Most blue-chip companies today are not confined to a single line of business. Instead, they resemble sprawling conglomerates, operating through subsidiaries that span multiple industries and geographies. The idea behind this diversification is simple: spread risk, capture opportunities across markets, and amplify growth potential.
However, diversification through subsidiaries does not always deliver the envisioned stability or growth. In some cases, subsidiaries fail to gain traction and instead drain resources, turning into financial deadweights. While standalone financials of the parent company may look healthy, consolidated figures often reveal the true picture.
In this article, we examine three cases—GMR Infra, Andhra Sugars, and Tata Power—where struggling subsidiaries have hampered overall performance.
GMR Infra: Demerger to Unlock Value
GMR Group is a classic example of a diversified conglomerate, with interests spanning airports, energy, transportation, and urban infrastructure. Despite this broad presence, the group faced significant challenges.
GMR’s power business suffered from low utilization rates, leading to poor operating leverage and weak margins. Meanwhile, regulatory uncertainties around airport projects further hurt financial viability. Project delays and mounting debt exacerbated the situation, with rising interest costs steadily eroding profits.
In an effort to regain its footing, GMR began divesting non-core assets, raising funds, and reducing debt. A pivotal step in this turnaround was the demerger of its airports business into a separate entity, GMR Airports Ltd. The remaining businesses were consolidated under GMR Power and Urban Infra Ltd.
This move attracted a strategic investor—France’s Groupe ADP—which valued the streamlined, focused airport business. Post-demerger, GMR Power and Urban Infra’s focus on core operations paid off: it reported ₹1,400 crore in profits on ₹6,000 crore in revenue for FY25, and delivered a stellar CAGR of 47% in stock returns since FY23. Meanwhile, GMR Airports, though growing in revenue, continued to incur losses and lagged in stock performance.
The GMR case highlights how de-consolidation can unlock investor value, attract strategic partnerships, and allow for sharper operational focus.
Andhra Sugars: Jocil’s Drag on Profitability
Founded in 1974, Andhra Sugars evolved from a sugar manufacturer into a diversified chemical and power company. Today, sugar contributes a mere 6% to revenues, while industrial chemicals and chlor-alkali products dominate the revenue mix.
Despite this diversification, Andhra Sugars has struggled to deliver strong financial results. Persistent weak demand, lower realisations, and underutilized capacity have pressured margins.
Adding to these woes is Jocil Ltd., a subsidiary producing fatty acids, stearic acid, refined glycerin, soap noodles, and industrial gases. In FY25, Jocil contributed ₹870 crore to Andhra Sugars’ consolidated revenue of ₹2,020 crore. Yet, it posted a dismal net profit margin of only 0.12%.
Jocil’s heavy dependence on a single customer for 50% of its revenue has eroded its pricing power. Rising raw material costs—particularly crude derivatives used in soaps—could not be fully passed on to customers, further compressing margins.
Though moderation in crude prices may offer temporary relief, Jocil’s structural weaknesses continue to weigh on Andhra Sugars’ consolidated performance. This example underscores how a large but struggling subsidiary can nullify the benefits of diversification and dampen overall investor returns.
Tata Power: Mundra Plant Woes and Renewable Expansion Strains
Tata Power, India’s largest integrated power company, is a key player in generation, transmission, distribution, and renewables. Its standalone operations have been robust, with strong operating efficiencies and reliable cash flows driven by long-term PPAs.
Yet, the company’s subsidiaries tell a different story. The most prominent example is Coastal Gujarat Power Ltd (CGPL), which operates the Mundra power plant.
Since its start in 2013, CGPL has been plagued by unviable power purchase agreements due to rising coal costs—sparked by regulatory changes in Indonesia. The result: perpetual losses and a drag on Tata Power’s consolidated margins.
A temporary relief came in 2023, when regulatory adjustments under Section 11 of the Electricity Act allowed CGPL to pass through higher fuel costs. Losses narrowed, but the path to profitability remains uncertain.
Meanwhile, Tata Power’s ambitious renewable energy expansion has introduced new challenges. Debt-funded capacity growth from 4.5 GW to 5.5 GW pushed the company’s net debt-to-EBITDA ratio from 3.5 in FY24 to 3.65 in FY25. While profitability improvements have supported debt coverage, upcoming plans to add another 5.4 GW—and roughly ₹20,000 crore in debt—could increase financial strain.
The combination of CGPL’s persistent losses and mounting debt in renewables threatens to overshadow Tata Power’s otherwise healthy standalone performance.
The Bigger Picture: When to Cut the Cord
It is natural for subsidiaries to post initial losses and require parental support during their gestation phase. However, when these losses become chronic and start dragging down consolidated performance, tough decisions are necessary.
GMR Infra’s demerger illustrates the power of cutting off non-core or underperforming units to unlock value. In contrast, Andhra Sugars and Tata Power continue to grapple with subsidiaries that erode margins and investor confidence.
Moreover, these relationships are often intertwined beyond mere financial investments. Jocil’s credit ratings, for example, are bolstered by Andhra Sugars’ support, while CGPL’s survival hinges on Tata Power’s backing.
At the same time, subsidiaries can also become growth engines rather than liabilities—as seen in cases like Essar Ports, where consolidated profits vastly outshine standalone numbers.
Ultimately, investors must scrutinize consolidated financials and adjust valuations appropriately, applying holding company discounts when necessary. Subsidiaries aren’t always red flags—but ignoring their impact can lead to misleading investment decisions.
Conclusion
Conglomerates are built on the promise of diversification and synergy. But when subsidiaries fail to perform, they can turn this promise into a pitfall. By closely analyzing consolidated results and understanding the dynamics between parent companies and their subsidiaries, investors can make more informed decisions and avoid the hidden traps lurking behind standalone financial statements.
Feel free to share your experiences and insights in the comments below. Let’s continue the conversation and grow together as a community of traders and analysts.
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Disclaimer
This article should not be interpreted as investment advice. For any investment decisions, consult a reputable financial advisor. The author and publisher are not responsible for any losses incurred by investors or traders based on the information provided.