Bonds Of Steel

The Jindal brothers have built separate empires while keeping the family together
On the afternoon of 18 February, a steady stream of guests made its way through the grounds of Jindal House on Prithviraj Road in New Delhi. At the mehndi ceremony of Tarini, Sajjan Jindal’s daughter — she was getting married the next day — people from across the spectrum of life came in through the gates: celebrities, public figures, family friends and relatives rubbed shoulders. Savitri Jindal, the 61-year-old matriarch of the Jindal family, greeted and welcomed the guests while her sons, Prithviraj, Sajjan, Ratan and Naveen played hosts to groups of people on the lawns of the family mansion. The third week of February had been very hectic for the entire family; the wedding was a huge affair with multiple ceremonies and functions. Throughout, the close ties between the four sons of the late O.P. Jindal — the

patriarch who founded this industrial family — was evident. After lunch, Naveen Jindal, member of Parliament and vice-chairman of Jindal Steel and Power (JSPL), made a quick change into a suit and, carrying his shoes, headed to his car to go to a meeting of Parliament’s Public Accounts Committee, of which he is a member. The calls of duty and business, it seemed, were never far. Now, another important date looms: it has been six years since O.P. Jindal died in a tragic helicopter crash on 31 March 2005. The companies he founded and his sons ran — and still do — have grown rapidly. Their collective revenues are about Rs 60,000 crore. Separately and together, the companies are implementing a grand plan of going from being big in India to being big globally. At present though, they are still minnows globally. In 2010, ArcelorMittal had revenues of $78 billion (about Rs 3.74 lakh crore) and crude steel production of 90.6 million tonne, representing approximately 8 per cent of world steel output. Tata Steel along with Corus recorded deliveries of 24 million tonne after considering the decline in demand because of global economic slowdown — the 2009-10 turnover was Rs 1,02,393 crore. After the ongoing expansions, the Jindal brothers will jointly have a 20 million tonne-capacity from the next financial year (2011-12). The group’s global ambition is evident from the recent deal in which Japanese steel giant JFE picked up 14.9 per cent stake in JSW Steel for Rs 4,800 crore. Despite the identity of being part of the O.P. Jindal Group, each of the brothers runs an independent operation, a couple of them managing miniconglomerates. Prithviraj, the eldest brother, heads Jindal SAW, and frequently fills the void left by their father’s demise. Sajjan, the second eldest, heads JSW Steel and JSW Energy while Ratan and Naveen run JSL Stainless and Jindal Steel and Power, respectively. All of them are in the steel and power businesses, and two in cement. In some situations, they could even be business rivals, prompting a few to suggest a coming Jindal-versus-Jindal scenario. “JSW Energy (run by Sajjan) and Jindal Power (run by younger sibling Naveen) have started competing for selling power to states such as Rajasthan,” says an executive with a global bank. “They all have applied for mining licence in Afghanistan.” Each brother also has ambitions on a big scale (see ‘From Big To Bigger’ and ‘Thinking Big’ on pages 40 and 42 respectively). All of them have children of their own who will succeed them and are being prepared for their roles (more on that a little later). Given the speed at which the Jindal businesses are expanding and growing, they could become large conglomerates that could end up becoming business rivals and creating

separate identities. But among themselves, the brothers believe that family ties will not suffer or be strained in any way. One Source, Many Rivers: O.P. Jindal, a farmer’s son from Nalwa near Hissar in Haryana, did not finish high school. As a young man, he wanted to become a bodybuilder, and later became a pehalwan (wrestler). Anil Dharker, in his book on O.P. Jindal, The Man Who Talked To Machines, writes that the young man’s parents indulged him when he took up wrestling. Once, his mother Chandrawati Devi told him, “Wrestle if you want, but don’t come home crying that you lost a fight.”

Even after he became an industrialist, O.P., as was called, showed the same spirit and courage, training his sons along the same lines. “When we entered the business, father gave us small businesses,” says Sajjan. “Then we expanded it and controlled and continued with it.” A well-thought out strategy helped O.P. avoid the family clashes often seen in business families. First, the father entrusted the management responsibilities of each company to a different son. Second, he devised a stakeholding structure by which each of the four sons owns 20 per cent of the total promoter’s stake in each group company. Also, the person who controls the management gets another 20 per cent (they call this their father’s share). This device helped the sons stay together, without thinking too much about their individual wealth. “In this system, all the brothers share the benefit of each and every company’s financial performance,” says Prithviraj. “So there is no point in competing with each other.” Also, the brothers have no right to question the one who controls the management of the individual company in his decisions. The Jindal brothers, who now control the management of four clusters of businesses, claim they avoid competition (see ‘Divide & Rule’, page 37). To begin with, they prefer to operate in different parts of India. For instance, Sajjan operates in the south and the west, while Naveen is active in the east. Second, they have different product portfolios: SAW

pipes (used in pipelines), flat steel (used mostly in consumer durables), longs (used in construction and infrastructure) and stainless steel (used in architecture, decorative and other high value-added products). The economics of each segment is different. However, this does not hold true for power generation. “But the size of the market for electric power is so huge that disruptive competition is unlikely,” says an investment banker. Some analysts, however, say that if three brothers get together, they could in theory become one with their combined 60 per cent stake. But Sajjan pooh-poohs it. “I have my brothers’ proxies to exercise voting power,” he says. “That helps in smooth running of the independent entities.” If one brother wants to sell his stake for any reason, the one with management control has the right of first refusal, explains a source close to the family. But some experts are reluctant to dismiss the idea that rapid expansion and growth in revenues would not lead to a ‘Jindal versus Jindal’ scenario, given that essentially they are in the steel business. “If their businesses outgrow the economy and the respective sectors, competition could be inevitable,” says K. Ramachandran, professor of entrepreneurship, family business and strategy at the Indian School of Business (ISB), Hyderabad. He says this could become evident in the third generation. We Are Family Prithviraj’s daughter Sminu is the first from the third generation to enter the family’s business. As the managing director of Jindal SAW, she is instrumental in the pipe manufacturing company diversifying into infrastructure, transportation, logistics and fabrication. Ratan’s son Abhyuday also joined the business recently, and is being groomed by his uncle Sajjan. His job: to work on turning around the recently acquired Ispat Industries, in which JSW Steel is picking up about 41 per cent. “I will be with JSW for two years, after which I go get a business degree in the US,” says 22-year-old Abhyuday. Parth (Sajjan’s 21-year-old son) and Venkatesh (Naveen’s son, who is 15) will follow him into the family business once they complete their studies. All are expected to be active businessmen by the end of the decade. “We have no confusion in the succession plan. Our sons will inherit the business,” says Sajjan. In the sprawling Jindal House in Delhi, there are four separate sections for all the brothers. But, like in the Hindu Undivided Family (HUF) (which has legal standing under the

Constitution), the mini-families share a common kitchen. Sajjan relocated to Mumbai in 1984 to look after his business, but stays at the family home when he is in Delhi. He has recently bought another house on the same road. FROM BIG TO BIGGER The numbers look mind-boggling. Naveen Jindal’s Jindal Steel and Power (JSPL) plans to invest $15.23 billion to build steel units, $13.4 billion on power plants and $8 billion on a coal-to-liquid (CTL) project — that’s nearly $37 billion, or Rs 1,67,500 crore. JSPL is building two 6 million tonne per annum (mtpa)-steel plants in Orissa and Jharkhand, another 3 mtpa-plant in Chhattisgarh and a 2 mtpa-plant at its iron ore mines in Bolivia. Thermal coal-fired plants are under construction in Chhattisgarh and Jharkhand, and on the drawing board is a 6,100-MW hydel power plant in Arunachal Pradesh. The CTL project will come up in Orissa. In addition, a 1.5-mtpa steel plant will be coming up in Oman. But where will the capital come from? In 2009-10, the company generated a cash profit of Rs 4,800 crore on turnover of Rs 11,700 crore; operating margins were an impressive 53 per cent. The consolidated debt was low at Rs 9,000 crore, and cash reserves were Rs 1,000 crore. “We are looking at a 60:40 debt-equity ratio to fund these projects,” says Sushil Maroo, group chief financial director, JSPL. The present debt-equity ratio is 0.59. The company will export iron ore from its El Mutun mines in the next 2-3 months. The estimated investment for the entire project is $2.1 billion. “The quantum of iron ore exports from the Bolivian mines will be raised step by step to 10 mtpa,” says vice-chairman Naveen Jindal. “Construction of the steel plant is on and it will be commissioned by 2014.” Grand plans directed by grand vision?

Savitri Devi Jindal is the head of the family, and chairperson of all major group companies. “After the unexpected demise of our father, who was heading all companies, we requested our mother to take over the position,” Sajjan says. She did, and eventually went on to become the wealthiest woman in India. In the second phase of his career, the late O.P. Jindal took up politics and contested as a Congress candidate for the Haryana state assembly from Hissar. His sons ran the businesses under Prithviraj’s guidance, who had entered the business first, in 1972. Savitri Jindal decided to follow her husband’s footsteps into politics, contesting the Haryana state elections from her husband’s constituency (O.P. was state power minister at the time of the accident). She won the election in 2005 and was re-elected in 2009. She spends at least two days in a week in Hissar. “Though I am chairperson of the group

companies, my sons are looking after the entire business and the credit for the growth goes to them,” she says with a proud smile. The family gets together at least thrice a year, she says. “We celebrate Diwali together in Hissar every year,” she adds. They also always get together for O.P. Jindal’s birth anniversary. Doing Business With Family The cohesion extends to business, too. When the proposal to acquire Ispat Industries came to JSPL, Naveen backed out, clearing the way for Sajjan’s JSW Steel, which is now completing the process of buying stake in Ispat and becoming a co-promoter with Pramod and Vinod Mittal, younger siblings of steel tycoon Lakshmi Mittal. In 2007, Sajjan bought three companies — Jindal United Steel, SAW Pipes USA and Jindal Enterprises — for $940 million in a leveraged buy-out (LBO) deal from older brother Prithviraj’s flagship, Jindal SAW. The three companies had a combined loss of $17 million; though the deal was based on fair valuation, Sajjan was also helping save the sinking business. The brothers are also ready to extend support in their personal capacities at any point, says Ratan. “We respect each other, consult each other in business issues and wish for the best for all group companies since everybody holds stake everywhere,” says Prithviraj. Like the ‘Four Musketeers’, one for all and all for one. Savitri Jindal says “All the brothers will be there if one fails in the business.” Such familial kindness, however, appears to be a matter of concern to some. “This sort of help raises corporate governance issues,” says an analyst from a foreign bank. “If one brother uses his company to help the other, shareholders may react unfavourably.” He points out that when JSW Steel announced the acquisition of Jindal SAW’s companies in the US, its share price sank more than 6.5 per cent in a day. Independent though they might be, could they have used the synergies within the businesses? “They could have used the synergy in production and marketing,” says Arun Kejriwal, director at KRIS, an investment advisory firm. “They could have jointly bargained for buying equipment and raw materials such as iron ore, coking coal and thermal coal that would essentially cut input costs.” But not everyone agrees. “The group companies are operating in different geographies with different visions and aspirations,” says Rakesh Arora of Macquarie Securities. “Their strategies are also different, so there is little likelihood of using synergies. But in sourcing plant and equipment, they use joint bargaining power.”

Sajjan says that they explore the possibility of jointly owning large raw material assets. “If one cannot individually own a mine because of its size, we will consider jointly exploring the opportunity,” he says. But Prithviraj begs to differ, saying that the brothers should not hold anything together. “In that case, the person in charge of the asset will be answerable to the other brothers if anything goes wrong,” he points out. Which begs the question: is there an O.P. Jindal Group of companies, as most people refer to them, or will there be separate and smaller groups? Matter of Identities Under the O.P. Jindal roof, the largest revenue earner is the Sajjan Jindal-controlled JSW sub-group, especially its flagship JSW Steel with over Rs 20,200 crore in 2009-10 at the consolidated level, or about half the combined revenues. But when it comes to profit after tax, Naveen’s JSPL is the largest, accounting for about half the group’s profit at Rs 3,570 crore in 2009-10, according to a group presentation covering the major companies. Global consulting firm Boston Consulting Group (BCG) recently ranked JSPL as the second-largest value creator in the world, based on total shareholder return (TSR) for the five-year period from 2005 to 2009. JSPL is the only Indian company among the global top 10 rankings. JSPL’s remarkable bottom line performance and solid margins has earned it investors’ confidence, which is reflected on their stock price and market capitalisation, says Rakesh Arora, managing director and head of research, Macquarie India.

THINKING HUGE
Sajjan Jindal-led JSW Steel is on the verge of becoming the largest steelmaker in the domestic market. But increasing prices of raw materials are eroding profit margins. So JSW Steel’s vice-chairman is drawing up plans to secure iron ore and coking coal supplies by 2015. “We are developing a mine in Chile to produce iron ore for captive use, and will look to buy more mines,” says Seshagiri Rao, joint MD and group chief financial officer. JSW Energy is negotiating to buy coal mines (for thermal coal) in Botswana. The company buys 80 per cent of its iron ore from the open market and most of its coal through contracts. “The increases in raw material prices are denting our profitability,” says Rao. Then, the 41.29 per cent acquisition in ailing Ispat Industries will add another 3.3 mtpa. “This will add Rs 12,000 crore to the topline,” says Rao. “Another Rs 12,000 crore is expected from Ispat in the coming financial year.” JSW Steel’s upcoming 3.2 million tonne per annum (mtpa) furnace at Vijaynagar will up the capacity to 14.3 mtpa (current capacity at Vijaynagar and Salem units is 7.8 mtpa), overtaking state-run SAIL. Along with additional revenue from higher power generation (Rs 5,000 crore) and cement production (Rs 2,000 crore) will help the JSW group double revenue to Rs 60,000 crore, says Rao. By 2020, JSW Steel will produce 34 mtpa of steel when new integrated steel plants in West Bengal and Jharkhand come up. The numbers just keep adding up.