guarantee of honesty for fellow business people and quality for consumers. Family ties allowed business people to operate across countries and regions.” FOBs serve as an important mechanism for transmitting capital from the rich to the poor (via job creation) and from one generation to another (via inheritance). As the 18th April 2015 issue of The Economist notes, “Family businesses make up more than 90% of the world’s companies. Many of them are small corner shops.” Hence, FOBs also play a key role in generating employment. FOBs also play a big role in innovation. In his book, "Dynasties", David Landes writes about how FOBs in the West have been at the forefront of innovation, "These countries (Europe and the United States) have in fact been the leaders of economic development and innovation, the makers of modernity - and much of this development, innovation, and modernity has been the work of family enterprise." In the absence of a formal banking system, a patriarch and his family become the primary source of capital for the community. For example, the Muthoot Family in Kerala founded a gold loan business in 1939, an offshoot of the trading business established by Ninan Mathai Muthoot in 1887. In their book, "Family Multinationals", editors Lubinski, Fear, and Perez write about how, as far back as the mid-1880s in Southeast Asia, Indian families (in specific, the Chettiar community) were prominent in insurance, banking, and money-lending, as the only source of mid-to-long-term credit. The Murugappa Group set up an insurance company amongst its first businesses when it relocated to India from Burma after World War 1. However, these informal and unorganized transactions also raise the cost of capital since they are based on mutual trust. In fact, FOBs thrive in an atmosphere of weak institutions such as banks, legal courts, etc. Academic research indicates that FOBs act as substitutes in the absence of strong institutions that enforce contracts, protect property rights, protect investor interests, etc. Writing for the Journal of Economic Perspectives in 2006, authors Marianne Bertrand and Antoinette Schoar noted3, “An alternative explanation for the presence of family firms is that family ties serve as a second-best solution in countries with weak legal structures, since trust between family members can be a substitute for missing governance and contractual enforcement.” Landes writes of the necessity of family enterprises in the developing world, "..the nations of the developing world, particularly those most desperate for economic development, urgently need family enterprise. Their cultural, political, and economic circumstances are not mature enough for managerial business structures."

1http://familybusinessindex.com/data/Global_Family_Business_Index_comment_by_Thomas_Zellweger.pdf 2http://www.economist.com/news/special-report/21648174-worlds-most-dynamic-region-family-companies-occupy-commanding-heights 3 http://www.mit.edu/~aschoar/BertrandSchoarJEP2007.pdf

FOBs are among the oldest forms of trade, commerce, and industry in the world.

FOBs serve as an important mechanism for transmitting capital

Family ties serve as a second-best solution in countries with weak legal structures

http://familybusinessindex.com/data/Global_Family_Business_Index_comment_by_Thomas_Zellweger.pdf

http://www.economist.com/news/special-report/21648174-worlds-most-dynamic-region-family-

http://www.mit.edu/~aschoar/BertrandSchoarJEP2007.pdf

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FOBs – the best of both worlds FOBs, ideally, combine the positives of family (values such as commitment, loyalty, stability, and trust) and the positives of business (profit, growth, professional management). Since he is the owner, an entrepreneur typically has a better understanding of, and has a higher level of commitment to, his business than a professional.

As the business grows, the FOB then becomes a mirror image of the founder. The stamp of the owner’s personality in the business can be a strong positive. For example, the frugality of Asian Paints is well-known and goes back to days of its founders. In 1967, when Asian Paints became the largest paints company in India, the four founders still shared one car (an Ambassador) between themselves. The car would bring family members to office every day and serve every family for one day in a week. Asian Paints’ co-founder, Champaklal Choksey, explained this by saying “Mujhe har paisa bachana hai, yadi mujhe Asian Paints ko badhana hai” (or, I have to save every single paisa, if I want Asian Paints to succeed).

In specific, the advantages of an FOB include:

Removal of the principal-agent problem: In the principal-agent problem, the motives of the agent (professionals that manage a company and do not have an ownership stake) are different from those of the principal (the shareholders), making it difficult for the principal to manage the agent. In case of FOBs, the largest shareholder also runs the business and, hence, the motives of management and ownership are effectively aligned.

The charismatic promoter as a competitive advantage: A driven, motivated promoter can also be a competitive advantage. He can also take risks and be conservative depending on the situation. With leadership being centralized, the FOB can move quickly compared to professionally managed companies that need an internal consensus for big decisions. In his book, “Ambani & Sons”, Hamish McDonald writes about how "by the end of 1986 Dhirubhai Ambani had raised an unprecedented `9.4billion from the public over eight years, including `5billion from one debenture issue." Ambani used this funding to rapidly expand Reliance's manufacturing operations. The Patalganga polyester plant was put up in a fast 18 months (Du Pont's international director had stated that such a plant would have taken 26 months to build in the United States). Macdonald wrote, "Constant expansion and heavy borrowing gave ever-increasing cost deductions to offset against profits. Reliance became the most famous of India's 'zero-tax' companies." Indeed, no consensus-seeking professional CEO would ever have been able to take such remarkably aggressive decisions. In the US, Apple’s founder CEO Steve Jobs was known for huge strategic moves that could never have been taken by a conventional CEO with an Ivy League MBA. For example, when it launched in 1998, the iMac famously did not feature a floppy disk drive – a bold move then and much ahead of the eventual removal of these drives in computers. In 2001, after the dotcom bubble burst, experts predicted that the central role of the personal computer was ending. After reviving its personal computer offering, Apple had to think differently. As Walter Isaacson wrote in Steve Jobs biography, “It was at that moment that Jobs launched a new grand strategy that would transform Apple—and with it the entire technology industry. The personal computer, instead of edging toward the sidelines, would become a “digital hub” that coordinated a variety of devices, from music players to video recorders to cameras.” He added, “Apple would no longer be just a computer company—indeed it would drop that word from its name—but the Macintosh would be reinvigorated by becoming the hub for an astounding array of new gadgets, including the iPod and iPhone and iPad.”

Focus on business, not QoQ/YoY: Promoters in general, and passionate entrepreneurs in particular, are driven by longer-term motives of greatness and achievement and this long-term commitment is a key positive for their businesses. Rather than chase short-term goals, they have a longer horizon for their business. Since they are the owners of their business, promoters are more thrifty and conscious of how money is being spent and they realize that productivity is critical

FOBs combine the best of both business and family

A driven, motivated promoter can also be a competitive advantage.

Rather than chase short-term goals, promoters tend to have a longer horizon for their business.

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and costs reduction imperative. FOBs are thus focused on building institutions that last, compared to professionally run companies that have to satisfy their shareholders, sell-side analysts, and investors and therefore tend to pace their achievements in quarterly performance. Given that they have a majority stake in their own company, promoters of FOBs have a freer hand in their companies and are not beholden to QoQ and YoY performance. Like Steve Jobs, Jeff Bezos, the founder of Amazon, is well-known for his passion and ambition. In his book, “The Everything Store”, Brad Stone writes about Amazon’s first letter to public shareholders in 1997. “The letter also stated that the company would make decisions based on long-term prospects of boosting free cash-flow and growing market share rather than on short-term profitability, and one section in particular served as a guidepost for the unorthodox way the company planned to approach Wall Street.” Stone quotes from the 1997 letter that is publicly available4, “We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.” (Note: the emphasis on ‘long-term’ is as per Amazon’s original letter).

Introducing the IFFI In order to track the performance of India’s large, listed FOBs, we construct the Ambit Indian Family Firm Index (IFFI), using the following methodology:

We start with the BSE200 Index as it stood in June 2006. We define an FOB as a listed company where the promoter and promoter group (including his family) holds more than 25% stake.

We exclude the following from Ambit’s IFFI:

1 Companies that were acquired and/or delisted, such as Essar Ports, Essar Steel, Ranbaxy, etc.

2 Companies from the Banking and Financial Services Industry (BFSI), because the RBI does not favor any large industrial house promoting a bank, as is evident in the fact that no large private sector bank in India is owned by any major family and,

3 Multi-national companies (MNCs), since they are not owned by Indian families.

After running this filter, we are left with 86 companies. We use the full market capitalization of these companies and give equal weights to all of them to avoid bias towards any particular company. We start the IFFI from 1st Apr 2006, where the value is taken as 100.

Our back-testing results of the IFFI’s performance for the past decade are given in Exhibit 2.

4 http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf

Ambit’s Indian Family Firms Index (IFFI) tracks India’s largest FOBs

http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf

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Exhibit 1: Ambit's IFFI has outperformed the BSE200 Index in the past decade

Source: Bloomberg, Ambit Capital research.

After performing broadly in line with the BSE200 until Mar 2009 (also the post-global financial crisis bottom made by the market), the IFFI began outperforming the BSE200. Hence, from 31st Mar 2006 to 30th Jun 2016, the IFFI has risen at a CAGR of 12.2%, ahead of the BSE200’s 9.1% CAGR. The main outperformers are from the consumer (Asian Paints, Marico, Titan, and Godrej Consumer) and healthcare (Lupin, Divi’s Lab, and Aurobindo Pharma) sectors. The main laggards are not from any particular sector but include Sterling Biotech, Bajaj Hindusthan, Suzlon, Alok Industries, and Gujarat NRE Coke.

The highlights of the IFFI are as follows:

The revenues of the 86 companies in the IFFI stood at `18.8tn for FY16, or 49% of the revenues of the BSE200 (ex-BFSI).

Companies in the IFFI employed a total of 1.3m people, or 60% of the headcount of the BSE200 (ex-BFSI).

The combined PAT of the IFFI companies stood at `1.3tn in FY16, or 53% of the PAT of the BSE200 (ex-BFSI).

The combined market cap of the 86 companies in the IFFI is `29.3tn, or 53% of the market cap of the BSE200 (ex-BFSI).

In the exhibits below, we track the financials of IFFI versus the broader indices for the past decade. As can be seen, the IFFI companies have seen stronger revenue and operating profit growth in the past decade than the BSE200 Index (ex-BFSI).

Exhibit 2: Strong revenue growth for IFFI companies in the past decade

Source: Company, Ambit Capital research

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IFFI has risen at a 12.2% CAGR over 2006-2016, compared to 9.1% for the BSE200

Revenues of India’s biggest FOBs are about 14% of India’s GDP

IFFI revenue growth has outpaced the revenue growth of the BSE200 over 2006-16

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Exhibit 3: IFFI’s EBITDA growth has also beaten BSE200 (ex-BFSI)


After increasing from FY06 to FY11, median capex of the IFFI companies has stabilized and remained remarkably steady at `4.1bn/annum from FY12 to FY15. Hence, this is line with our thesis that FOBs lead the overall industry (BSE200 ex-BFSI) in terms of capex generation.

Exhibit 4: Indian FOBs are big generators of capex


In short, the revenues, PAT and capex5 of the IFFI companies have grown 4.2%, 3.3% and 4.3% points faster than the BSE200 over the past ten years.

In terms of debt/equity, the IFFI companies are more leveraged as compared to the BSE200. This is because the large IFFI companies have resorted to taking debt to fund their expansion. However, although the IFFI companies have more debt than the rest of the BSE200, we note that debt/equity levels have stayed within the 0.8-1x range in the past decade.

5 Please note that Capex outperformance of IFFI v/s BSE200 is over FY05-15 since cash flow data is not available in quarterly filings. Revenue & PAT data is over FY06-16.

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Median capex for IFFI companies stood at `4bn/annum in the past four years

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Exhibit 5: IFFI companies debt/equity ratios have largely remained stable


FOBs falter at ROCEs and ROEs

However, we note that ROEs and ROCEs for IFFI companies lagged the overall BSE200 Index. This reflects the impact of large capital outlays by FOBs such as Reliance Industries (telecom venture capex), Bharti Airtel (Zain acquisition in FY11 and subsequent network expansion), Tata Motors (JLR acquisition in FY09), and Tata Steel (Corus acquisition in FY09). Led by these large expansions, all of these companies have seen a significant decline in ROCEs from FY06 (average 30%) to FY15 (average 11%), dragging down the overall ROCE and ROE for the IFFI companies.

Exhibit 6: But IFFI ROCE has lagged the BSE200


Exhibit 7: Similarly, IFFI ROEs have also lagged the BSE200


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From the above analysis, we delve further into the question - why do large FOBs allocate capital poorly, given that the promoter family loses the most with such poor returns on capital? Ambition and aspiration can only explain very little. We believe there is more at play and provide the following reasons:

Most capital intensive businesses in India tend to be large FOBs. Thanks to their large size, they have better access than most to large amounts of funds that the FOBs use for capex/acquisitions. Hence, almost by definition, a leading player in a capex intensive sector, will most likely be an FOB.

Over 90% of capex in India over the past decade has come from five sectors – power & infra, telecom, metals, oil & gas, real estate – all of which are synonymous with crony capitalism.

Therefore, as crony capitalism has been battered in India (the CAG reports on allocation of telecom spectrum, coal, Delhi airport, KG-D6, etc. followed by the resets triggered by Modi & Rajan), FOBs have taken the hit in the form of poor returns on their capex.

India – at a turning point for entrepreneurism India also has a long history of business families that go back several generations. Families that have been around for more than 100 years include the Tatas, the Birlas, the Jains (of the Times of India Group), the Murugappas, the Burmans (of Dabur), and the Wadias. However, as countries grow and prosper, access to capital increases (as organized finance in the form of banks and financial institutions spreads across the country) bringing down the cost of capital and reducing reliance on FOBs.

India is at a turning point of entrepreneurship, with 2016 being the 25th year of the economic reforms that liberalized India. As per Walt Whitman Rostow’s ‘stages of growth’ theory, economic growth occurs in five stages of varying lengths:

1. Traditional society

2. Preconditions for take-off

3. Take-off

4. Drive to maturity

5. Age of high mass consumption

India was stuck in the first phase until the end of the license-raj in 1991. More specifically, the first two stages corresponded to the pre-license raj era, with the second stage corresponding to the 1980s with early reforms such as export liberalization, industrial policy reforms, and moving away from a single currency peg.

India’s economy reached Stage 3 with the broader set of reforms in 1991 which included trade and FDI liberalization, privatization, globalization and tax reforms. The expansion of India’s road network, telecom and power sector reforms, from FY04 to FY14 match with Stage 4, the drive to maturity. We have covered these economic phases in depth in our March 2014 thematic report (click here), ‘Invest into India’s the Fourth Wave’. India is thus in the final two stages of economic growth with increasing penetration across categories from automobiles to consumer staples driving mass consumption.

FOBs should outlive their founders

In our September 2014 thematic report (click here) titled ‘The lifecycle of a great company’, we analyzed how great businesses in India tend to follow the founding promoter’s biological lifecycle. As the promoter prospers, so does the company and as the promoter readies to retire, the handover to the next generation becomes critical. This report builds on the criticality of this handover in the form of smooth succession planning. We believe that an FOB can live beyond its founder and become an institution over the long-term, creating wealth for the promoter family, investors, as well as for society at large.

India has a long history of business families that go back generations.

India is in the final two stages of Rostow’s 5-stage model of economic growth

http://reports.ambitcapital.com/reports/Ambit_Economy&Strategy_Thematic_FourthWave_11Mar2014.pdf

http://reports.ambitcapital.com/reports/Ambit_Thematic_Thelifecycle_17Sept2014.pdf

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In section 2, we describe the inherent challenges in an FOB in general and the unique issues faced by Indian FOBs in particular.

In section 3, we describe succession models used by Indian companies as well as insights from our case studies.

In section 4, we provide a checklist for investors to gauge an FOB’s vulnerability to succession planning issues.

In Appendix 1, we show how the lifecycle of an FOB tracks the lifecycle of the promoter.

Finally, in Appendix 2, we provide detailed case studies under three categories, where succession plans worked (called ‘the good’, Asian Paints and Marico), where prolonged family disputes broke out during generational shifts, (called ‘the bad’, Apollo Tyres and Ranbaxy) and where family disputes resulted in the disaggregation of the listed company’s business (called ‘the ugly’, Reliance Industries and Bajaj Auto).

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Section 2: The challenges faced by FOBs “Tales of money, power, and kinship inevitably entail drama and passion, especially with the passage of generations: as wealth grows, so do the opportunities for disagreement.”

- David S. Landes in his book ‘Dynasties: Fortunes & Misfortunes of the World’s Great Family Businesses’ (2006)

Classification of FOBs FOBs are more prone to disputes than professional companies due to their composition. We believe FOBs can be classified into three categories:

a) Founder/entrepreneur: FOBs usually are born as the enterprise of an entrepreneur with or without the support of his family. As the founder/entrepreneur grows old and has children, and if the FOB survives, the businesses move to the next generation. From Dhirubhai Ambani in India to Henry Ford in the USA, first generation entrepreneurs mark the beginnings of most FOBs.

b) Founder with siblings: In this case, a group of brothers start the family business together or, in some cases, rapidly expand the father’s business far beyond what it originally began. Some examples include the Dhingra Brothers (Kuldip Singh and Gurbachan Singh) of Berger Paints, Shashi and Ravi Ruia of Essar, the Hinduja brothers (Srichand, Gopichand, Prakash, and Ashok), the Mittal Brothers (Rakesh Bharti, Sunil Bharti, and Rajan Bharti). In the case of the Ambanis, Dhirubhai Ambani’s brothers, Ramniklal and Natwarlal, eventually joined him in the business. In case of the Bajaj family, the third generation (mainly Rahul Bajaj) went on to make Bajaj Auto the largest company within the family. Similarly, Aditya Vikram Birla built the AV Birla Group, which is currently the largest in the Birla family.

c) Founder with partners: In this case, the FOB is formed by a group of people who are not related by blood. Compared to single founders and founders with siblings, FOBs with founder partners are less common. Prominent examples include: a) Asian Paints which was founded by Champaklal Choksey and his friends Chimanlal Choksi (no relation despite the similar surnames), Suryakant Dani, and Arvind Vakil; and b) Infosys which was founded in 1981 by N.R. Narayan Murthy and six other engineers. Other examples of founding business partners include Emami (founded by Radhe Shyam Agarwal and Radhe Shyam Goenka) and Ipca Laboratories (which was acquired by the Bachchan family, Premchand Godha, and M.R. Chandurkar in 1975 from its previous owners). The Firodia and Bajaj families started Bajaj Tempo and Bajaj Auto to manufacture two-wheelers and three-wheelers in the 1950s but drifted apart by 1968.

FOBs – more vulnerable to failure However, FOBs also face unique challenges such as its sustainability over long periods of time. As Harvard Business Review noted6 in its Jan-Feb 2012 issue, “In the United States, a familiar aphorism — “Shirtsleeves to shirtsleeves in three generations” — describes the propensity of family-owned enterprises to fail by the time the founder’s grandchildren have taken charge. Variations on that phrase appear in other languages, too. The data supports the saying. Some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over. Just 10% remain active, privately held companies for the third generation to lead. In contrast to publicly owned firms, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and

6 https://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses

FOBs usually are born as the enterprise of an entrepreneur

A group of brothers can also start the family business together

An FOB can be started by a group of unrelated promoters as well

“Shirtsleeves to shirtsleeves in three generations”

https://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses

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consumer behavior. Today family firms in developing markets face new threats from globalization. In many ways, leading a family-owned business has never been harder.” (emphasis ours).

Thus, FOBs worldwide face unique problems. India has its fair share of families that faded in prominence (Shri Ram Family of DCM Group, the Dalmias, the Mafatlals, etc.), that survived through the ages (the Tatas, the Birlas, the Burmans, etc.), and that grew exponentially (the Ambanis, Dilip Shanghvi of Sun Pharma, Mittals of Bharti, Agarwal of Vedanta).

We discuss some of these challenges faced by FOBs:

a) The exponential multiplication of promoters: Assume that the promoter has children and they get married and have their own children. In an FOB, this potentially creates feuds, dissipates power, fractures the unity of command, and introduces politics.

Consider this: if two friends or brothers set up a business, then within 20 years, there will be four people vying to run the business (assuming each promoter has two children) in the next generation. We provide the family tree of the Birlas as an example to highlight this point. In each of our 6 case studies in Section 4, we provide similar family trees for the families discussed.

Exhibit 8: The sprawling empire of the Birlas matches its large family

Source: Business Maharajas by Gita Piramal (1996), Ambit Capital Research

b) Growth issues: As the company becomes large, promoters begin to diversify in unrelated areas. This is also one way to provide for separate businesses for the promoter’s children. While the Birlas started with trading cotton, eventually each family branch ventured into different areas, with the AV Birla Group being the largest – with industries as diverse as cement (Ultratech) and telecom (Idea Cellular). The Ambanis started with polyester and are now present in telecom (Reliance Jio, Reliance Communications), retail (Reliance Retail), and finance and insurance (Reliance Capital), energy (Reliance Power). Even a comparatively new family like the Sunil Bharti Mittal Group began as manufacturers of crankshafts for bicycle manufacturers in Delhi, and eventually ventured into telecom. Once the telecom business grew, the Mittals diversified into retail (Bharti-Walmart tie-up) and insurance (Bharti-Axa). The liberalization of India’s economy has also helped in adding new sectors for diversification. Not all diversification is bad and

Expansion of family also increases the number of contenders to run the FOB

Diversification in unrelated areas is one way to provide for separate businesses for the promoter’s children

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providing businesses for children is the prerogative of the promoter. However, in our view, this raises questions on capital allocation choices that are driven by promoter ambition instead of profitability and maintaining strong ROCES.

c) Ill-equipped promoters: An absence of professionals can choke promoter bandwidth, and as the company grows its family members might not be equipped for handling new challenges. While the promoter can take a company to its prime, as the FOB grows large, it will require professional help to stave off competition. Professionals bring in a different skillset and mindset as well as infusion of youth – all of which are is vital for the long-term success for the FOB. In their 2015 book, ‘Indian Family Business Mantras’, authors Peter Leach and Tatwamasi Dixit write, "There comes a time in the development of every business when owners reach a saturation point after which they can no longer do everything themselves. They can try, but this will mean that they have ceased to make the most effective use of their time - and an entrepreneur's most valuable asset is time."

d) Transition to the next generation: In case of FOBs, there are two scenarios: the first where the children are interested in running the FOB after their parents, and the second where they have no interest. In the second case, the solution is easy – the promoter should let professionals run the show, with the children free to do what they want as long as they continue to hold their stake in the company. We have seen this play out in case of Marico where Harsh Mariwala stepped down in 2014 and handed over leadership to Saugata Gupta since Mr. Mariwala’s children (Rishvi and Rishabh) ventured off on their own. TTK Prestige, part of the TT Krishnamachari (TTK) Group, is run by Chandru Kalro (who has been with TTK Prestige since 1986), and family head, TT Jagannathan, is the Chairman. The Murugappa Group let professionals lead the company as far back as 1999. However, if the children are interested in joining the company, this involves a shift in power from the old to the new. These shifts are often major turning points for FOBs, often characterized by power plays and politics, and hence have to be managed well.

e) Lack of professional talent: All of the above problems create the impression that FOBs are a one-man or one-family outfit where professionals have limited growth opportunities. Leach and Dixit write, "Business professionals think twice before joining a family-owned firm because career expectations often terminate one rung from the top of the ladder, above which positions are reserved for family members”. To make things worse, promoters feel threatened by CEOs given the loss of turf and loss of power involved in handing over the running of a business built from scratch to a stranger outside of the family.

The challenges unique to Indian FOBs A) The first flush of entrepreneurs are nearing retirement

Whilst India has a high level of entrepreneurial spirit, the traditional model of entrepreneurism (which flourished in India under the license raj) ended in 1991. As we show in the case studies of Apollo Tyres and Ranbaxy (in Appendix 2), the end of this model caused rifts between generations within families.

India is also at an unusual cusp. Let us take the example of an entrepreneur who, at the age of 35, began his business after the liberalization reforms of 1991. Today, that entrepreneur would be 60 years old and it would be time for him to step aside over the next 5 to 10 years. Moreover, an entrepreneur of the 1991 era would find that the character of the economy has changed with the advent of disruptive technologies, making his knowledge and experience (of navigating through a very different India) appear outdated. His successor will hold the key to the continuation of the FOB. Hence, for the FOB to survive, its leadership should navigate the company in the new era, while the founder/promoter can provide mentorship to strengthen the company from within.

B) Crony capitalism is on its way out in India

The post 1990s model of entrepreneurism - gaming the public contract system - was exposed with the Comptroller & Auditor General’s Report on telephone spectrum in 2010. This is also on its way out. As we have highlighted several times (read our

Absence of professionals chokes promoter bandwidth

Generational shifts are a major turning point for the FOB

"Business professionals think twice before joining a family-owned firm”

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December 2015 thematic, ‘M+R+T=Earnings recession in India’ (click here), India is undergoing a major structural transformation under the influence of resets driven by PM Narendra Modi and the outgoing RBI Governor Dr. Raghuram Rajan.

These changes will pose existential issues to all businesses (FOBs or otherwise), as their competitive advantages (for example, licenses, access to political patronage, access to capital, etc) are challenged by newer, hungrier businesses and entrepreneurs. Large FOBs will struggle to deal with this change more than large, executive run companies like HUL, ITC, etc. This is because often, the promoters of the FOBs refuse to look beyond family members to identify the best talent from the next generation to run the FOB.

C) Cost of capital set to rise

Due the reasons highlighted in points A & B, FOBs, especially in the capex heavy sectors, have proved to be less adept at capital allocation than the broader BSE200. To reiterate our findings from Section 1, companies in the IFFI have poorer capital efficiencies (ROCE and ROE) and higher debt/equity ratios than BSE200 (ex-BFSI companies).

This means that the next generation of FOBs CEOs will have to tackle several existential risks facing the FOBS as the stockmarket rapidly increases the cost of capital for capex intensive FOBS. The last time the Indian economy went thru as big a transition (in the 90s), a whole generation of big FOBs got kicked out of the Sensex. Exhibit 7 is from our June 2010 thematic, ‘Decadal changes in the Sensex’ (click here) and shows how large, established companies like Bombay Dyeing, Hindustan Motors, and Century Shipping churned out of the Sensex in the decade following the 1991 reforms.

Exhibit 9: FOB exits from the Sensex in 1992 and 2002

Exits by 2002 (Churn in 1992-2002) Share price CAGR 92-02 (%)

CAGR 92-02 (Rel to Sensex)

Bombay Dyeing (21) (26)

Ballarpur Industries (18) (23)

Ceat Tyres (15) (20)

Century Spinning (20) (25)

GE Shipping (14) (19)

Hindustan Motors (16) (21)

Indian Hotels 7 2

Indian Rayon (8) (13)

Kirloskar Cummins 7 1

Indian Organic (21) (27)

Mukand (29) (34)

Premier Auto (21) (26)

Tata Power (6) (11)

Voltas (10) (15)

Zenith (31) (36)


Going forward, as the playing field levels out, FOBs which relied on sources of advantage such as superior access to capital and political connections, face two challenges: finding a suitable successor and rewiring their business models to compete in an altered world. We believe some FOBs have already realized these immensity of these challenges and, in response, have begun selling their businesses – for example, Vijay Mallya selling United Spirits to Diageo in 2013 and, more recently, the Jaypee Group selling its cement assets to Ultratech Cement.

In the remaining two sections of this report, we address the following questions:

How can FOBs deal with succession related issues in an optimal manner? (Section 3)

Which FOBs face the most imminent challenges on the succession front? (Section 4)

Large, established companies churned out of the Sensex in the decade following the 1991...

http://reports.ambitcapital.com/reports/Ambit_Strategy_Thematic_MRT_EarningsrecessioninIndia_16Dec2015.pdf

http://reports.ambitcapital.com/reports/Ambit_Strategy_Thematic_Sensexexits_05May2015.pdf

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Section 3: How to succeed at succession "Doing nothing about succession is quite often disastrous for family companies. Yet many business owners, reluctant to give up control and preferring to live with ambiguity, decide that avoiding the issue is the best course for them."

- Peter Leach and Tatwamasi Dixit in their book ‘Indian Family Business Mantras’ (2015)

Succession planning models To create long-term wealth for the family, businesses should outlive and thrive even after their promoters. When done right, succession planning ensures harmony within the family, longevity of the business and value creation for investors, including the family which is the largest shareholder of the company. Succession planning resolves uncertainty and provides stability for the FOB.

There are three distinct models of succession planning that have ensured that FOBs make the most of leadership under the family as well as from professionals. These are as follows:

Promoter handing over leadership to a professional: In this case, the family removes itself from running the company and relinquishes operational control to a professional. The founder remains on the Board of Directors as chairman but the CEO/MD post is given to a professional CEO. The founder’s family has minimal presence in the Board which is dominated by professionals. In case of Marico, Harsh Mariwala stepped down as MD in March 2014, elevating Saugata Gupta to the Board in his place. Marico’s Board consists of nine directors, including Harsh and Rajen Mariwala, with the remaining seven directors (including Saugata Gupta) being professionals. As mentioned earlier, Mr. Mariwala’s children are not involved in Marico.

Family Group working as a managing agency: This is the closest to the decentralization concept espoused in William Thorndike’s celebrated 2012 book, ‘The Outsiders’, namely the family limiting its role to being mentors and advising only on strategic matters (like major decisions of capital allocation such as acquisitions) rather than actively managing the company. The Tata Group Executive Council (GEC) is an example of this model. The GEC is chaired by Cyrus Mistry, the Chairman of Tata Sons, and consists of five professional members. GEC members sit on the Boards of Tata Group companies to lead various strategic functions. In this way, the management of all Tata companies (including succession planning) remains with their individual leaders, while a GEC member on the Board acts as a strategic oversight partner.

Promoter grooms second generation without disrupting leadership: Promoter involvement is higher in this case although the CEO/MD post remains with a professional. The promoters take a lot of effort in grooming the next generation to be non-interfering, but at the same time, not passive promoters with a presence on the Board. Asian Paints and Berger Paints stand out in this regard. Asian Paints has a 14-member board which consists of six non-executive/promoter directors (two each from the three families that own the company), 7 independent directors and Mr. KBS Anand as CEO/MD. Similarly, Berger Paint’s 10-member board consists of 4 family members from the Dhingra family, 5 independent directors, and Mr. Abhijit Roy as the CEO/MD. In both cases, promoter families have a presence on the Board, with specific duties. However, professional management remains at the CEO/MD level.

Family relinquishes operational control to a professional

Family limiting its role to being mentors and advising only on strategic matters

Promoters groom the next generation to be non-interfering, but not passive promoters with a presence on the Board

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Insights from case studies With the above background, we provide detailed case studies in Appendix 2 to show the fine balance between professional management and family involvement, the role of family disputes and the importance of succession planning. We divide

a) The Good: These are seamless transitions that happened from one generation to another or from owner to professional. Case studies included are Asian Paints and Marico.

b) The Bad: In this case, prolonged, often ugly, disputes occur following the transfer of power from one generation to another. Case studies included are Apollo Tyres and Ranbaxy.

c) The Ugly: In this case, family disputes result in disaggregation of the business. Case studies included are Reliance Industries and Bajaj Auto

The key insights from our case studies are as follows:

The personality of the promoter: Promoter profiles have changed. The pre-license raj era promoter would look at maintaining close links with politicians to protect and expand his business interests. As this construct becomes outdated, the next generation of business families should look at sustaining the competitive advantages built by their parents and build upon them. Any diversification venture should be driven by return on capital decisions rather than by blind ambition. We believe that promoters today must be collaborative and be open to the idea of professionals (rather than the promoters) forming the foundation of the leadership in the FOB. The role of professionals: The examples of Asian Paints and Marico show that the use of professionals in the early days of a franchise builds a work culture that, over long periods of time, attracts and retains the best talent. Promoters should be open to letting these professionals rise through the ranks all the way to the CEO level. The next generation should respect the seniority of professional CEOs and not look at them as stop-gap measures till they take over (Ranbaxy). In the absence of professionals, family insiders and confidantes (Reliance Industries) occupy positions of power next to the promoters, thus building a political culture of power-play. The entry of the next generation: The next generation should be asked early on if they are interested in joining the FOB. If yes, they should join at the entry-level and earn their spurs (Rajiv and Sanjiv Bajaj, Mukesh and Anil Ambani, Onkar Kanwar, Dr. Parvinder Singh). If not (Rishabh and Rishvi Mariwala), then the promoters should let them pursue their own interests and ensure that they continue to hold their stakes in the company. For the children who choose to stay on, the promoter should explicitly tell them that leadership is not guaranteed just because they are related to him. As the children rise within the organization, they should be encouraged to hire professionals to help run the business. Family governance: Founders must decide on allocation of ownership and management of companies, especially in the handover to the next generation. An atmosphere of trust and consensus is especially critical in order to avoid showdowns within the family. Founder promoters must understand that handing over their company to the successor is important for its survival (Raunaq Singh – Onkar Singh Kanwar, Bhai Mohan Singh – Dr. Parvinder Singh). As the families grow, promoters have to allocate responsibilities for the next generation across family factions in agreement with each other rather than wait for demands for a division (Ambanis, Bajajs). Family boards and family constitutions are useful for this purpose as the Burmans have shown at Dabur. Corporate governance: Promoters must be open to building a Board of Directors consisting of truly independent directors rather than paying lip service to regulations. Having a Board with professionals from relevant backgrounds (Asian Paints, Marico) can help in guiding the company in strategic decisions especially around capital allocation. An independent Board can eventually become a competitive advantage for the company. In the next section, we use the learnings from these companies to build a checklist of questions for company promoters to use in their succession planning. Finally, we wrap up the report with a list of companies where our analysts believe there are red flags over succession planning.

Promoters today must be collaborative

Promoters should let professionals rise through the ranks all the way to the CEO level

Promoter should explicitly tell his children that leadership is not guaranteed

An atmosphere of trust and consensus within the family is critical

Promoters must build a Board of Directors of truly independent directors

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Section 4: The Succession Checklist “Eventually, I want to make myself redundant in the organization”

- Harsh Mariwala, Chairman, Marico (20137)

From the learnings gleaned from the case studies provided in Appendix 2, we provide a checklist for investors to gauge the strength of the FOB and its vulnerability to disputes in the coming years. These questions can be juxtaposed with the lifecycle of an FOB (Appendix 1) for a stage-wise list of issues. Alongside each question, we also provide concrete, real-life examples of the acceptable norm on each of these issues.

Checklist for investors A: Family Background

What is the age of the promoter and how long can s/he run the show? Has s/he explicitly set a timeline for his succession?

Example: Harsh Mariwala stepped down as Managing Director of Marico at the age of 63 years in 2014. Saugata Gupta, who was appointed as CEO in 2007, took over as MD.

Is the personality of the outgoing promoter such that s/he is likely to cling on to power?

Example: As far back as 1998, the Dabur Family patriarch, Ashok C. Burman professionalized the company and, in 2002, elevated Sunil Duggal to CEO.

How large are the promoter families and are they known to live in harmony, both visibly and going by primary data checks?

Example: The Murugappa family is now in its fourth generation and lives in harmony with explicit family values and responsibilities that guide the FOB.

Are all businesses of the family sufficient to accommodate subsequent generations of promoters?

Example: Reliance Industries Limited is now spread across retail, telecom, and media, over and above the core upstream/downstream petrochemicals business.

Is the holding structure of the company complex or do owners directly own their shares?

Example: The promoters of V-Guard hold 66% of the company in their individual names: Chittilappilly Thomas Kochouseph holds 24%, Mithun Kochouseph Chittilappilly holds 17%, Arun K Chittilappilly holds 13%, and Sheela Kochouseph holds 11% in their individual names as at 31st March 2016.

Does the family have any disputes over ownership of group companies, holding trusts, etc. and what is the status of these disputes?

Example: Tata Sons, the holding company of the Tata Group, is majority held by philanthropic trusts and has a long track record of harmony.

Is the company vulnerable to a major split within family factions? Will promoter bandwidth get exhausted in case of a major dispute?

Example: The Bill of Responsibilities for individuals in the Murugappa Group includes, "to ensure that, in the event of disposal of the individual share of the businesses and partnerships, such disposal is carried out in a manner that will not jeopardize the interest of the family in any manner."

7 http://articles.economictimes.indiatimes.com/2013-10-29/news/43495927_1_soap-opera-n-harsh-mariwala-independent-director

http://articles.economictimes.indiatimes.com/2013-10-29/news/43495927_1_soap-opera-n-harsh-

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B: Background of the Next Generation

Are the promoters in sync with their next generation or is there a visible difference in their strategy and objectives?

Example: Relations between the late Brijmohan Lall Munjal and his son, Pawan Munjal, of the Hero Group were always cordial and in-sync. Pawan Munjal took over as MD/CEO in 2001 and became Chairman in 2015. Throughout, Hero Moto has maintained its dominance of the Indian motorcycle industry and withstood the split with Honda Japan in 2010.

Is the next generation of the promoter generally assumed to be the successor and how qualified is he/she?

Example: Rajiv Bajaj joined Bajaj Auto in 1990, after completing his education. After working in various departments for 15 years, he finally took charge as Managing Director in 2005.

Has the next generation of the promoter contributed significantly and shown leadership so far in her/his existing role in the FOB?

Example: Mukesh Ambani had played an instrumental role in the construction of the Patalganga polyester plant of Reliance Industries which was set up in a fast eighteen months in 1982. He took over as Chairman in 1986, when his father, Dhirubhai Ambani suffered a stroke.

C: The role of professionals

What is the promoter’s track record of hiring professionals? Currently, how many professionals are there in the FOB and at what levels?

Examples: The Daburs professionalized their company in the late-1990s. Similarly, the promoters of Asian Paints hired professionals when they became the largest paints company in India in the late-1960s.

What is the senior-most position that a professional has been allowed to rise to?

Examples: Marico, Berger Paints, Asian Paints, Dabur, Godrej Consumer, are all examples of companies that have elevated professionals, right up to CEO to lead the company.

What is the composition of the Board of Directors? Is the background of the independent directors relevant to the business?

Examples: Marico and Asian Paints have boards that consist of professionals relevant to their respective businesses.

In case the next generation of promoters is working with the company, how is the demarcation between them and the professionals, if any, on the Board?

Examples: Both Berger Paints and Asian Paints have family members on their respective boards of directors with clear roles, while the company is led by professional MD/CEOs.

What is the organization structure? How does reporting work between senior staff, the directors and the Board?

Example: Asian Paints has an Executive Council (EC) which focuses on vision and strategies of the Company. The EC includes members of the promoter family such as Jalaj Dani (President – Supply Chain, HR & Chemicals) and Manish Choksi (President – Home Improvement, International & IT). The EC reports to the MD/CEO. Thus, while the Board has an oversight of the company, promoter family members also have a specific areas of responsibility that report to the MD/CEO.

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D: Succession Planning

What is the track record of succession planning in the company? Is succession entirely left to the promoter?

Example: While Adi Godrej remains the Chairman of the Group, he had hired a facilitator for succession planning in 20098. Today, Godrej Consumer is led by a professional Managing Director (Vivek Gambhir) while other companies in the group, like Godrej Properties (Pirojsha Godrej) are led by family members who have earned their role. Senior leadership at group companies consists of professionals like Gambhir at GCPL, Mohit Malhotra at Godrej Properties, etc. who have been hired by the family.

Is there an explicit policy on succession planning? Does the Board play a role and does the Annual Report specifically mention succession planning?

Example: As explicitly stated in its FY16 annual report, Marico has a board committee whose terms of reference include succession planning for the board, key managerial personnel, and senior management.

Is there a succession planning process at the C-Suite level? Does this succession planning extend to one and two levels below the leadership?

Example: Wipro stands out as an example. In its FY10 annual report, Azim Premji said, “What we do in terms of our succession planning is that every position we have to have at least three successors to that position – one on an immediacy basis, one within one to two years and one within two to four years."

E: Family Boards

Does the family use Family Councils or Family Boards and have they been open enough about their functioning?

Example: The Dabur Groups uses a family constitution and family council, as stated9 by Anand C. Burman.

Does the Family Council/Board have documented terms of reference, or a scope of their responsibilities and duties?

Example: As stated earlier, the Murugappa Group has a Bill of Rights and Bill of responsibilities for its family members.

Do professionals play a key role in the Family Boards/Family Councils?

Example: The Murugappa Group is led by the Murugappa Corporate Board which has eight members consisting of two family members and six non-family members, who are professionals.

8 http://www.business-standard.com/article/companies/godrej-group-appoints-facilitator-for-succession-plan-109071300089_1.html 9 http://forbesindia.com/printcontent/34203

http://www.business-standard.com/article/companies/godrej-group-appoints-facilitator-for-succession-

http://forbesindia.com/printcontent/34203

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Prominent companies where succession beckons Finally, we present a list of companies where a change of guard is due over the next five years and, hence, will be an important event to watch for. The change of guard can be at the chairman level (even if the chairman is non-executive, he tends to influence decisions) or at the MD/CEO level. In both cases, when succession is due in the next couple of years, clarity from management is a positive. While we admit that this need NOT be a negative event, we highlight that change of guard at the top holds the potential to change the direction of these companies.

Exhibit 10: Companies where we see succession planning issues in the near future Company Chairman MD/CEO Comment

AIA Engineering Rajendra Shah (Non-executive, independent)

Bhadresh K Shah

Mr. Bhadresh Shah (age: 63 years) is a first generation technocrat promoter. Whilst the company has a number of senior marketing and manufacturing executives, the company is mainly managed by Mr Shah. Apart from him, there is no senior person who has cross-functional experience. Ex-employees suggest that he keeps a tight control over operations, costs and capital allocation. His daughters have joined the Board in Nov-14. Given that neither have related experience or education, the succession becomes relevant as the company grows primarily through more international mining clients signups.

Dabur AC Burman (Non-executive) Sunil Duggal Mr Sunil Duggal is nearing 60 years and is a key man for the organisation. Succession is

reportedly due in 2018.

Godrej Consumer Adi Godrej Vivek Gambhir Mr Adi Godrej is 74 years old and due to retire. His progeny are on the Board of GCPL.

HCL Tech Shiv Nadar Anant Gupta Mr Shiv Nadar is 70 years old and whilst his term ends in 2017, he can seek re-appointment.

Hero Motocorp Pawan Munjal Pawan Munjal Mr Pawan Munjal is 61 years old. No succession plan has been announced and the firm has no mandatory retirement age. Mr Munjal's children aren't at Hero Motocorp. Press articles indicate nephews are being groomed to take over management.

M&M Anand Mahindra Anand Mahindra

Anand Mahindra is 61 years old. He has two daughters but they do not appear to be interested in M&M (none of them are involved in the company). Divya Mahindra married10 in 2015 and is now based in New York, and Aalika Mahindra, also based in New York, is involved in film making/photography11.

Mayur Uniquoters SK Poddar SK Poddar

Mr S.K. Poddar (69 yrs old) has built Mayur Uniquoters over the last 40 years. Whilst his son, Manav has been working alongside him for nearly two decades now, we note that Mr Poddar is still actively involved in all decisions – capital allocation, hiring of people, pricing of supplies to customers. Lack of experienced senior personnel in the company implies that the successor has to be from within the family. Apart from his son, his son-in-law is also active in the company.

Supreme Industries B L Taparia (Non-Executive) M P Taparia

Mr M.P. Taparia (74 yrs old) has been managing Supreme Industries for nearly 50 years. Whilst his family members are involved in the business, there is no clear indication in regards to who will succeed him. Succession will become a critical issue as not only does Mr M.P. Taparia handles all capital allocation decisions, he also handles product portfolio expansion and many day to day decisions.

Tech Mahindra Anand Mahindra CP Gurnani Mr C.P. Gurnani, a key leader for TechM, is 57 years old. As yet, no successor has been officially announced.

VA Tech Wabag BD Narang (Independent) Rajiv Mittal

Whilst Mr Mittal (age: 55 yrs) is not looking at retiring any time soon, he will have to soon look for a CEO to manage a company with operations across 22 countries. Managing people across cultures in a government dependent business is not easy; Mr Mittal’s success has been on account of the cult-like following he has with his staff, several of whom came with him at the time of the acquisition of Indian entity (in 2005) and later global entity (in 2007). Given the lack of senior talent in water engineering industry, finding a CEO-leader could become a challenge.

Wipro Azim Premji (also MD)

AZ Neemuchwala (CEO)

Mr Premji has named his son, Mr Rishad Premji, as a successor and has explicitly said that his son will not be CEO, but will represent promoter ownership on the company’s board.

Zee Entertainment Subhash Chandra (Non-Executive) Punit Goenka

Mr Subhash Chandra is 65 years old and remains an instrumental presence. While his children, Mr Punit Goenka (MD & CEO) and Mr Amit Goenka (CEO-International Business) lead the company, we believe that Zee still faces key man risk given the centrality of Mr Subhash Chandra.


10 http://economictimes.indiatimes.com/magazines/panache/anand-mahindras-daughter-divya-had-a- super-quiet-wedding/articleshow/47906198.cms 11 http://indianquarterly.com/a-conscious-uncoupling/

http://economictimes.indiatimes.com/magazines/panache/anand-mahindras-daughter-divya-had-a-

http://indianquarterly.com/a-conscious-uncoupling/

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Appendix 1: Lifecycle of an FOB, its problems, and solutions Lifecycle of an FOB Like any business, FOBs have a lifecycle too. We track this lifecycle across three phases: Youth, Prime, and Transition, which are parallel to a promoter’s biological lifecycle. We highlight that this cycle will play out for every generation of the promoter, assuming that the FOB survives over time. Hence, well-managed transitions can rejuvenate FOBs landing them back at the Youth phase. Many FOBs in India are more than 100 years old (e.g., Tatas, Daburs, Wadias of Bombay Dyeing, Kirloskars, etc.) but not all of them are as large and influential as they once used to be. For FOBs, surviving is easy, but thriving and taking advantage of new opportunities require effective succession planning.

Exhibit 11: Various stages of an FOB

Youth Prime Transition

Characteristics Single or limited product portfolio, that meets with success and grows rapidly

Products become market leaders or in Top 5 of their categories

Products have sustained leadership but competition is creeping up

Promoters are prime drivers of their business, fuelled by ambition

Promoters remain leaders, ambitions have grown larger, but operation level work has been delegated

Promoters are still active but due for retirement in next 5-10yrs

The first generation of family is in charge

Second generation is young and joins the company at a junior level

Second generation/professional CEO is due to take charge

Duration 15 to 20years 10 to 15years 3-5years

Examples Asian Paints (1942 to 1967) Reliance Industries (1980s) Hero Moto (current)

Ranbaxy (1952 to 1970) Bajaj Auto (1980s) Godrej Consumer (current)


As the company grows and families expand over time, the FOB structure becomes complex. Leach and Dixit explain this complex structure using a three-circle model that comprises the family, the owners and the business. We have given this structure in the exhibit below.

Exhibit 12: Interlocking Systems: The Three-Circle Model

Source: ‘Indian Family Business Mantras’ by Peter Leach and Tatwamasi Dixit, Ambit Capital research

In the above exhibit, Leach and Dixit have described the areas in the circles as follows. We add examples to each category:

1-3: Individuals in these sectors have only one connection with the business – they are family (family members of owners), or they are owners (Tata Sons), or they are employed by the business (professional CEOs such as K.B.S. Anand of Asian Paints, Saugata Gupta of Marico, etc.)

The lifecycle of the FOB run parallel to a promoter’s biological lifecycle

As the company and family grows, the FOB structure becomes complex

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4: This sector is within both the family and ownership circles and, therefore, comprises family members who own shares in the business but are not employees (eg: Rishabh and Rishvi Mariwala own Marico shares but do not work with Marico).

5: Owners who work in the business but who are not family members. (eg: Danis, Choksis and Vakils are promoters of Asian Paints).

6: Family members who work in the business but who do not own shares. (eg: typically extended family that works in the company and is related to the founder but does not own any shares in the FOB)

7: Owners who are family members and employees in the FOB (Ambanis, Birlas).

We now show how the entry of professionals and succession should ideally be planned at each phase to make these phases (Youth-Prime-Transition and back to Youth) as the ideal template for an FOB.

Youth phase: We define the youth phase as the period spanning the birth of the business till the promoter(s) aggressively expands the business. Examples of this phase include Bhai Mohan Singh and Ranbaxy’s early days. In his book, “Business Battles”, Shyamal Majumdar, writes, “Even though he had no knowledge of the pharmaceutical business, Bhai Mohan could sense the potential that the industry promised. He made some smart moves after the (Ranbaxy) acquisition and soon graduated from distribution to manufacturing drugs. Bhai Mohan saw a business opportunity in the manufacture of copycat drugs which, given the patent regime in India at the time, was legitimate and also a precursor to Ranbaxy becoming a global name in the generics business." Another example of this phase is Asian Paints in its early years, when Champaklal Choksey and his partners found success by selling paints directly to shopkeepers in rural areas, after failing to find a market in urban regions.

First generation entrepreneurs start young, though there is no standard age for the Indian entrepreneur. Dhirubhai Ambani started in his 20s, Rahul Bajaj joined Bajaj Auto when he was 26. In 1938, when JRD Tata was appointed chairman of the Tata Group at age 34, he was the youngest member on the Tata Sons Board. Among the younger companies, Sandeep Engineer incorporated Astral Poly in 1996 at 35.

In this phase, the promoter should look at adopting the following practices:

1. Employ professionals: While the promoter is the sole driver of the business, he should be open to looking at people with ideas to help him drive the early phase of the business. He can look for young and vibrant talent that matches his levels of drive and ambition. Co-founders (eg: the founding promoters of Asian Paints) fill this gap at this early stage, which is why sole promoters should look for external talent.

For example, Sandeep Engineer of Astral Poly appointed Hiranand Savlani as Astral’s Chief Operating Officer. Savlani is a Chartered Accountant (CA), Cost Accountant (ICWA), Company Secretary (CS), and also holds a degree in Law (LLB). Savlani was entrusted with setting up Astral’s new plant at Baddi. Engineer also hired Sanjay Shah to run the day-to-day operations at Baddi. Savlani and Shah ensured that the Baddi operations didn’t require constant oversight from Engineer and he could remain focused on Astral’s marketing and brand building. In fact, Engineer also hired Mayur Vakil, a veteran of the plastics industry, as President of Astral Poly in 2004. While Vakil quit Astral in FY10, Engineer stands out as an example of an entrepreneur willing to hire professionals early in the FOB lifecycle.

Among older families, the Birlas were famous for hiring Chartered Accountants. In her book, “Business Maharajas”, Gita Piramal quotes the late Aditya Vikram Birla on this preference, “I have nothing against MBAs. They are brilliant boys, extremely bright and enterprising. There is nothing wrong with the man, but the training that is given is better suited to multinationals. CAs have a very good background. Their whole educational upbringing is such that they have a very good grasp of the basics, of all that is happening in India, in company law, in accounting.” Similarly, Harsh Mariwala at Marico also hired professionals in four critical areas, advertising, marketing, human resources, and distribution to build out the early phase of his edible oil and hair oil business.

Youth phase lasts from birth till aggressive expansion

Promoter should look at people with ideas to help him drive the early phase

Strategy


2. Define transition: While this might appear too early for the promoter, he must plan for the future of the FOB. Legal documents such as the will should be prepared with enough clarity on who will inherit the business to avoid future conflict (eg: media reports12 state that Dhirubhai Ambani had died intestate since he assumed his sons would remain united). Large families should define and create shareholding structures for companies within the family group to avoid future conflict. Complicated holding companies and ownership structures can potentially create problems later. For example, in 2005, the Birla Family saw a dispute over the ownership of Pilani Investments, the holding company of the family’s stakes in various companies.

Prime Phase: By this time, the promoter is at his peak and his company has found its groove. Professionals, if hired earlier, have grown into leadership positions but the family is firmly in charge of all strategic decisions. If professionals have not been hired, the promoter must ensure that he gets them on board at this phase. The company’s products are in the Top 5 of their categories and promoter ambitions have, naturally, grown larger. Examples include Rahul Bajaj and Dhirubhai Ambani at the peak of their game in the 1980s. As Piramal notes in her book, "In the 80s, Reliance grew at an astonishing 1100 per cent, with sales moving up from `2bn to `18.4bn, but it wasn't India's fastest growing company. Its expansion trailed behind Bajaj Auto's incredible growth rate of 1852 per cent. Under Rahul Bajaj, the Pune-based scooter company's sales swelled from `519m to `18.5bn during the same decade. Both Reliance and Bajaj Auto are lean and owner-driven corporations, yet in terms of character, style, background - every parameter that counts - there couldn't be two more dissimilar chairmen than Dhirubhai Ambani and Rahul Bajaj."

1. Change mentality: At its peak, the promoter must gear up to move to a role that focuses on ‘vision, values, and strategy’. The promoters must start thinking of building institutions, rather than growing their business. While businesses might struggle with choosing a leader, institutions do not face any difficulty with change in leadership. Hence, the FOB must have its own distinct identity and a clear sense of purpose. Ideally, the promoter must look at himself as a custodian of the business, of the resources, and of the family’s values. For example, the Tata Group’s purpose, as per its website, is summarized in two succinct paragraphs:

“At the Tata group we are committed to improving the quality of life of the communities we serve. We do this by striving for leadership and global competitiveness in the business sectors in which we operate.

Our practice of returning to society what we earn evokes trust among consumers, employees, shareholders and the community. We are committed to protecting this heritage of leadership with trust through the manner in which we conduct our business.”

The website goes on to list integrity, understanding, excellence, unity, and responsibility as its core values. Similarly, the Murugappa Group’s website states that it “...is inspired by a set of enduring values and beliefs called the ‘Five Lights’ – a guide to everyday excellence. It clearly defines a way of life, and is demonstrated by these strong values we live by: Integrity, Passion, Quality, Respect and Responsibility.”

2. Handle children: In case the promoter’s children have decided to join the family business, they must be groomed from the bottom up instead of joining the company directly at the Board level. In case the Promoter still wants her/his child on the Board, s/he can provide her/him with a specific area to look at while leaving overall leadership with herself/himself or, even better, with professionals.

Sudarshan Chemicals, founded by Dr. R.J. Rathi in 1950, stands out as an example where the founder laid down ground rules for his children. In his book, 'The 10 Commandments for Family Business", author Kavil Ramachandran writes about the key principles Rathi set for himself and the family:

12 http://www.rediff.com/money/2004/nov/19ril.htm

Large families should define shareholding structure to avoid future conflict

In the prime phase, the promoter is at his peak and his company has found its groove

Promoter must move to a role that focuses on ‘vision, values, and strategy’

Promoter’s children must be groomed in the business from the bottom up

http://www.rediff.com/money/2004/nov/19ril.htm

Strategy


“Family members will be permitted to join the business if they have graduated in chemical engineering from a reputed US university, preferably with an MBA from another famous institution.

Family employees will be treated on par with other employees in terms of attendance, salary, leave, and other rules. They have to eat from the canteens, like other employees.”

Hence, the FOB must accept the children on their individual strength and not on blood ties with promoter. For example, Rajiv Bajaj joined Bajaj Auto in 1992 but was elevated to Managing Director only in 2005 (albeit, after it was clear that Bajaj Auto would be led by Rahul Bajaj’s sons) after proving his abilities and shifting Bajaj Auto towards motorcycles away from scooters in line with market realities.

3. Employ and elevate professionals: In case founders haven’t yet hired professionals to run senior roles, they should do so now. Hiring professionals is critical in the prime phase as the founder might be overwhelmed by increasing complexities for expansion. For example, while the FOB’s products might have succeeded with the target audience in his hometown, the founder might be at a loss to expand across India. Some of the key areas where promoters might be out of their depth and need professional supervision are distribution models, supply chains and advertising and communication. For example, each area in India responds to different types of ads. Hoardings work in the south but not in the north and west. These nuances may be lost on the promoter and can be addressed by hiring professionals to run these functions.

Professionals already in senior roles should be promoted and given more responsibility. These professionals should also be encouraged to build a unique work culture (discussed in the next point). Besides Asian Paints, Berger Paints and Marico, the Murugappas and the Burmans of Dabur stand out as families that induct professionals early and groom them for senior roles even as family members retain overall control of the company. Similarly, each business of Godrej Industries is headed by a non-family CEO or COO. M&M has a professional Executive Director (Pawan Goenka) for its auto and farm business, while Anand Mahindra remains the chairman.

4. Nurture a distinctive work culture: A growing FOB is an opportunity for the promoter to nurture a unique work culture instead of remaining a ‘command and control’ outfit. William N. Thorndike’s classic, ‘The Outsiders’, provides a useful decentralized structure that releases entrepreneurial energy and keeps costs and rancor down. In Chapter 9, titled “The Outsider’s Mindset”, Thorndike writes, “The outsider CEOs were master delegators, running highly decentralized organizations and pushing operating decisions down to the lowest, most local levels in their organizations. They did not, however, delegate capital allocation decisions. As Charlie Munger described it to me, their companies were “an odd blend of decentralized operations and highly centralized capital allocation,” and this mix of loose and tight, of delegation and hierarchy, proved to be a very powerful counter to the institutional imperative.”

This decentralized structure, which empowers executives and places the family-owners in a mentoring capacity, de-risks the firm from promoter/key-man risk AND de-risks it from succession planning issues. Harsh Mariwala is a good example of this approach. As he told us in November 2015, “I strongly believe that culture can be a source of competitive advantage in an organization and it’s impossible to copy. The organization’s culture is a major driving force in the execution of strategy. Correct culture helps in proper execution of strategy by helping everyone align on the same page.” Our February 2016 Coffee Can Legends report on Marico (click here) deals with this aspect at length and how Marico’s unique work culture is its competitive strength against MNC FMCG companies that are much larger.

Hiring professionals is critical in the prime phase

A decentralized structure that releases entrepreneurial energy and keeps costs and rancor down

Strategy


5. Constitute an independent Board of Directors: The promoter should look at inducting professionals in the Board of Directors instead of filling it with friends and family to meet the legal requirement of having half of the board as independent directors. The presence of these independent professionals with their collective experience helps in guiding the company through key strategic moments. The boards of both Asian Paints and Marico are relevant examples in this regard. In the case of Asian Paints, 7 of 14 directors are independent professionals with relevant experience, and in the case of Marico, 6 of 9 directors are independent professionals with high pedigree.

Exhibit 13: Background of Independent Board of Directors on Asian Paints

Name On Board since Background

Dipankar Basu 15th April, 2000

Was Chairman of State Bank of India till August 1995. Member of Government's Divestment Commission (1996-99). Advisor to the Government on banking sector reforms (1997).

Dr. S. Sivaram 4th July, 2001

Bestowed with "Padma Shri" in 2006. More than 30 years’ experience in research on polymer synthesis. Serves on the editorial board of several journals in chemistry and polymer science.

Mahendra Shah 6th June, 2001

Was Managing Director of The Indian Card Clothing Co. Limited (1985-2001) Was Chairman of panels of Textile Machinery Manufacturers’ Associations. Holds a B.E. degree in Electrical Engineering and a Master’s degree in Industrial Engineering.

S. Ramadorai 16th September, 2009

Recipient of Padma Bhushan in 2006 and CBE (a grade within the British order of chivalry) in 2009. Was CEO and MD of TCS (2004-09); 32 years of total work experience at TCS. Advisor to the Prime Minister in the National Skill Development Council.

M. K. Sharma 25th October, 2012 Inducted into the Board of HUL in 1995 as a Whole time Director. Vice Chairman of HUL (2000-07). Completed PGDPM and Diploma in Labour Laws from Indian Law Institute, Delhi.

Mrs. Vibha Paul Rishi 14th May, 2014

Was part of the founding team of Titan Watches, and founding team employee of Pepsico India. Was Director, Marketing and Customer Strategy at the Future Group. 17 years’ experience at PepsiCo in marketing and innovation roles in India, US and UK.

Deepak Satwalekar 30th May, 2000

Was MD of HDFC Ltd. from 1993 to 2002. MD & CEO of HDFC Standard Life Insurance Co. Ltd (2000-08). Chaired and been a member of expert groups related to industry, Government and the RBI.

Source: Industry, Ambit Capital research

Exhibit 14: Background of Independent Board of Directors on Marico

Name On Board since Background

Anand Kripalu 2007 MD and CEO of United Spirits since 2014 Was MD and President of India and South Asia with Mondelez International till Sept 2013 Was MD for Unilever's East Africa operations; 22 years’ experience in HUL

Atul Choksey 2001 Chairman of Apcotex Industries Ltd and Apco Enterprises Ltd. Was MD of Asian Paints from 1984 to 1997; 24 years’ experience in Asian Paints Was President of the Bombay Chamber of Commerce & Industry of India 1993-994

B. S. Nagesh 2010 Vice Chairman and Non-Executive Director of Shoppers Stop Ltd since 2009 Chairman of Retailers Association of India; 24 years’ experience in retail industry First Asian to be inducted into the “World Retail Hall of Fame” 2008

Hema Ravichandar 2005 Was Vice President and Global Head of HR for Infosys Group Was the Chairperson for The Conference Board's HR Council of India & Member of the National HRD Network of India; 28 years of experience in HR

Nikhil Khattau 2001 MD of MF Advisors Pvt. Ltd. Founding CEO of SUN F&C Asset Management which was sold to Principal Financial Group, USA in 2004. On the Board of the national board of advisors of AIESEC in India.

Rajeev Bakshi 2003 MD of METRO Cash & Carry India Pvt. Ltd. Was Joint MD of ICICI Venture Funds Management Company Limited Was MD of India operations and South African business in Mondelez India Foods.


6. Family Councils: As promoter families grow large, they should consider setting up a Family Council that consists of family members. A Family Council, including – if the family is large enough – a Family Constitution can lay down rules, regulations, structures within which the family will operate. It can also define a procedure for succession planning in order to avoid uncertainty. Family Council meetings should be held at least once a quarter with contributions from each family member. The performance of these contributions from the respective members should also be reviewed in these meetings. Examples of families that have made a Family Constitution include the Jhawars of Usha Martin Group, the

Boards of both Asian Paints and Marico are relevant examples of professionalism

A Family Council can lay down rules, regulations, structures within which the family will operate

Strategy


Agarwals and Goenkas of Emami, and the Raos of GMR Group. Prominent family groups that have set up Family Councils or Family Boards include the Adi Godrej Group, the Murugappas and their Murugappa Corporate Board (which has 2 family members and 6 non-family members), and the Burmans of Dabur (whose Family Council13 has 10 seats, of which 4 are occupied by family members).

7. Succession Planning: This is the right time for the promoter to actively consider who will be his successor - either from within the family or a professional. Succession planning should extend beyond the promoter/founder to include all ‘C-Suite’ executives. Hence, every ‘Chief’ of a function should ensure succession planning for his own job as well as one to two levels below him. This will ensure the survival of the FOB into the long term and help transition the FOB to an institution, rather than just a company.

Wipro stands out as an example here. In an interview14 in 2014, then CFO Suresh Senapaty said, “For us, succession planning is a process in which for every individual in a critical position, a successor has been planned. The successor is a potential replacement who could take charge immediately. There is succession planning for all of us, whether it is (chairman Azim) Premji, (chief executive T K) Kurien or me. Even for our direct reports, we have succession planning in place. This plan goes two levels below.”

Family Boards and Family Councils can have healthy discussions on the change in command in the next phase so that there is no ambiguity among family members about the change in command. Succession planning should also include who will be the successor in case the promoter suddenly dies. Marico divided succession planning in two parts: defining a process for a ‘drop-dead successor’, and developing internal talent. In case of an emergency, the drop-dead successor would only be an interim-CEO until the Board identifies a replacement.

Transition phase: By this time, the FOB is a market leader with competition likely creeping up. The promoter is well past his prime having given his best years to building the company and bringing it to a leadership level. Almost all FOBs reach this phase as generations change guard. Owner promoters must be prepared to let go of their organizations and move to a mentoring/advisory role. Currently, we see Godrej Consumer at this sensitive point given that Adi Godrej is 74 years old. Similarly, Hero Motocorp is also at this point since Pawan Munjal is 61 years old with no clear indication as to who will take over from him.

1. Choose successor: At this stage, the announcement of a successor should be inevitable rather than uncertain. Uncertainty fuels speculation, creating a negative atmosphere. Unexpected surprises tend to bring family disputes out in the public. Examples include: Ranbaxy – Dr. Parvinder Singh hired professionals to lead the company much to the consternation of his father, Bhai Mohan Singh; and Reliance Industries – the tiff between Mukesh and Anil Ambani came out in the open after Dhirubhai Ambani’s death. In comparison, the Tata Group stands out as one where the transition from Ratan Tata to Cyrus Mistry has been smooth, while the previous transition from JRD Tata to Ratan Tata was acrimonious following the power struggle between Ratan Tata and Russi Mody. If the owner’s children were inducted in the prime phase and given line responsibilities, then the owner must choose who, among his children, is best qualified to succeed.

Many FOBs in the Nifty have made the transition to professional CEOs. Excluding the Tata Group which has a history of professional CEOs at individual companies, these FOBs include Asian Paints (KBS Anand), Bharti Airtel (Gopal Vittal), HCL Tech (Anant Gupta), Idea Cellular (Himanshu Kapania), Tech Mahindra (C.P. Gurnani), and Wipro (Abidali Neemuchwala).

13 http://www.forbes.com/sites/anuraghunathan/2015/10/07/delhis-burman-family-professionalized- consumer-company-dabur-in-1998-and-reaped-rich-rewards/#6fdc1527538b 14 http://www.business-standard.com/article/companies/wipro-confident-about-succession-planning-says- senapaty-114081300835_1.html

Succession planning should include promoter and all ‘C-Suite’ executives

The promoter has given his best years to building the company and bringing it to a leadership level

The announcement of a successor should be inevitable rather than uncertain

http://www.forbes.com/sites/anuraghunathan/2015/10/07/delhis-burman-family-professionalized-

http://www.business-standard.com/article/companies/wipro-confident-about-succession-planning-says-

Strategy


2. Move to non-executive chairman/mentor role: With a professional CEO in charge, the promoter should become an advisor/mentor to the CEO and limit his involvement to Board meetings and key strategic decisions. Speaking about his role in Dabur India, Dr. Anand Burman, Chairman, said in a 2012 interview, “There are certain decisions in which the family is always involved. For instance, I’m involved in personnel (recruitment) above a certain level. Other areas include acquisition and disposals (of an asset above certain value) and capital expenditure above a certain limit. I don’t get involved if an old machine has to be sold. But if it is a factory, then I do. Every three or four years, we have a strategy review, which has to be cleared by the family.” To be clear, we are not advocating that the promoter leave the company completely. Indeed, far from retiring, the owners must play a mentorship role in guiding the next generation. In today’s context, they would become ‘Chairman Emeritus’ of their FOBs. Examples include Ratan Tata and Narayan Murthy. Examples of founders who are now Chairmen include, Azim Premji, Shiv Nadar and Harsh Mariwala. This will ensure that the collective experience and expertise of the founder is still available for the FOB.

3. Family Council: Family Council meeting should be routine affairs. The family patriarch, now retired from his company, can ensure that family ties are cordial and the ambitions of all family members are satisfied. His wealth of knowledge and experience should be used by subsequent generations to further the FOB and, more importantly, ensure that the family sticks together. Again, the Murugappa Corporate Board (headed by A Vellayan, 63 years old) and the Dabur Family Council stand out as relevant examples. The Murugappa Group even has a bill of rights and responsibilities15 for their family members. For example, the bill of rights confers many rights on each male family members, such as “the right to be given an opportunity to work in any of the Group companies provided he has an aptitude for the job”. The bill of responsibilities calls for individuals to the family to, for example, “uphold the tradition, reputation, and values the family stands for.”

What could go wrong? Our suggested lifecycle of youth-growth-transition is based on the promoter’s biological cycle. We recognize that reality can be very different in each phase given emotions and ambitions involved in family ties. We now discuss the unique problems that FOBs can face. We also contemplate some solutions that might work in these cases.

Disputes between founders and their children, and between siblings

FOBs are vulnerable to the following problems that often cause rifts between founders and their children, as well as between the founder’s children:

a) Disagreements over how the business should be run: Clash of egos and over-arching ambitions are reasons for rifts between promoters. In case of Ranbaxy and Apollo Tyres in the 1990s, we have seen how father and son fought over how the business should be run. In case of Ranbaxy in 1999, while Dr. Parvinder Singh favored professionals to lead Ranbaxy, his father, Bhai Mohan Singh preferred control to remain with the family. In “Business Battles”, Majumdar writes, “His son’s action rattled Bhai Mohan. And that is what, many believe, drove him to assert his role as family patriarch and not let emotions come in the way of doing his duty.” In case of Apollo Tyres, Onkar Singh Kanwar believed that his father could not handle change in business environment. Majumdar writes, “This perceived inability, on the part of his father, to manage the business environment would later become a recurring theme in Onkar Kanwar’s decade-long, very public battle with him (Raunaq Singh).”

Possible solutions: Families should be frank and open in their communication with their children. There is no formula for this but a relationship of trust between parents and children needs to be built and maintained to avoid

15 Source: The 10 Commandments of Family Business by Kavil Ramachandran.

The promoter should become an advisor/mentor to the CEO

Murugappas and Dabur stand out as examples of Family Board/Family Councils

Clash of egos and over-arching ambitions are reasons for rifts between promoters

Families should be frank and open in their communication with their children.

Strategy


misunderstandings and miscommunication. An open communication system builds trust and this is invaluable in times of crisis. Parents can likely look for leadership traits within their children as they grow and communicate with them as to their future in the business. If things get worse, family insiders, family confidantes, influential lawyers, and chartered accountants, are normally used as mediators to resolve issues. S. Gurumurthy, for example, was a mediator in the Bajaj family dispute.

b) Favouritism in succession and inheritance: Fathers choosing their favourite children is a natural tendency. However, when it comes to business, with extended families, this is another cause of strife. In the case of Bajaj Auto, Kushagra Bajaj held ambitions of running Bajaj Auto only to find that his uncle, Rahul Bajaj, chose his own sons (Rajiv and Sanjiv) instead of him. This resulted in an ugly, public spat that ran from 2001 to 2009. In the case of Ranbaxy, Bhai Mohan Singh’s sons, Manjit and Analjit, were dissatisfied when the crown jewel of the family, Ranbaxy, went to Dr. Parvinder Singh. This resulted in a long-standing war between the families that was eventually settled in 2006. When Priyamvad Birla died in 2004, her will bequeathed her fortune to R.S. Lodha, which caused a huge dispute between the Birlas and Lodha. The Birlas are no strangers to strife over inheritance. In the 1980s, 6 branches of the Birla clan were fighting over the empire of GD Birla, the best of which was left for his son BK Birla and his son AV Birla. And finally, the Kirloskar Group saw a major dispute break out after the death of founder-patriarch, Shantanu Kirloskar, over inheritance of the family business. Eventually, the dispute16 between Vijay Kirloskar (Kirloskar Electric) and his nephews Atul, Sanjay, and Rahul (Kirloskar Brothers, Kirloskar Oil Engines, Kirloskar Pneumatics) ended in 2002 when the warring factions sold their stakes in group companies to each other so that each family member got what he wanted.

Possible solutions: Once again, open and honest communication between members goes a long way in building trust. Disagreements should not lead to disenchantment and estrangement. For any family, it is critical to build respect and tolerance for diverse views instead of an atmosphere of jealousy and insecurity. Open channels of communication and a forum (like a Family Board of Family Council) are also critical mechanisms. Succession planning can then become a process decided in advance and in consensus with all family members, including seniors. This avoids acrimony at the time of the death of the patriarch. A family constitution and a family council should be useful in resolving matters over succession and inheritance.

c) Sibling rivalry: Sibling rivalry is common and, perhaps, inevitable. As a positive, it fosters healthy competition within the family. As a negative, it causes resentment and bitterness. Sibling rivalry is a very common cause of family battles – one generation of Bajaj brothers (Rahul Bajaj versus Shishir Bajaj) to another (Rajiv versus Sanjiv); the Ambani scions (Mukesh versus Anil); and even families of yore like the Chhabrias (Manohar versus Kishore) are prime examples. It can impact any FOB model that survives beyond one generation since battles between cousin brothers (Birlas, Bajaj) are also common.

Possible solution: What works to resolve father-son discord should work for sibling rivalry too, namely, open and transparent communication, the involvement of elders and family confidantes. Parents can give specific businesses and responsibilities to each sibling and let them compete. Parents would also do well to define, in advance, the role of each sibling when they join the business.

16 http://www.livemint.com/Home-Page/TWDuj9uEP602NN17nqzmAO/Kirloskars-untangle-crossholdings.html

Extended families can cause strife when it comes to choosing successors

Open and honest communication between members goes a long way in building trust

http://www.livemint.com/Home-Page/TWDuj9uEP602NN17nqzmAO/Kirloskars-untangle-

Strategy


Problems related to the alpha male personality

The flip side of an entrepreneur with ambition and energy is the possibility of a dominating, alpha male personality. Often enough, their ambitions consume their lives and even family members pay the price in terms of family disputes. From Dhirubhai Ambani and Rahul Bajaj to Bhai Mohan Singh, there is no dearth of examples of motivated business founders driven by their ambition to establish empires. Even in the case of founders who have retired as chairmen, they continue to pull the strings in the background. In such cases, even if the son has been elevated to a CEO/MD position within the company, the real control and command will still lie with the patriarch.

For example, in case of Zee Entertainment, our primary data research indicates that Mr. Subhash Chandra, 65 years old, still plays an important role in key decisions such as senior management appointments although his son Punit Goenka, 41 years old, was appointed MD and CEO in FY08. Clearly, this is in stark contrast to the glowing words that Mr. Chandra had to say about his son, in his book “The Z Factor” where he says, “The success which he (Punit) has achieved in the entertainment content business as CEO of Zee Entertainment has given him confidence and helped him improve as an entrepreneur. He brought stability to the company. The flagship channel has come from the fourth position to being number 2.”

Hence, promoters who refuse to let go of running the company can become a hindrance to the future of the FOB. Truly letting go is difficult and even if the promoter does let go, there is a chance he will return.

A recent, high-profile, and international example was the resignation of Nikesh Arora from Softbank. Arora, at one time Google’s highest paid employee, joined Softbank in 2014. In 2015, Softbank founder, Masayoshi Son, anointed Arora as his successor, a rarity in Japan where outsiders don’t normally run FOBs. A year later, Son changed his mind and on 21st June 2016, Arora announced his resignation from Softbank. Subsequently, the Financial Times reported17 Son as saying, “I know I should not be a hindrance to SoftBank’s future growth and that I need to pass on the baton to the younger generation. But I’ve become greedy again and I want to continue as chief executive for a bit longer. I’ve come to a realisation once again that I’m young. Please let me lead a bit longer.”

Thus, a dominating alpha male promoter’s refusal to let go poses a key risk to the FOB. In their book, Leach and Dixit quote a 2009 survey18, "In a recent survey, when CEOs of Indian family businesses were asked when they plan to retire or turn over the leadership of their companies, an astonishing 52.2 per cent said they planned to work in their current position until they died. In the United States, the comparable figure was 16 per cent."

In the table below, we provide a list of some of the longest serving chairmen of India’s Nifty companies of FOBs. We add L&T and ITC to show that even in professionally owned companies, a chairman can have a long tenure.

17 https://next.ft.com/content/2d2ff4be-3825-11e6-a780-b48ed7b6126f 18 http://www.baylor.edu/business/research/index.php?id=68729

Founders who have retired can still continue to pull the strings in the background

Promoters who refuse to let go can become a hindrance to the future

https://next.ft.com/content/2d2ff4be-3825-11e6-a780-b48ed7b6126f

http://www.baylor.edu/business/research/index.php?id=68729

Strategy


Exhibit 15: Tenures of some of India's oldest corporate leaders Family Chairmen Tenure (From-To) Years Status

Tatas JRD Tata 1938-1988 50 Deceased

Mahindras Keshub Mahindra 1963-2012 49 Retired from company

Ambanis Dhirubhai Ambani 1977-2002 25 Deceased

Wadias Nusli Wadia 1977-present 39 Active

Infosys N R Narayana Murthy 1981-2011 30 Retired from company

Hero Moto Brijmohan Lall Munjal 1984-2015 31 Deceased

Tatas Ratan Tata 1991-2012 21 Retired from company

Mittals Sunil Bharti Mittal 1995-present 21 Active

AV Birla Group KM Birla 1995-present 21 Active

L&T AM Naik 2003-present 13 To retire in 2017

ITC YC Deveshwar 1996-2016 20 To retire in 2017

Source: Business Standard19, Company, Ambit Capital research

Possible solutions: The founder must accept the fact that at some point of time – if he wants his business to endure – he must let go. They should pick successors far ahead of retirement and have open and frank discussions with their children. This will avoid turmoil later. A family confidante, insider, or even taking professional help in choosing a successor can provide much-needed objectivity in this critical decision.

In the next appendix we highlight case studies where succession planning has worked and where disputes have broken out within the promoter family.

19 http://www.business-standard.com/article/companies/deveshwar-to-step-down-from-executive-role-at-itc-116062101123_1.html

Founders should pick successors far ahead of retirement

http://www.business-standard.com/article/companies/deveshwar-to-step-down-from-executive-role-at-

Strategy


Appendix 2: Case studies of FOBs and succession planning We highlight how good companies provide for succession planning and show how in-fighting and family disputes ruin the scope for any succession planning and, in the worst case, result in breakups of the FOB. Many families – such as the Mafatlals, Modis, Kirloskars, BPL, etc. – have seen a decline in their prominence after disputes within in the family.

a) The Good: These are seamless transitions that happened from one generation to another or from owner to professional. There are many examples of good transitions – the AV Birla Group survived the untimely death of Aditya Vikram Birla, the Murugappas have an open and transparent way of separating ownership from management, and the Tata Group has handled transitions at the top as well as within their companies very well. Similarly, Anand Mahindra took over from Keshub Mahindra in 2012 and has professional CEOs for the Mahindra Group’s various businesses.

In this category, we discuss Asian Paints and Marico as FOBs where the owners separated ownership and management effectively. Both companies are part of our 2014 Coffee Can Portfolio (click here) and have sustained 10% revenue growth and 15% ROCEs for a long period of time – an achievement that only 0.5% of listed Indian companies can lay claim to.

Case studies discussed: Asian Paints, Marico

b) The Bad: In this case, disruptive squabbles and bickering follows the death/retirement of the founder-patriarch, but after the disruption a solution is found and the business moves forward more or less intact. Disputes are eventually resolved when family members agree on who runs what business.

Under this category, we discuss Apollo Tyres and Ranbaxy. Both are large companies that witnessed serious family disputes. While Apollo Tyres survived, Ranbaxy was eventually sold off to Daiichi Sankyo, which then went on to sell it to Sun Pharma.

Case studies discussed: Apollo Tyres, Ranbaxy.

c) The Ugly: In this case, promoter bandwidth is exhausted solving disputes within the family. Public slanging matches after the death/retirement of the promoter have the potential to disaggregate the business. Hence, there is no scope for discussing succession planning since it is unclear which family member will acquire which part of the family business.

Under this category, we discuss two of India’s most high-profile break-ups and demergers, namely, Reliance Industries and Bajaj Auto. In both cases, disputes within the family led to demergers of the largest listed company within the FOB.

Case studies discussed: Reliance Industries, Bajaj Auto

Seamless transitions from one generation to another or from owner to professional

Succession planning is severely hindered due to in-fighting among family members

Disputes after death/retirement of promoter have the potential to disaggregate the business

http://reports.ambitcapital.com/reports/Ambit_Strategy_Thematic_IndianCoffee_17Nov2014.pdf

Strategy


The Good – succession plans that worked Case Study 1: Asian Paints

Family Background: Asian Paints is India’s largest manufacturer of paints. It was formed in 1942 by four friends: Champaklal Choksey, Chimanlal Choksi, Suryakant Dani, and Arvind Vakil. While Champaklal Choksey was mainly responsible for the early growth of the company (such as hiring professionals from India’s foremost management institutes, using computer technology much earlier than competition), the Chokseys sold their stake in 1997. Since then, the remaining families have lived in harmony while allowing professionals to run the company. The effectiveness of this structure is evident in the fact that Asian Paints continues to maintain its huge leadership in the paints industry. Berger Paints, the #2 player, has been run by CEOs who are ex-Asian Paints – another testimony to the high caliber of work culture at Asian Paints. The company’s history and ascent are covered in detail in our January 2016Coffee Can legends deep-dive report (click here). The family trees of the three promoter families who hold, in total, 52.8% in the company are given below.

Exhibit 16: Vakil family tree - Shareholding (%) and responsibilities (where information was available)

Source: Ambit Capital research; Note: The family trees have been made based on the information available and may not be completely accurate.

Exhibit 17: Dani family tree - shareholding (%) and responsibilities (where information was available)

Source: Ambit Capital research

Arvind Vakil

Abhay Vakil (2.97%)

Bhairavi Vakil (0.23%)

Nehal Vakil (0.25%)

Vivek Vakil (0.33%)(Imports Executive -

Supply Chain)

Amar Vakil (1.36%)

Amrita Vakil (0.27%)

Dipika Vakil (0.21%)

Varun Vakil (0.23%)(Manager - Project

Sales)

Surykant Dani

Ashwin Dani (0.22%) & Wife - Ina Dani (0.05%)

Hasit Dani (Age 43) (0.42%) (Non exec Director in APNT from 2001-11; Presently,

MD of Gujarat Organics Ltd)

Shubhlakshmi Dani (0.01%)

Ishwara Dani (0.04%)

Malav Dani (Age 40) (0.34%) (MD of Hitech Plast

Ltd.)

Jalaj Dani (Age 45) (0.17%) (President - HR International &

Chemical)

Smiiti Dani (0.01%)

Mudit Dani (0.02%)

Vita Dani (0.05%)

Asian Paints was founded by four promoters, of which one moved out in 1997

http://reports.ambitcapital.com/reports/Ambit_Asian_Paints_ChangeinStance_Seventyyearsofexcellence_04Jan2016.pdf

Strategy


Exhibit 18: Choksi family tree - shareholding (%) and responsibilities (where information was available)

Source: Ambit Capital research

Succession planning at Asian Paints: Asian Paints hired its first professionals as far back as the late 1960s and early 1970s, soon after it become #1 and Champaklal Choksey realized that scaling up operations would need professional help. Accordingly, Choksey hired Biji Kurien, P M S Murty, and K B S Anand from the IIMs. These professionals, under Choksey’s leadership, drove Asian Paints’ growth through the 1980s and 1990s. However, there was a dispute among promoters in 1997 when the Choksey faction sold its stake in Asian Paints to its competitor, ICI, and Atul Choksey – then the Chairman and Managing Director of Asian Paints – left the company. The remaining promoters successfully staved off ICI from taking a stake in Asian Paints. Atul Choksey’s departure made no difference to Asian Paints fortunes and till date, the company maintains its leadership. As Ashwin Dani recalled20 in 2007, "We made one tactical error. That everyone thought the company was revolving around only one person. People thought that by and large that if one family is leaving, it would affect the prosperity and performance of the company. Shareholders feared that it could hurt them and the company. But we were very sure that the company was run by a good team of professionals."

We believe the harmonious relationship between owners and managers is key to Asian Paints success. The owners allowed professionals to take control of middle and senior management roles as early as 1969. Although many second generation members of the four promoter families were engaged in the business in the 1970s and thereafter, they had been given strict instructions not to interfere with professionals especially when the latter had been made responsible for a specific function. To date, all six family members on the Board are at a non-executive status. However, outside of the Board, members of the family play key roles within the company, with the senior most being Jalaj Dani, President - HR, International and Chemical.

In 2009, Asian Paints showed its commitment to rewarding professionals when – for the first time – it elevated a professional (P M S Murty) to MD/CEO position. Murty remained MD/CEO till FY12 and, when he retired, was replaced by another veteran, K B S Anand. The culture of succession planning internally remains strong, as Anand said in a 2015 interview21, “We have a method in place for evaluating key positions that need succession planning and proposing to the board on a regular basis, who can fit the bill." Anand’s tenure was from 1st April 2012 to 31st March 2015, and last year this tenure was extended to 31st March 2018. Hence, while it is too early to guess Anand’s successor, Asian Paints will, most likely, continue its tradition of choosing a career veteran as the leader from within its ranks to lead the company in the future.

20 http://www.dnaindia.com/money/report-come-what-may-we-have-to-protect-our-turf-1117970 21 http://www.businesstoday.in/mindrush/mindrush-2015/kbs-anand-sunil-duggal-and-jayadev-galla-at-mindrush-2015/story/227289.html

Asian Paints hired its first professionals soon after it become #1

Harmonious relationship between owners and managers is key to Asian Paints success

http://www.dnaindia.com/money/report-come-what-may-we-have-to-protect-our-turf-1117970

http://www.businesstoday.in/mindrush/mindrush-2015/kbs-anand-sunil-duggal-and-jayadev-galla-at-

Strategy


Case Study 2: Marico Limited

Family Background: Marico is a rare example of a family member breaking away from the larger family with a specific business and, over a period of time, building it up with professional talent. Marico remains India’s largest edible and hair oil company and a brand built assiduously by Harsh Mariwala and his team of professionals. Bombay Oil Industries Limited (BOIL) belonged to the Mariwalas and specialized in institutional (i.e. business-to-business) sales of coconut oil (Parachute) and edible oil (Saffola). Mariwala shifted this business to a higher-margin model of selling to consumers and built both brands through the 1970s. In the early 1990s, Mariwala separated both businesses from the family, and called his company Marico. Since those early days, Mariwala’s trust in professionals remains intact, as seen in 2014 when he relinquished the MD/CEO position to Saugata Gupta and became the Chairman. Marico’s history is covered in detail in our February 2016 Coffee Can legends deep-dive report (click here). The family tree of the Mariwalas and the family separation chart in 1990 are given below.

Exhibit 19: Mariwala family tree


Exhibit 20: Bombay Oil Industries’ division into 5 different businesses in 1990


Succession planning at Marico: Leading by example, Harsh Mariwala is among the most vocal proponents of a structured, well-thought-out process of succession planning and the importance of employing professionals in a company. He used professionals for building the consumer-facing brands of Parachute and Saffola in the 1970s and broke away from the family business in 1990 to ensure that Marico is never perceived as a family business, but as a professionally-run FMCG company. He has gone on record22 to state that Marico is not a ‘lala’ company (lala is a Hindi word for businessman and a ‘lala company’ is a pejorative term used to describe a

22 http://articles.economictimes.indiatimes.com/2013-10-29/news/43495927_1_soap-opera-n-harsh-mariwala-independent-director

Kanji Mooraji- Vallabhdas (Vasanji) Mariwala(Uncle- Nephew Team)

Charandas Mariwala (b. 1921)

Harsh (b. 1951) Joined

the business in 1971

Jayasinh Mariwala (b. 1933)

Sanjay (b. 1960) Joined business in

1981

Ajay (b. 1963)

Joined the business in 1988

Mohan (b. 1967)

Hansraj Mariwala (b. 1932)

Madhav (b. 1960) Joined

the business in 1986

Shyam (b. 1967)

Kishore Mariwala (b. 1935)

Rajendra (b. 1962)

Joined the business in 1988

Ravi (b. 1966)

Bombay Oil Industries Ltd.

Charandas MariwalaChairman & MD of BOIL and Chairman of Marico

Harsh -Marico

Jayasinh MariwalaHeads Kanji Mooraji Kanmoor Foods Ltd. and Kancor Flavours

& Extracts

Sanjay -Kancor

Ajay -Kanmoor Mohan

Hansraj MariwalaChairman of EPRO

Biotechnologies

Madhav -EPRO Shyam

Kishore MariwalaHeads the Chemical division of

Bombay Oil and Hindustan Polyamides & Fibres

Rajendra -Chemical Division

Ravi

Rare example of a family member breaking away from the larger family and building the business with professional talent

Marico’s Board composition reflects Mariwala’s philosophy.

http://articles.economictimes.indiatimes.com/2013-10-29/news/43495927_1_soap-opera-n-harsh-

http://reports.ambitcapital.com/reports/Ambit_Marico_CompanyInsight_Theartofpeoplemanagement_09Feb2016.pdf

Strategy


company run on the whims and fancies of its owner). Marico’s Board composition reflects Mariwala’s philosophy. Of the 9 directors, 6 are independent, 2 belong to the promoter family (Harsh and Rajen Mariwala), and Saugata Gupta as MD/CEO. Devising a succession plan for the Board, Key Managerial Personnel, and senior management is an explicit duty of the Corporate Governance Committee of the Board of Directors. In 2015, Mariwala told us, “What we need to understand is that the Board is a source of competitive advantage and not just there to meet statutory requirements. At Marico we identify the competencies we need in the business and accordingly build the Board.”

Mariwala’s children, Rishabh and Rishvi, joined Marico23 but quit within a few years. Rishabh joined Marico in 2008 as operations manager and worked in the Kaya Skin Clinic division. He quit in 2011 to set up a soap company. Rishvi joined Marico in 2007 in the brand-building team and quit in 2009 to pursue sociological research. At Marico, Mariwala reorganized the business in 2013. Marico's domestic and international businesses were merged to create one FMCG business. Saugata Gupta, who until then headed the domestic Consumer Products Business (CPB), was elevated as Chief Executive Officer for the entire FMCG business. Vijay Subramaniam, who headed the International FMCG business, was appointed Kaya CEO after its demerger. A year later, in 2014, Harsh Mariwala stepped down as Managing Director, relinquishing the post to Saugata Gupta – a rare move among Indian promoters most of whom struggle to contemplate ceding control to professional management.

Marico’s succession planning and use of professionals on the board stand out as an example of good corporate governance practices. These practices also go a long way in building competitive advantages for the company.

23 http://www.business-standard.com/article/companies/mariwala-scions-building-careers-outside-marico-114032900024_1.html

Harsh Mariwala’s children are not involved with Marico

http://www.business-standard.com/article/companies/mariwala-scions-building-careers-outside-marico-

Strategy


The Bad – Prolonged family disputes during generational transfers Case Study 1: Apollo Tyres

Family Background: Raunaq Singh was the founder of Apollo Tyres. Born in 1922, Singh went from trading steel tubes to manufacturing them when he founded Bharat Steel Tubes and expanded his businesses to include auto components, finance, etc. He acquired Ruby Rubber Works, a Kochi-based rubber manufacturer, and incorporated Apollo Tyres in 1972. However, due to labor problems and competition from established players, the business struggled through the 1970s. Singh’s son Onkar Singh Kanwar took over operations of the company in the early 1980s and turned it around. However, this success also sparked off a dispute between Kanwar and his father. Singh passed away in 2002, and while Kanwar had another dispute with his brothers in 2007, he remains in command of Apollo Tyres. The company has made two acquisitions (Dunlop’s Africa operations in 2006 and Netherlands-based Vredestein in 2009) that went through and a third (Cooper Tyres in 2013) that was aborted.

Exhibit 21: Raunaq Singh Family Tree

Source: 'Business Battles' by Shyamal Majumdar (2014), Ambit Capital research

Family disputes at Apollo Tyres: The dispute between Raunaq Singh and his son, Onkar Singh Kanwar, in 1993 was a textbook case of a generation that flourished in the old license-raj versus the new, competitive economy that resulted from the liberalization of India’s economy in 1991. As the Economic Times reported24 on Singh’s death in 2002, “Unfortunately, corporate power, for Singh, ended with the onset of liberalisation. Given to the ways of easily obtaining licences and diverting cash from one business to another, Singh found it difficult to grapple with the dynamics of changing corporate equations in a more globalised world that banked on professionalism, not patronage, in the way business was run." Singh accused Kanwar of financial irregularities at Apollo Tyres and refused25 to sign the annual accounts of FY92-93. Singh ultimately lost the battle and had to relinquish the MD position to his son as he got elevated to chairman. As Majumdar writes, “Onkar Singh Kanwar, Raunaq's eldest son had turned the entire board against him. The board decided to make Onkar, the vice-chairman and managing director and reduced Raunaq Singh's role in the company by making him a figurehead chairman." According to Majumdar, Singh wanted to divide the spoils of Apollo Tyres between his four sons, while “Kanwar did not want his brothers claiming a share of Apollo’s good fortunes which, he felt, was entirely due to his own hard work.”

24 http://articles.economictimes.indiatimes.com/2002-09-24/news/27344097_1_raunaq-singh-onkar-singh-kanwar-apollo-tyres 25 http://indiatoday.intoday.in/story/md-of-apollo-tyres-raunaq-singh-and-son-onkar-singh-kanwar-feud-over-the-group-flagship/1/302877.html

Raunaq Singh

OnkarKanwar

NarinderJeet

ArvinderPal

RaajaKanwar

Shalini

RaniSurinder

Pal

Neeraj Kanwar

Raunaq Singh

Satinder Pal

Apollo Tyres stands out as an example of severe conflict between generations

The division of Singh’s empire was a cause for strife within his sons

http://articles.economictimes.indiatimes.com/2002-09-24/news/27344097_1_raunaq-singh-onkar-

http://indiatoday.intoday.in/story/md-of-apollo-tyres-raunaq-singh-and-son-onkar-singh-kanwar-feud-

Strategy


Singh divided his empire as follows: Arvinder Pal got Apollo Tubes, Onkar Singh Kanwar got Apollo Tyres, Surinder Pal got Bharat Gears, and Narinder Jeet got Panshila Rubbers. Of these, only the businesses of Onkar Singh Kanwar and Surinder Pal have done well.

As per its FY15 annual report, Kanwar is Chairman and Managing Director, his younger son, Neeraj Kanwar, is Vice-Chairman and MD, and while his elder son, Raaja Kanwar, is not on Apollo Tyres’ board, he is Vice-Chairman and MD of Apollo International which handles the family’s other businesses such as distribution and marketing of tyres, logistics, digital cinema, leather exports, etc. As per its FY15 annual report, Apollo’s Board consists of 11 directors, including 7 independent directors. To its credit, Apollo has assembled a global management team to help achieve its stated goal of US$6bn26 revenues by 2020. Members of this team (Martha Desmond – Chief HR Officer, Marco Paracciani – Chief Marketing Officer, etc.) sit on the Management Board, which includes both Onkar Singh and Neeraj Kanwar.

While these foreign professionals will play an instrumental role in Apollo Tyres, it is evident that ultimate leadership, strategy, and operations of the company will remain with the Kanwars. We included Apollo Tyres as a company at risk of sliding from greatness, in our May 2016 thematic report (click here), “At the brink”.

Case Study 2: Ranbaxy

Family Background: Bhai Mohan Singh acquired Ranbaxy in 1952 from his cousins Ranjit Singh and Gurbax Singh (hence ‘Ranbaxy’ – a fusion of the owners names). Through the late 1960s, Singh found success in making drugs in India that were based on those overseas (for example, Calmpose, an early success was based on Roche’s Valium). Singh’s eldest son, Dr. Parvinder Singh, joined him at Ranbaxy in 1967 and transformed Ranbaxy into a research-driven, manufacturer of generic drugs. However, differences between father and son erupted in 1993 over Dr. Parvinder Singh’s choice to allow professionals to run Ranbaxy. There were disputes between Dr. Parvinder Singh and his brothers as well, and these continued through the 1990s. Dr. Parvinder Singh’s sons sold their stake in Ranbaxy to Daiichi Sankyo in 2008 who eventually sold Ranbaxy to Sun Pharma in 2015.

Exhibit 22: Bhai Mohan Singh's Family Tree

Source: 'Business Battles' by Shyamal Majumdar (2014), Ambit Capital research

26 http://economictimes.indiatimes.com/magazines/corporate-dossier/apollo-tyres-md-neeraj-kanwar-plans-to-make-it-a-global-player/articleshow/47628069.cms

Differences between father and son over Dr. Parvinder Singh’s choice to allow professionals to run Ranbaxy

Role of professionals and division of assets were key reasons in the fight at Ranbaxy

http://economictimes.indiatimes.com/magazines/corporate-dossier/apollo-tyres-md-neeraj-kanwar-

http://reports.ambitcapital.com/reports/Ambit_Strategy_Thematic_Atthebrink_11May2016.pdf

Strategy


Family disputes at Ranbaxy: Ranbaxy’s disputes went on through most of the 1990s. The fight between father (Bhai Mohan Singh) and son (Dr. Parvinder Singh) was over the role of professionals. Dr. Parvinder Singh believed in the role of professionals, while Bhai Mohan Singh preferred business to remain within family. This, coupled with the family settlement of Bhai Mohan Singh’s assets between his sons in 1989, caused a rift in the family. In 1993, Bhai Mohan Singh resigned from the Board of the company that he had built. As Majumdar writes, "The message was now loud and clear. On 6 February 1993, before a board meeting was to select Parvinder as chairman and managing director, and make him chairman emeritus, Bhai Mohan resigned. Father and son were not on talking terms after that day."

In 1999, just before he died, Dr. Singh elevated Davinder Singh Brar (a Ranbaxy veteran) to MD/CEO of Ranbaxy, while keeping his own sons, Malvinder and Shivinder, outside the Board – much to the displeasure of Bhai Mohan Singh. Added to this was another battle between his sons over Bhai Mohan Singh’s will, which was finally settled27 in 2006 although Manjit Singh continued to battle on. Thus, the fights between father and son and between brothers went on for nearly 13 years (1993 to 2006).

Back at Ranbaxy, Brar’s term didn’t last long. The veteran made way for Malvinder Singh, who joined Ranbaxy’s Board and took over as CEO in 2006. Hence, while Dr. Parvinder Singh was known for trusting professionals, Brar had to eventually step down in favour of family. Finally, Malvinder and Shivinder Singh sold28 their stake in Ranbaxy to Daiichi Sankyo in 2008 for US$2.8bn. Even though Daiichi Sankyo made him CEO for a five-year term, Singh resigned in 2009. While the departure was abrupt, Ranbaxy was then also under the watch of the United States Food & Drug Administration (US FDA), which had put a ban on the import of medicine produced at Ranbaxy’s Paonta Sahib facility in Himachal Pradesh for falsification of data.

In 2014, Daiichi Sankyo sold its stake in Ranbaxy to Sun Pharma for US$4bn. The sale came after Ranbaxy, under Daiichi, had agreed to pay US$500m to the US FDA in 2013 to resolve a lawsuit and the federal charges that Ranbaxy sold improperly manufactured drugs. Earlier this year, in May 2016, an arbitration court in Singapore asked29 Malvinder and Shivinder to pay `26bn as damages for concealing facts from Daiichi Sankyo when they sold their stake in Ranbaxy to the latter in 2008.

Once one of India’s most promising pharma companies, Ranbaxy was delisted from the bourses in 2015 as the merger with Sun Pharma was completed.

27 http://articles.economictimes.indiatimes.com/2006-08-01/news/27464876_1_nimmi-singh-analjit-singh-ranbaxy-family 28 http://www.livemint.com/Companies/ABxz5axWTnk7EmtdNF7GxN/Six-business-lessons-from-the-DaiichiRanbaxy-deal-fiasco.html 29 http://www.livemint.com/Companies/D21WaP0ZtLJRJk5moFFtGM/Former-Ranbaxy-owners-fined-`2600-crore-by-Singapore-court.html

Brar eventually had to make way for family

http://articles.economictimes.indiatimes.com/2006-08-01/news/27464876_1_nimmi-singh-analjit-

http://www.livemint.com/Companies/ABxz5axWTnk7EmtdNF7GxN/Six-business-lessons-from-the-

http://www.livemint.com/Companies/D21WaP0ZtLJRJk5moFFtGM/Former-Ranbaxy-owners-fined-

Strategy


The Ugly – Family disputes that resulted in break-ups Case Study 1: Reliance Industries Limited

Family Background: Dhirubhai Ambani started a yarn trading business in the late 1950s, which eventually grew to be Reliance Industries (RIL). RIL’s IPO was in 1977 and the company rapidly integrated backwards into petrochemicals through the 1980s and 1990s. In 2000, RIL commissioned the Jamnagar petchem and refinery complex, which was then the world’s largest. Beyond refining and oil & gas, Reliance Industries spread its operations across electricity distribution (acquisition of BSES in 2002), telecom (launch of Reliance Infocomm in 2002), finance (Reliance Capital in 1986), etc. In 2005, Reliance Industries demerged its power generation and distribution, financial services, and telecom companies into separate entities as a settlement between Dhirubhai’s sons, Mukesh and Anil Ambani. Since then, both brothers operate separate divisions, sharing the ‘Reliance’ name across businesses.

Exhibit 23: Ambani Family Tree

Source: 'Business Maharajas' by Gita Piramal (1996), Ambit Capital research

Exhibit 24: Snapshot of Reliance Industries (led by Mukesh Ambani)

(̀ bn) FY16A FY16A

Market cap Revenues Profits

Reliance Industries 3,085 2,765 275


Exhibit 25: Snapshot of Anil Ambani's Companies

(̀ bn) FY16A FY16A

Market cap Revenues Profits

Reliance Communications 117 215 7

Reliance Infra 133 167 14

Reliance Capital 95 98 14

Reliance Power 138 107 14


The demerger of Reliance Industries was among India’s largest corporate splits

Strategy


Family dispute at Reliance Industries: Like many industrialists such as the Birlas of that era, Dhirubhai Ambani benefited from the license-raj that kept out competition and stifled manufacturing via licenses. Compared to the Tatas and Birlas, Ambani was a new kid on the block when he started Reliance in the late 1950s. Unlike them, however, Ambani differed in his track record of expanding his company. Not surprisingly, he was also known for his access to politicians that helped him to get permissions and licenses quickly. However, his vision of building an empire is also unique among India’s industrialists. As Hamish McDonald wrote in his book, 'Ambani and Sons', "Over the years, Dhirubhai developed close ties with politicians in many parties. [..]. The links were not always based on money, however. Dhirubhai is widely acknowledged to have been a masterful exponent of his own business visions, which have generally been more far-sighted than those of almost anyone else among India's business leaders." Dhirubhai’s ambitions were also passed on his sons, Mukesh and Anil. Both of them joined Reliance in the late 1980s and, as McDonald notes, “…the lean early years gave them a hungry ambition, unusual for the second generation of a successful Indian business family.”

Dhirubhai Ambani passed away in 2002 without a will. As McDonald wrote, "The family's main asset, its 34 per cent of Reliance, was held in the thicket of investment companies. Dhirubhai felt no need to leave a will, apparently confident that Anil would agree to work under Mukesh's leadership.” By then, the rift between his sons was part of the corporate grapevine and incidents like Anil’s absence at the launch of Reliance Infocomm in December 2002 only added to speculation30 that something was amiss between the brothers.

In 2004, the fight played out in public eye when Mukesh Ambani admitted31 “ownership issues”, a near-official acknowledgement of the rift. Majumdar notes, "Skeletons tumbled out of the cupboard with the force of a tsunami. Neither brother was willing to climb down from his stated position. Also, friends and colleagues were busy spreading stories about the rival camp. Anil and his friends stubbornly opposed everything that Mukesh suggested. Mukesh and his team rarely consulted Anil and neither did they take him into confidence on critical decisions."

Finally, in 2005, a settlement between the two brothers was reached. Mukesh would retain Reliance Industries, while Anil would get the power generation and distribution (Reliance Energy), financial services (Reliance Capital), and telecom companies (Reliance Infocomm that was later renamed Reliance Communications). Both brothers would clash subsequently over the RIL-RNRL gas dispute, but this was settled by the Supreme Court in favor of RIL in 2010.

Reliance Industries’ 13-member Board of Directors consists of 2 promoter directors (Mukesh and his wife Nita), 4 executive directors, and 7 independent directors. Mukesh’s children, Akash and Isha Ambani, were given32 seats on the boards of directors of Reliance Jio and Reliance Retail, but are absent on the board of Reliance Industries. Mukesh Ambani is 59 years old and has a long way to go before appointing a successor.

In case of the Reliance-ADA Group, Anil Ambani, 57 years old, remains in charge and his children are absent from the boards of his companies. His son, Jai Anmol, reportedly33 joined Reliance Capital in 2014.

30 http://www.rediff.com/money/2003/jan/02dalal.htm 31 http://www.thehindu.com/2004/11/19/stories/2004111904711400.htm 32 http://www.forbes.com/sites/naazneenkarmali/2014/10/13/mukesh-ambanis-22-year-old-twins-get-board-seats/#fa040e3ad5ea 33 http://www.business-standard.com/article/companies/gen-next-ambanis-get-board-seat-at-reliance-114101100810_1.html

Dhirubhai Ambani passed away in 2002 without a will.

..and a settlement between the two brothers was reached in 2005

http://www.rediff.com/money/2003/jan/02dalal.htm

http://www.thehindu.com/2004/11/19/stories/2004111904711400.htm

http://www.forbes.com/sites/naazneenkarmali/2014/10/13/mukesh-ambanis-22-year-old-twins-get-

http://www.business-standard.com/article/companies/gen-next-ambanis-get-board-seat-at-reliance-

Strategy


Exhibit 26: RIL stock price before demerger

Source: Bloomberg, Ambit Capital research. Note: Prices have been rebased to 100 as of 1st Jan 1996.

Exhibit 27: RIL stock price after demerger


Exhibit 28: R-ADA Group stocks have underperformed the Sensex since Jan 2006


Exhibit 29: Reliance Group companies before and after merger Reliance Industries (consolidated financials) FY05 FY06* FY07 FY08

Revenues 6,64,652 8,26,913 11,37,764 13,75,094

PAT 75,707 94,018 1,19,777 1,52,769

ROCE 18% 18% 18% 17%

Reliance Communications (consol financials)

Revenues - - 1,37,523 1,88,274

PAT - 75 28,244 40,245

ROCE DNA DNA 13% 14%

Reliance Infra (consol financials)

Revenues 41,521 39,558 69,092 81,340

PAT 4,679 6,421 8,132 9,316

ROCE 8% 9% 8% 7%

Reliance Power (consol financials)

Revenues - - 23 -

PAT (0) (1) 2 667

ROCE 0% 0% 1% 1%

Reliance Capital FY05 FY06* FY07 FY08

Income 5,435 9,663 21,578 47,240

PAT 1,162 5,771 7,030 10,091

ROE 8% 20% 15% 17%

Source: Company, Ambit Capital research. *de-merged financials

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Strategy


Case Study 2: Bajaj Auto

Family background: Bajaj Auto and Bajaj Tempo (now known as Force Motors) started manufacturing scooters and auto-rickshaws in the late 1950s. Though Rahul Bajaj joined Bajaj Tempo in 1964, he eventually built Bajaj Auto into one of India’s biggest automobile companies. By 1995, Bajaj Auto was the biggest company in the Bajaj Family, where other large companies included Bajaj Electricals and Bajaj Hindusthan, which were run by other family members. There were also family trusts and holding companies. All of these were at the center of a dispute between Rahul Bajaj and his brothers that was finally resolved in Dec 2008. However, prior to this, in 2007, Bajaj Auto itself was split between Rahul Bajaj’s sons, Rajiv and Sanjiv Bajaj.

Exhibit 30: Bajaj Group Family Tree

Source: 'Business Maharajas' by Gita Piramal (1996), Ambit Capital research

Exhibit 31: Snapshot of Bajaj Auto's demerged companies

Market cap (̀ mn) FY16A FY16A

Revenues Profits

Bajaj Auto 7,75,156 2,22,528 35,625

Bajaj Finserv 3,30,619 94,464 27,745

Bajaj Holdings 1,71,709 4,698 3,416


Family disputes at Bajaj Auto: To its credit, Bajaj Auto has survived and thrived through India’s post-Independence era, license-raj era and the post-1991, liberalized economy. Led by Rahul Bajaj, the eldest among his brothers and the patriarch of the family, it successfully made the transition from a scooter manufacturer to a motorcycle manufacturer. Along with Reliance Industries, it was among India’s fastest growing companies in the 1980s. However, the Bajaj family has seen its share of disputes that threatened to break up the family. As the family expanded in subsequent generations, fights broke out among brothers over who will control what. In her book, 'Business Maharajas’, published in 1996, Gita Piramal wrote, "Will Rahul Bajaj break away from the group? Can Rahul Bajaj keep the family together? Will Madhur accept Rajiv and Sanjiv or will he feel threatened enough to ask for a split? Will Rajiv give Madhur the respect he should? [..] Most of the time the Bajajs manage to ignore the whispering around them."

Rahul Bajaj built Bajaj Auto into one of India’s biggest automobile companies

Strategy


In 2001, Shishir Bajaj demanded34 a division of the family’s companies. A settlement in 2005 failed, prompting a public fight between the Shishir Bajaj and Rahul Bajaj factions. However, a split between Rajiv and Sanjiv Bajaj was also imminent. As in the case of the Ambani brothers, this split was also not spoken about publicly till things went beyond a point.

In March 2007, Kushagra Bajaj (Shishir Bajaj’s son) launched a public attack on Rahul Bajaj, saying, “When Bajaj Hindusthan was given to us as part of the settlement, the company was in a bad shape. Two things have happened now. First, the company has turned around and will soon be the fifth-largest sugar company in the world. Second, Rahul's sons Rajiv and Sanjiv cannot stand each other. And Rajiv isn't going to let go of Bajaj Auto. Sanjiv needs to be given something sizeable and Rahul thinks that should be Bajaj Hindusthan." As Majumdar writes in his book, "Kushagra had hit a raw nerve. The brothers Rajiv and Sanjiv had not sparred in the open but it was common knowledge that they were not close and their styles of functioning were very different."

Finally, in August 2007, Bajaj Auto demerged its auto and finance business. Rajiv Bajaj took over the newly carved Bajaj Auto, while Sanjiv Bajaj headed Bajaj Finserv, which housed the financial services business of Bajaj Auto. In Dec 2008, the Bajaj brothers reached a settlement whereby the Bajaj Group shareholding in Bajaj Hindusthan and Bajaj Consumer Care went to the Shishir-Kushagra Bajaj (SKB) Group. The promoter shareholdings of all other companies in the Bajaj Group, including those held by the SKB Group, are now with the four brothers of the Bajaj Group.

Today, Rajiv (49 years old) and Sanjiv (46 years old) Bajaj lead their respective companies, while also having a Board seat in each other’s companies. Given their age, there are no issues of succession planning. Bajaj Auto’s 16-member board is dominated by the family, with 9 independent directors. Similarly, Bajaj Finserv’s board has 9 members, out of which 5 are independent directors. Incidentally, 2 generations of Bajaj family sit on each other’s Boards, namely Rahul and Madhur Bajaj, and Rajiv and Sanjiv Bajaj.

Exhibit 32: Snapshot of the demerged Bajaj Auto companies

Market cap

(̀ mn) FY16A FY16A

Revenues Profits

BJAUT IN Bajaj Auto 7,75,156 2,22,528 35,625

BJFIN IN Bajaj Finserv 3,30,619 94,464 27,745

BJHI IN Bajaj Holdings 1,71,709 4,698 3,416


34 http://www.livemint.com/Companies/Q1yt1hDIr9FrJM3lDkwMvM/How-the-Bajajs-split-and-made-up-after-7-yrs.html

In 2001, Shishir Bajaj demanded a division of the family’s companies

Finally, in August 2007, Bajaj Auto demerged its auto and finance business.

http://www.livemint.com/Companies/Q1yt1hDIr9FrJM3lDkwMvM/How-the-Bajajs-split-and-made-up-

Strategy


Exhibit 33: Bajaj Auto stock price performance before demerger

Source: Bloomberg, Ambit Capital research. Note: prices rebased to 100 as of May 1998.

Exhibit 34: Bajaj Auto stock price performance after demerger


Exhibit 35: Bajaj Finserv stock price performance after demerger


Exhibit 36: Bajaj Holdings stock price performance after demerger


Exhibit 37: Bajaj Group companies financial performance before and after demerger Bajaj Auto (Old, combined) FY05 FY06 FY07*

Revenues 61,964 81,881 1,03,134

PAT 7,309 10,204 11,004

ROCE 20% 23% 21%

Bajaj Auto (new, demerged) FY08 FY09 FY10

Revenues 86,631 84,460 1,15,432

PAT 8,019 6,422 16,773

ROCE 40% 30% 64%

Bajaj Finserv (new, demerged) FY08 FY09 FY10

Income 3,552 3,782 9,820

Net profit (329) 713 5,591

ROE 1% 4% 22%

Bajaj Holdings (new, demerged) FY08 FY09 FY10

Revenues 3,576 1,398 7,105

PAT 5,257 3,249 13,626

ROCE 9% 7% 28%

Source: Company, Ambit Capital research. *FY07 was the year till which the company reported financials before demerger.

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Bajaj Holdings & Investment Ltd SENSEX Index

Strategy


Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Aakash Adukia Oil & Gas / Chemicals / Agri Inputs (022) 30433273 [email protected]

Abhishek Ranganathan, CFA Retail (022) 30433085 [email protected]

Achint Bhagat, CFA Cement / Home Building (022) 30433178 [email protected]

Anuj Bansal Mid-caps (022) 30433122 [email protected] Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected]

Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected]

Karan Khanna, CFA Strategy (022) 30433251 [email protected]

Kushank Poddar Technology (022) 30433203 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 [email protected]

Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected]

Rahil Shah Banking / Financial Services (022) 30433217 [email protected]

Rakshit Ranjan, CFA Consumer (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected]

Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected]

Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected]

Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Jestin George Editor (022) 30433272 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]















































Strategy


Wipro Ltd (WPRO IN, SELL)


HCL Technologies Ltd (HCLT IN, BUY)


Hero Motocorp (HMCL IN, SELL)


Dabur India Ltd (DABUR IN, SELL)


Godrej Consumer Products Ltd (GCPL IN, SELL)


Tech Mahindra Ltd (TECHM IN, BUY)


0100200300400500600700800

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HCL Technologies Ltd

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Strategy


Zee Entertainment (Z IN, SELL)


Supreme Industries Ltd (SI IN, BUY)


AIA Engineering Ltd (AIAE IN, UNDER REVIEW)


VA Tech Wabag Ltd (VATW IN, BUY)


Mahindra & Mahindra Ltd (MM IN, SELL)


Mayur Uniquoters Ltd (MUNI IN, NOT RATED)


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SUPREME INDUSTRIES LTD

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MAYUR UNIQUOTERS LTD

Strategy


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital . AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases,

in printed form. Additional information on recommended securities is available on request. Disclaimer 1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and

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Additional Disclaimer for Canadian Persons 18. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securi ties. 19. AMBIT Capital's head office or principal place of business is located in India. 20. All or substantially all of AMBIT Capital's assets may be situated outside of Canada. 21. It may be difficult for enforcing legal rights against AMBIT Capital because of the above. 22. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2 Canada. 23. Name and address of AMBIT Capital's agent for service of process in the Province of Montréal is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada. Additional Disclaimer for Singapore Persons 24. This Report is prepared and distributed by Ambit Capital Private Limited and dis tributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph

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not or ceases to be such an ins titutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited. Disclosures 26. The analyst (s ) has/have not served as an officer, director or employee of the subject company. 27. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities . 28. All market data included in this report are dated as at the previous s tock market closing day from the date of this report. 29. Mr. Hoon has been consulted as a subject matter expert and has not authored this report. 30. Ambit and/or its associates have financial interest/equity shareholding in M&M, Hero Motocorp, Lupin, Suzlon, Tata Motors, Apollo Tyres, Bajaj Auto, Sun Pharma, Wipro, Tata Power & L&T. 31. Ambit and/or it associates have received compensation for investment banking/merchant banking/brokering services from Astral Poly Analyst Certif ication Each of the analysts identified in this report certi fies , with respect to the companies or securi ties that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2015 AMBIT Capital Private Limited. All rights reserved.

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