Gaurav Dalmia, Chairman of Dalmia Group Holdings, delivered the keynote address at the Neo Wealth conference on May 10th in Bangalore. Here's the full transcript of the address:
Good evening,
To begin with, I must congratulate Neo on the tremendous success it has achieved so far. When Nitin Jain founded the company in 2021, he set an ambitious goal: to make Neo a ₹1 lakh crore company in market capitalization — approximately $12 billion. That’s a significant milestone, even by global standards. For context, the United States has over 500 companies with a market cap of that size, while China has only 94, and India has 92.
Other large economies: Brazil has 14, Germany 28, UK 35, Indonesia 10. So, this is a good club to be a part of. We have studied these companies at some depth. We had seen a few of these 92 when they were private but unfortunately declined, have invested in some of them in the public markets, so have a good understanding of a few members of this club. Before I get into that, I want to highlight a cover story from India Today magazine. I think it was in 2022.
It spoke about the rise of the entrepreneur class in tier 2 India. The stories were overwhelming. Many of these were niche leaders, some were narrow global companies. They featured 178 tycoons from a range of industries, each having a net worth of Rs 1000 crore or more, that is $125mm or more. Their collective net worth - $86 billion! That’s right. I had to read the number twice! A related point – I was reading another sell-side research report on small-town entrepreneurs.
Now, we have all heard of unicorns – private companies with market valuations of $1 billion or more. Small-town India’s answer to these new age unicorns is – Octopuses! Many small-town entrepreneurs do not have the skills to increase their footprint across multiple plants in multiple locations. So instead of building a national presence in their sector, they build multiple strong local businesses.
They do not care about pure plays, or core competence or private equity or public markets. They just care about building a portfolio of strong local businesses, which, on the whole, can be quite substantial. This is the contrasting success, albeit on a smaller scale, to the Rs 1 lakh crore club!
Having said that, let’s go international. Warren Buffett has created a personal fortune of almost $170 billion doing some very basic bread-and-butter stuff. Had he not given away much of his wealth, his net worth, according to some estimates, would have been in the ball park of $ 290 billion. He claims he’s very lucky. He was born in the US, which has been perhaps the world’s most dynamic economy during his career. He was born male, which might be a politically incorrect thing to say, but that gave him many small advantages in life, even in the US. And he was “wired”, as he says it, to allocate capital, which ultimately became his edge.
I would argue, today, we are in the same sweet spot in India. India’s short-term economic cycles are driven by oil prices and monsoons; the long-term cycles by geography and demographics, all of which, coastline, mineral endowments, fertile land, age break up of the population, are favourable. And the empirical evidence supports this – 64 new companies have joined the Rs 1 lakh crore club since 2019! Let’s get into a bit of the history of this club. 8 companies have dominated the #1 spot since 1991.
The largest in 1991 was Tata Steel. Market cap only $1.8 billion. For comparison, Reliance, which has the #1 spot today, is worth approximately $200 0 billion. At its peak, it was worth $241 billion. Clearly, India’s dimensions have changed since then! The others which have held the #1 spot in the last 25 years are – ITC, Hindustan Unilever, ONGC, SAIL, TCS, Wipro. In the context of becoming India’s largest company, some of these are relatively young; their foundations were laid only in the late 70’s or 80s and within 30-odd years, they reached the #1 position.
The lesson for Neo is simple: play the game well for 30-odd years, ride the megatrend, focus on business building, and you can not only become a member of this elite club, you may even dominate it! Let’s analyse this club for a minute. I asked a colleague to make some subjective judgments about the 92 companies which have crossed Rs 1 lakh crore in market cap. He divided them into 3 categories – legacy, intermediate and new.
The legacy category had banks, resources industries like oil and gas, steel etc, automotive, cement etc. The intermediate category has consumer, engineering, telecom, airlines etc. The new category has software services, healthcare, tech etc. So out of the total of 92 companies, 51 are in the legacy category, 31 in the intermediate category and 10 in the new category.
While this is a subjective assessment, and you can make your own categories, the message is that churn is happening, Schumpeterian creative destruction is happening even in the uppermost strata of Indian business and new wealth creation opportunities are immense. As an aside, I was talking to a member of the Bhartia family, who control the Jubilant Group, and have a collective personal net worth of about $4.5 billion. Most people would think of them as a legacy business house.
They gave me a rough and ready assessment that most of their net worth is from their new initiatives in the past 25 years – pizza and pharmaceuticals being amongst the top in their portfolio. Entrepreneurial energy beats legacy advantages. Or disadvantages, for that matter. So, what does it take to get into this club? Well, lots of capital or lots of hype. That’s true. Let’s look at balance sheet sizes. Reliance balance sheet size, as per book value, not replacement cost, is $99 billion. Its market cap is $200 billion or so.
On the opposite side, Eternal, parent company of Zomato, market cap is $25 billion. It raised a total capital of $3.7 billion between 2008 and 2023. So, it trades at approximately 6.8 times money raised. Reliance is a bet on what hard assets can achieve; Eternal is a bet on what its business model can achieve. In the early days, it got funded on a story. That story is now becoming a reality. Still early days though.
Some more examples to exhibit how qualitative issues can affect valuations: ICICI has a market value of $115 billion on a book value of $36 billion; and poor big brother SBI, by far the largest bank in India, has a market cap of only $81 billion on a book value of $58 billion. That’s the power of franchise, which in the short term can be called hype, but if it sustains over the long term, it becomes goodwill!
Let me throw some more statistics at you. The highest price to book ratio in this club is Nestle, at 54. The median price to book is 5.3 for Tech Mahindra. Just see the difference. The lowest is Bank of Baroda, at 0.77. All this again reflects what we loosely call the quality of business, the ability to generate free cash flows, and the ability to grow. Let me give you two more examples of how India may be unique.
Varun Beverages is a darling of the stock market and a member of the Rs 1 lakh crore market cap club. Its highest p-e ratio was 154, it traded at 100 p-e for a while, now its at 60-odd. It makes approximately Rs 2000 cr in profit and was valued as high as Rs 2,00,000 crores. This high PE is a bet on growth. Let’s do some peer group comparison. Let’s take another developing market, say Mexico.
Under-penetration, so plenty of headroom to grow. Huge consumption story. By the way, Mexico’s per capita GDP is around $13,000 compared to India’s $2,500, so one could argue the near-term prospects for Coke there are better. Coca Cola’s biggest bottler in Mexico is Femsa. It also has a convenience store business. It’s broadly comparable to Varun. It’s highest ever p-e ratio was 128 during Covid. This happened because earnings crashed during Covid but the stock price did not correct that much. So, one needs to ignore this anomaly.
It’s average p-e for the past few years has been around 35. It’s currently 16 or 17. So, how do you reconcile these? Frankly, you can’t. Without getting into a fair market value discussion, the implied growth premium in India is so huge, and earnings growth expectations are so high, it’s like a treadmill for companies like Varun Beverages. Sm mall errors can have big consequences. Reminds me of Rudyard Kipling’s famous lines: “If you can meet with triumph and disaster, and treat those two imposters just the same”.
That’s the price business leaders have to play to be in this club. Being in this club is a real treadmill. The other example I want to give is HDFC Bank. It started in the mid 90’s, and I was looking at HDFC Bank vs Goldman Sachs a few years ago. This was before HDFC Bank had merged with its parent HDFC. HDFC Bank’s market cap was $125 billion and it had crossed the market valuation of the 150- year old legendary Goldman Sachs, which was $120 billion at the time. Today, Goldman’s market cap is about $170 billion, and the merged HDFC-HDFC Bank is around $175 billion. Of course, HDFC trades at a much higher price-to-book multiple than Goldman, but the market’s verdict is clear.
This is the India premium, married to building a great business and a great franchise. Let’s look at return on equity for this club. The median ROE is 16.79% for the pharma giant Cipla. The highest is Nestle, at 72%. Just imagine what a profitable machine it is. The lowest is Jio Financial at 1.29%, or Eternal, which has been negative for the past few years, but in the world of corporate life cycles, its early days for both.
I used to have a singular focus on ROE but learnt only a decade or so ago, that high ROE alone does not create wealth. One needs a potent combination of ROE and growth. I used to believe, if you have high ROE, it means that you have a good business model with moats etc, time is on your side, and growth will come. Turns out, it’s not true. Growth is as important at ROE.
Let’s look at Bharti Telecom, which ranks #59 on the ROE rankings within this elite club. It ranks #4 in the market cap league tables. Its ROE was below 10% for the past ten years, and even negative for 2 years, which is a result of the AGR dues and the price war with Jio. Its market value is about $120 billion. Its book value is about $11 billion, so the price-to-book ratio is 12.26. Contrast it with China Telecom, which is as dominant in China as Bharti is in India. China Telecom has a price-to-book ratio of only 1.03. In the near-term, markets may be wrong but such differentials between the Indian telecom sector and other markets like China have persisted for a while.
My takeaways from this: Government and regulatory risk is higher in China than in India, in spite of the big issues the Indian telecom sector has faced. China Telecom is majority government owned so it inspires less confidence. This is just the SBI-ICICI public sector-private sector valuation differentials I had mentioned earlier. The market share wars in Indian telecom are behind us and earnings growth should be substantial. And certainly, Bharti’s management is far more dynamic than China Telecom. Not surprisingly, Bharti’s ROE jumped to 29%-plus this year after being at sub-10% for a decade. Like I said, it’s not easy to be in this club.
Staying with return-on-equity, Indian ROE, weighted average for the listed companies as a whole is 13.5%. This is second only to the US, which is 16-17%. Brazil’s is 12%. ROE for Indonesia’s IDX Index is 7-8%, for China’s Shanghai Composite Index it is 6.5%, for Japan’s Nikkei it is 9%, for Germany’s DAX index it is 10.5%, for FTSE companies in the UK it is 8%. This, combined with growth, seems to be India’s magic formula for wealth creation. It feels good to see Indian companies dominating their industries in the market cap sweepstakes.
JSW Steel recently overtook the traditional steel industry market leader, America’s Nucor, to gain the #1 spot at $30.3 billion in end-March this year. Indigo Airlines briefly became the largest market cap airline in the world, at $23.45 billion, beating Delta by a sliver, for a few days. Some may argue that these valuations in India may not sustain, but that’s for another discussion. The fact is Indian companies are now in the top echelons of the global league tables, even if some may not retain their #1 status. Irrespective, Indian companies are a force to be reckoned with on the global stage. This feels good! Changing topics, let us look at long term wealth creation.
Warren Buffett argues that for strong companies, ROE etc may all be good, but it is the utilization of free cash flow and reinvestment of capital is what determines long term winners. Else, the businesses plateau. Guess which are the 4 most valuable financial companies in the world. The largest is JP Morgan at approximately $700 billion, Visa at approximately $675 billion, Mastercard at around $520 billion and China’s ICBC at about $325 billion. Notice that two out of these four are nonbalance-sheet businesses. Visa and Mastercard are just enablers.
They take a small sliver of consumer spends. Just based on that small commission they have built a global duopoly. They have not used their surplus cash to buy a bank or do anything outside their core. They are like tech platforms with high up front set up costs, huge gross margins and network effects. Their success goes beyond the business model. It is discipline.
I was invited for a presentation at Tata Sons many years ago. The theme of the discussion was what might be the next Titan Industries in the Tata portfolio? The thesis was that TCS was an aberration and might be difficult to duplicate. But certainly, Tatas can create a few more Titans. Please note that currently TCS is valued at about $150 billion and Titan at approximately $38-39 billion. Clearly, they were thinking about the next twenty years.
That’s what wealth creators do. Jeff Bezos is famous for saying that the financial results for any quarter were more-or-less baked in three years ago. So, he worries less about them and more about what’s going to happen three years hence and so on. He says he thinks in minimum fiveto-seven-year time frames. Such get rich slowly schemes may be boring but they are the real deal.
Coming back to Tatas, they identified many businesses that had the potential to be the next Titan. One they narrowed down was Tata Consumer. They were going to put resources behind that. Look at the numbers for Tata Consumer in the last 10 years. Revenue growth CAGR of 15%-plus. Profit growth CAGR of 20%-plus. Market cap CACR of about 24%. And this is in a relatively benign consumer sector environment. That is the power of intent. So, how might the mighty stumble? It’s well known that the average life span of a S&P 500 company is about 15 years. I have to narrate a rather interesting interview from late 1999 or early 2000. It was with the Chairman of the erstwhile Southwestern Bell in the US.
Remember, we were at the peak of the tech bubble. Southwestern Bell went on to become a consolidator in the telecom industry. Eventually, it merged into AT&T or Verizon or something, I cannot remember which. But in 1999-2000, crazy stuff was going on. Companies like Global Crossing were using the irrational exuberance of the financial markets to create unprofitable capacity.
Telecom companies were buying media companies or betting on technology. The dilemma before the boss of Southwestern Bell was as follows: Should he follow the crowd and do something audacious, which may eventually hurt the company. Or, should they refrain from following the current consensus, which may mean their stock price may correct and Southwestern Bell may become an acquisition target. It was a tough decision.
There was no clear-cut answer. But, Southwestern Bell navigated the turmoil well and its shareholders came out as winners. This required judgement. Many businesses don’t display this when they are in a frenzy. They follow the herd or get frozen into inactivity. This separates the long term winners from losers.
The lesson for Neo, and I think they are well positioned to do this, is: they have to be able to play different types of cycles. They have to make money in a bull market and also figure out how to make money in a debt crisis. I was reading a report, which quoted from Indian tax data. They had drawn up a master list of all the tax paying companies in India and divided them into deciles. From that report, it turned out that the 2nd decile of the most profitable companies were seeing the highest profit growth. Their analysis showed that this was the result of two seemingly opposing forces at play.
The first was the secular shift from disorganized to organized, and the resultant industry consolidation that one was seeing in industry-after-industry. The 2nd decile companies were gaining market share over 3rd and 4th decile companies in their sectors and hence beating them at profit growth. On the other hand, they were more entrepreneurial than the 1st decile companies in their sectors, thereby making inroads into new niches and often growing faster.
This is the challenge for the Rs 1 lakh crore club. The 2n decile companies are dynamic, ambitious and nibbling away. They are the ones to watch out for. And this is even before we take technological shifts and new industries or business models into account. So, how can the 1st decile companies continue to retain their edge? I believe it’s culture.
Take Toyota as an example. It’s the largest car company in the world by volume. It makes about 10 million vehicles. If I recall right, they have 70-odd plants, of which only about 15 are in Japan. Toyota has a concept called the Andon Cord. Any worker on any production line can pull the Andon cord and stop the production line if they think there is an issue. Lesser companies may see risk of productivity loss; Toyota sees it as a mechanism for building an undisputed culture of quality. Toyota generates about 700,000 ideas for improvement every year. Most of these are small ideas.
But if you have a strong commitment to improvement, nothing is small. And 90% of these ideas get implemented. How does one compete with this kind of culture of continuous improvement? It seems that the path to the very top is quite mundane. Amazon has a concept of “single thread leaders”. Employees are encouraged to pick up an idea and run with it, crossing product or functional boundaries. This kind of empowerment has led Amazon to tinker and add almost 2500 small new features every year, ranging from customer experience, to logistics to bandwidth and backend technology.
Of course, next quarter's profits were probably baked in 3 years ago. And these bets are meant to pay off in the future. I have seen this first-hand in my work career. When I started out in business in the early 90s, operating efficiency was the key mantra. As many companies crossed this threshold, strategy became the differentiating variable. As that got commoditized, in the last fifteen years, the game moved to culture. There is a video of Sunil Mittal from a few months ago, where he’s addressing the top management of Bharti at an offsite. He explains that while their “customer first” goal was good, their new “employee first” goal was even better. He went on to explain why these changes were not mere buzzwords but were the need of the hour.
To me, it was culture over strategy. Such is the evolution of industry leaders! In the real estate boom of the 2010 period, we were looking at a pretty large real estate deal, in the investment ball park of $150mm or so. We were looking for co-investors. Private equity in Indian real estate was quite nascent then. We started talking to a few possible investors. I spoke to my friend Ajit Jain, who is now Vice Chairman of Berkshire Hathaway, who in turn introduced me to another gentleman at Berkshire. I think his name was Mr Goldberg. We set up a video conference and over an hour we discussed the macro environment for housing, the project math, scenarios etc.
As we were finishing, Mr Goldberg said he could not really secondguess our analysis and would be guided by what we were saying and Ajit’s endorsement. However, he asked us two pretty fundamental questions. One was: if the project monetisation got delayed due to a cyclical downturn or whatever reason, how aligned would the developer be with investors, and a key variable here was what was the incoming price basis for us vis a vis the developer.
It so happened that the developer had bought the land some 10-12 years before when the real estate market was really in the doldrums and the marked-to-market price had moved up almost 7x in the ensuing rally. He warned us that such an incoming price differential, even if his investment was 12 years old, would dis-align us with the developer under certain long-tail risk scenarios and we should be prepared for that.
I can’t recall his second question, but it was equally fundamental. On the whole, he seemed positive and we agreed to close the loop in a week or so. However, for me personally, there was a bit of panic. We had missed two very fundamental questions. These had nothing to do with Indian macro or real estate or implementation challenges. These were just decision-tree scenarios. I discussed internally and I decided though we were 70% there in terms of making the decision, there were risks we would not be able to deal with so we should not make the investment. We communicated this to Berkshire. Because we were not sure of Berkshire as we were building financing, we had spoken to a leading global investment bank to be a potential investor. We communicated our decision to them as well. But they were quite bullish, so they wanted to do the deal anyway, which they eventually did.
Guess what? The long-tail scenario that Mr Goldberg was referring to played out. The developer wanted to ride out the slowdown. The investor was facing a 5-6 underwriting and wanted out. In the end, the developer bought out the investor with some 4-5% dollar IRR. Mr Goldberg had saved us! For someone who knew nothing about India, the investment decision making process was so disciplined and the key conceptual issues so internalized, they could see potential risks that we had not.
That is the Berkshire culture – keeping it simple, which gives them an extraordinary ability to separate the signal from the noise. That’s what makes for a trillion dollar market cap company, which is today patiently sitting on some $350 billion of cash. Let’s look at Reliance. Or Shree Cement for that matter. Some people may look at their financial metrics to say they’re great companies.
Others may look at market share gains. Or their capex plans. Let me offer you one more perspective to show you their strength which I believe leads to all these measurable metrics. Think about Reliance in the 90s. Or Shree Cement in the early 2000s. Try recruiting a middle level person for a lateral shift for a higher pay or for one level up. I think it would be quite difficult to recruit them. Their cultures were so strong and their people were so motivated that one had to offer maybe a 2-step jump in position and a big salary raise to get them. I have seen this first hand with Shree Cement.
That speaks a lot about the most intangible strength a company can have – their middle management. This is what corporate culture can get you! There’s a Silicon Valley legend called Bill Campbell. He helped build iconic companies like Apple, Google and several other companies. One of the best books I have read on Silicon Valley is “The Trillion Dollar Coach”. It’s on Bill Campbell, co-authored by Eric Schmidt, former Chairman of Google. It’s less about technology, or marketing, or disruption, or ambition. It’s more about the soft stuff: teams, trust, and love. Yes, love. To high adrenaline guys this may seem like a letdown.
But that’s what strong cultures are built of. And that’s a primary source of extraordinary power to some of the world’s greatest companies. I will make 2 closing points about extraordinarily successful companies. Companies that eventually make it to the Rs 1 lakh crore club or even higher. The first is what management guru and MIT academic Peter Senge identifies in his book “The Fifth Discipline”. Actually, I think it’s not just about off-the-charts successful companies, it’s about extraordinarily successful people. He says they harness the seemingly opposing forces of humility and drive. Simply put, they’re driven to succeed. But they’re humble about the steps. Balancing these forces is not easy. But it should be one the checklist of anyone wanting to be a part of the Rs 1 lakh crore club.
The second is what Jack Ma has famously said: “What do you have? What do you want?” And the third sentence is the most important. “What are you willing to give up?” Soma Mondal, Chairwoman of SAIL from 2021 to 2023 has made many personal sacrifices to reach the top job. Mukesh Ambani’s long hours are well known. What is less well known is how well prepared he is in his meetings. Which means how much prep-time he puts in, even as Chairman of India’s most successful company. Sunil Mittal, as a first-generation entrepreneur wanted to build a telecom behemoth. And for this he had to give a 30%-ish stake to Singapore Telecom, while his family’s stake is 25% or maybe a little less. Few businesspeople would have the courage and confidence to make that tradeoff.
So, my closing thought is: as Neo sets about to conquer the world, actually it applies to all of us, we need to think about what we are willing to give up. That, indeed, is the price of admission to the Rs 1 lakh crore club.
(This is a transcript of the keynote address given by Gaurav Dalmia, Chairman of Dalmia Group Holdings, at the Neo Wealth conference on May 10th in Bangalore.)