How Cyrus Mistry fixed 'legacy hotspots' to clear the financial mess

Former Tata Sons chairman Cyrus Mistry had put in place a strategy that would have pulled most of the Tata group’s “legacy hotspots” out of the financial mess from legacy issues and helped turn around the group’s finances. 

Mistry’s turnaround strategy, a source close to the development said, included a merger of Tata Teleservices with a large telco that would have resulted in merger synergies worth Rs 10,000 crore. Mistry was also keen to end the dispute with DoCoMo but as the Reserve Bank of India (RBI)’s permission to remit funds of $1.17 billion to DoCoMo had not come, the merger deal was pending, the source added. 

“After the turnaround plan was put in place, Tata Teleservices had started making an Ebitda (earnings before interest, taxes, depreciation and amortisation) of nearly Rs 2,500 crore, and had asked DoCoMo to make a joint application to the government but they moved court,” said the source asking not to be identified. “Mistry was also keen to pay Docomo and end the dispute, but his hands were tied by present laws,” the source noted. The option of paying Docomo from Tata’s overseas accounts would still violate Indian laws, the source added. 

Following Mistry’s removal by the Tata Sons board on October 24, the new management led by Ratan Tata is planning to end the litigation with DoCoMo by making a fresh application to RBI. The government is likely to help the transaction by making an exception to the law and allowing the buyback of shares at a pre-determined rates. 

Mistry had explicitly mentioned the five “legacy hotspots” of the group in his letter to the Tata Sons’ board: Indian Hotels, Tata Motors, passenger vehicles business, Tata Steel Europe, Tata Power Mundra and Tata Teleservices. A realistic assessment of the fair value of these businesses would result in a potential write-down of $18 billion. 

At Tata Steel, the source said the British operations were hit due cheaper Chinese exports to Europe. With the steel price crash, the fate of high-cost British operations of Tata Steel Corus was sealed. At the same time, the Tata Steel board was asking Mistry to get out of Europe so that the Indian operations could be salvaged. The high cost of acquisition made by Tata in 2007 had already led to a loss of up to Rs 80,000 crore to Tata Steel.

“Tata Steel sold a couple of operations in the UK to cut costs but due to aggressive cost cutting, the Port Talbot operations were looking up and the sale of Port Talbot plant was put on hold,” the source said. A merger with Thyssenkrupp, which was on the cards, would have helped Tata Steel to focus on Indian operations that were fast turning around with Kalinganagar coming on stream. 

“In the past three years, Tata Steel executed the largest industrial project ever in Tata’s group’s history with 49,000 people working at the site at its peak,” the source close to the Mistry camp said. The infrastructure is already in place to expand the capacity by another five million tonnes a year, the source said.

On Tata Motors' Nano, a board member said the product was losing close to Rs 1 lakh on every car produced, and the project has made total losses of Rs 6,000-7,000 crore. “The company has had four managing directors in the past 10 years, and employee morale was low. It took two years for Tata Motors to get a new CEO as the Tata Sons board was rejecting most candidates selected by Mistry.” 

However, Tata Motors’ domestic passenger vehicle business is on the right path, say insiders, and Mistry’s turnaround strategy with the launch of new products such as Tiago, new branding and a new CEO at the helm will help. 

At Tata Power’s Mundra project, the source said the company was suffering due to Indonesian coal prices that went up due to a change in local laws. A turnaround strategy was put in place by selling stake in Indonesian coal mine and the company made an acquisition in renewable power sector from Welspun for Rs 9,700 crore. As coal prices were falling, Mistry saw that the production costs at Tata Power’s coal mines were also reduced, which has helped the company’s financials, said the source.

To turn around Indian Hotels, the company first merged the off-balance sheet SeaRock hotel, a legacy purchase and took the impairment. The Pierre in New York, which is losing $15 million a year, could not be sold due to unattractive lease terms. Write-downs were also made for other bad acquisitions. In the process, 75%of Indian Hotel’s net worth was wiped off. A new management was put in place and a new branding for Taj was launched. The company was back on tracks  — a fact acknowledged by its independent directors in its board meeting held on Friday. 

“There were multiple turnarounds that were happening in the Tata group. In fact, it can be called the biggest turnarounds in the history of Indian corporates. Just see where the companies were three years ago and where they are now,” the source said.