Did family-owned businesses handle the pandemic better?
September 21, 2020 5:45 AM
The markets seemed to favour family-owned businesses in India, as is evident from stock performance. Also, they were more aggressive when it came to acquisitions
What we could ascertain was that FBs were quick to act to protect themselves.
By Janmejaya Sinha & Saurav Mohanty
Given the dominating presence, family-owned businesses have in India, we thought it was worth evaluating whether there was any difference in responses to the Covid between family-owned businesses (FBs) and non-family owned businesses (NFBs). Family-owned businesses comprise 300 of the top-500 Indian companies, they earn $670 billion of combined revenues, comprise 74% of manufacturing output and employ more than 5.2 million people. It is not commonly known that FBs lead even in respect of the environment, social and governance (ESG) scores in India. Over the last 15 years, FBs have shown higher revenue growth, together with higher leverage and lower short-term profitability, however, they have been rewarded with higher share price appreciation. We thought it would be instructive to evaluate how the FBs performed relative to NFBs during the pandemic.
To do this quick and dirty review, we restricted our sample to 200 companies—100 FBs and 100 NFBs. Covering sectors such as industrial goods & auto industries (40%), financial services (25%), consumer goods and services (16%), technology and media (11%) and pharma (10%). While a high-level analysis may not allow for deep insights, it does provide enough information to give us a broad directional indication of how India’s FBs have fared. On average, FBs have seen a higher drop in consolidated revenue in Q1FY21 against Q4FY20—a 34% decline as compared to 30% for NFBs. The PBT for FBs also similarly dropped ~35% as compared to a 23%-drop for NFBs.
The disparity observed in the analysed companies also arises from the higher proportion of NFBs in tech and financial sectors (which have till now performed better relative to other sectors) within the top companies of the country.
How have stock markets reacted to FBs and NFBs? It is true that market valuations across the globe are exaggerated because of the expansive monetary policy that all central banks are pursuing—increasing liquidity and lowering interest rates. This holds true for India, compounded further by large foreign inflows, together with a fall in imports and a rise in RBI’s reserves. Stock markets in India are at elevated levels.
Within this context, FBs’ stocks have gone up by 36% on average as compared to 23% for NFBs. In doing this, we took out the Jio effect, to see if the conclusions hold even if we did not account for the nearly $20-billion investment that Jio platforms attracted.
Why did the stock market show more confidence in FBs? Quite honestly, it is not possible to answer this question in real-time. We do not have all the data yet to explore this question deeply. But, there are a few surface-level indicators that suggest some answers. While a quick dipstick cannot substitute deep analysis, we have sifted through company results and media reports to form an opinion. Intuitively, one could imagine that FBs deal with the family wealth and so take preventive action early.
What we could ascertain was that FBs were quick to act to protect themselves. They exhibited strong pro-activeness with a majority of them building cash provisions higher than mandated. FBs were in the news constantly for raising capital using various means—NCDs (Mahindra, Reliance), commercial papers (Mahindra), debt restructuring (GMR), cash release from surplus assets (various FMCG players). Proactive measures and strong communication to the market gave confidence to the market about their plans.
Counter-intuitively markets were not upset by the lower PBT performance of FBs compared to NFBs. Large NFBs were clinical in managing their costs down to protect profit erosion primarily by a reduction in COGs—drop from 60% share of revenue to 49% of revenue but also by reducing their use of direct labour costs, mostly contract labour. FBs, on the other hand, had a more muted reduction of COGs from 56% of revenue to 50%.
The media did not report knee-jerk measures by FBs, only by some startups, in laying off large numbers of their employees. Salary cuts were reported for FBs and NFBs at mid-senior level executives. Whether this FB behaviour was because of the relationships that are formed between the promoters and long-serving employees or because of higher need for family reputation with a hire/fire approach is not clear. It is possible though that, after fully incorporating the productivity enhancement possible through digital, there may be long-term implications for employment.
Markets may also have noticed that FBs were more aggressive with respect to acquisitions. FBs made more than ~4 times more acquisition investment as compared to NFBs. Reliance has been at the forefront of this through its big-ticket acquisition of Future retail and Netmeds, but there were others also (the Murugappa Group is likely to acquire CG Power during Covid).
If there was one blessing due to Covid, irrespective of whether they were FBs or NFBs, it was in respect to the strong acceleration witnessed in driving greater adoption of digital and data in addressing and resolving the challenges of business. One could see this in digital marketing and personalisation (in respect of customers), adoption of new ways of working or in digitising operations—robotic process automation, digital supply chain, online auto purchase, and an e-commerce drive. Covid accelerated digital adoption by at least a decade.
What one uncovers is this fascinating dichotomy in India’s emotions with respect to FBs. Markets respect them, but the government, regulators and the public often suspect them. They span from the best reputations to the worst reputations. However, there is one thing that separates FBs from NFBs. FBs demonstrate a longer-term perspective than the next quarter, in fact, sometimes they want to build for the next generation. Maybe the market sees this!
Sinha is chairman and Mohanty is consultant, BCG India. Views are personal