In recent years, subsidiaries have emerged as vital catalysts for growth among Indian companies, allowing them to diversify and mitigate risks associated with their core operations. This shift has significant implications for the business landscape in India, as firms increasingly leverage the capabilities of their subsidiaries to enhance profitability and revenue generation.
An analysis conducted on 1,135 Indian companies over the past 15 years reveals a striking trend: India Inc generates approximately 30% of its consolidated revenue through subsidiaries, a notable increase from 20% in FY09. This growth in subsidiary contributions is underscored by a corresponding rise in profit generation during the same period.
This analysis specifically excludes the IT sector, banking, and other financial services entities to focus on core industries. In FY24, the total consolidated revenue of the surveyed companies surpassed ₹100 trillion, with subsidiaries contributing a substantial ₹30 trillion. Notably, while standalone revenue experienced a modest compound annual growth rate (CAGR) of 9% from FY09 to FY24, subsidiary revenue soared by 13%, thereby fortifying their role in the overall financial ecosystem.
Sector-wise Insights
The contribution of subsidiaries varies significantly across sectors. Industries such as auto ancillaries (an increase from 11% to 48%), commodities trading (from 24% to 54%), pharmaceuticals (from 22% to 38%), and infrastructure development & construction (from 13% to 31%) have seen substantial growth. Meanwhile, sectors such as automobile, mining, and real estate also rely heavily on subsidiaries but exhibited more modest changes, with growth under 10% over the same timeframe.
Moreover, the power generation sector currently reports a 24% share of revenue from subsidiaries, with expectations for this percentage to increase as numerous green energy projects are initiated through subsidiary structures.
Driving Factors Behind the Growth
The increasing reliance on subsidiaries can be attributed to several factors. Deepak Jasani, head of retail research at HDFC Securities, emphasizes that Indian companies are utilizing subsidiaries to enter new markets more efficiently. This approach facilitates easier technology transfers and capital infusions from foreign partners, especially for tech- and capital-intensive projects. Additionally, this structure helps mitigate risks associated with high-stakes ventures, allowing parent companies to explore new-age business opportunities with greater confidence.
Furthermore, adopting an employee stock options plan (ESOP) is simplified within a subsidiary model, making it easier to attract top talent for emerging businesses. Large acquisitions are also frequently structured as subsidiaries for operational efficiency, exemplified by major players like Reliance Industries Ltd, which saw its revenue share from subsidiaries surge from 6% to 41% following its ventures into telecom and retail. Other notable companies such as Larsen & Toubro Ltd and Bharti Airtel Ltd have similarly expanded their subsidiary contributions significantly.
Sector-specific Trends
Despite the overall positive trajectory, there are exceptions. In the steel sector, the share of revenue from subsidiaries has declined from 50% to 22%, primarily due to Tata Steel Ltd’s acquisition of Corus, which temporarily boosted subsidiary revenue. The sale of large parts of those assets, alongside robust domestic growth, has contributed to this reduction. Excluding Tata Steel, the subsidiary share in steel has actually seen a 7% increase.
On the other hand, in non-ferrous metals, a similar trend is observed. The subsidiary impact within Hindalco Industries Ltd has dwindled as its subsidiary Novelis, which accounted for three-fourths of revenue in FY09, has since diminished due to rising domestic operations.
Profitability Trends
A notable aspect of the rise in subsidiary revenue is the corresponding increase in profitability. The CAGR of EBITDA for standalone businesses stands at around 10%, while subsidiaries have emerged as significant profit centers with an impressive growth rate of 18% from FY09 to FY24. Consequently, the overall EBITDA margin for subsidiaries has risen from 11% to 18%, while parent companies have experienced a marginal increase, from 16% to just 18%.
Industries where subsidiaries display higher margins than their parent firms include real estate, infrastructure development, cement, and capital goods. However, in sectors like steel, pharma, and agrochemicals, subsidiaries continue to lag behind in terms of profitability, indicating a pressing need for improvement and strategic focus by investors and stakeholders alike.
