What decides the success of a Bussiness unit?

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Last year on the same day there was a news about Jet Airways being grounded all its planes and going to be auctioned under New Law, NCLT. Even after one year, the issue was not settled. Let us probe the reasons.

Many of the Term Loans became bad debts, starting from King Fisher Airlines to Bhushan Steel, Essar Steel, Electro Steel, Kamineni Steel factories and units of Anil Ambani starting from Reliance Communications to Reliance Naval Unit. Why these loans are becoming bad? The richest people, who earned heavily in business after 1998 are collapsing now. Then how Tatas, Birla brothers, Mukesh Ambani, Bajaj Group, Singhanias, Future group, Cement companies, Haldiram foods, Bata Shoes, Tata Steel, etc are so successful, even when strict financial measures like Demonetization, GST, drastic changes in Company law, stringent accountability norms on CA and Company Secretaries and so many acts brought after 2014.

The simple reason is the selection of Business activity, model of conducting business with some experienced executives.

For example Tata Chemicals, the country needs chemicals for many manufacturing processes. Similarly, Tata Steel is costly than any other company steel, but the assured quality makes the difference. No complaints on Tata Steel, they change varieties depending on market expectations. Similarly, Bata Shoes are known for quality, so the market is fixed. Tata entered in gold business also with assured quality and weight standards, no complaints about more than a decade, no penalties paid for any defects.

Birlas also made very good business without any pain. In fertilisers, Zuari Agro is a leading name. Quality and standard weight and package brought success. Airtel is a big success story for the Birla group. Similarly, the Aluminium factory is a great success.

Tata projects Ltd made big strides in construction and transmission lines. But never owned any road project based on toll gate collection basis. However big companies of 40 years or more years experienced SEW, Progressive Construction, Navayuga Engineering, and Lanco and another 7 companies have taken road projects on ownership basis and struggling due to low toll fee collections. There are no purchasers for these road projects unless the government increases the license period to 30 years or 35 years.

Selection of activity and how you conduct the business and develop confidence in public and bankers is very vital.

For example, I Quote RIL, Reliance Industries is in Petro Chemical business. The company is in good profits and good depreciation is also provided for the last 20 years. When Reliance Retail is planned, huge expenditure is needed for the establishment of furnishing etc apart from huge rentals and advertisement. If Reliance Retail is started as a separate company it would have posted losses for first years, due to depreciation provision and salaries, advertising and commercial shops rentals. So cleverly it is started in RIL only. Now individually Reliance Retail is also in profits.

Similarly when Reliance Jio was planned, huge loan, the interest cost, huge capital, heavy discounts, advertising cost are very heavy in the first two or three years. So it also might have posted losses in the first two years. If the loss is posted the market reacts differently. So Jio is also started in RIL only.

Similarly, Bajaj group also selects different fields and works out heavily and meets successful targets and good profits, whether it is scooters, finance, electronics etc. In Agro business also they made their mark. Same is the case with the Godrej group also.

So people from Gujarat and Maharashtra are showing the way, the method of conducting business and selection of activities, while investing crores of rupees.

Banks also while financing should think what is the way to recover if the company posts losses. Especially while financing term loans and Bank Guarantee to corporates in huge amount. Now there is a visible loss for banks in Jet Airways unless some foreign company takes over. In Road projects also banks have lost heavily.