N Chandrasekaran walks into Tata corner room

King-size headaches face new chairman, with no quick or easy solutions in sight

N Chandrasekaran, new chairman of Tata Sons, walks into the corner room in Bombay House on Tuesday. Amid uncertainties at almost all group companies due to global challenges, litigation and legacy issues. 

Chandra, who will succeed the ousted Cyrus Mistry, will have to take an immediate call on loss-making Tata Teleservices. The company requires fresh fund infusion of Rs 10,000 crore by the financial year starting April 1. This is apart from Tata Tele facing the prospect of losing another $1.2 billion to NTT Docomo, which has sued Tata Sons in US, UK and Indian courts to force the latter to buy back its 26.5 per cent stake in Tata Teleservices. 

With the Reliance Jio launch and Idea-Vodafone merger, fringe players like Tata Tele would face more heat and Chandra will have to decide how much more of Tata Sons’ money should be poured into the company, said an analyst.

The legacy issues, noted by Mistry in several letters after his ouster to Tata Sons’ board members, would continue to dog the group in the coming years. There are no quick solutions for these, say analysts. 

Newly appointed Tata Sons Chairman, Natarajan Chandrasekaran arrives at Bombay House in Mumbai on Tuesday 21st Feb, 2017. Photo: Kamlesh Pednekar

One example is the decision Chandra will have to make on Tata Steel, losing substantial money in its British operations. The latter is in talks for a merger with Thyssenkrupp to cut the losses.  A recent ballot by British worker unions has paved the way for pension reform that could lead to a  merger with the German giant.

Tata Motors is another big hurdle, though the company is taking several steps to revive its passenger car business in India. A border tax promised by US President Donald Trump could upset the finances at its Jaguar Land Rover arm, as the company does not have any plant in the US, say analysts.

Ratan Tata arrives at Bombay House in Mumbai on Tuesday 21st Feb, 2017. Photo: Kamlesh Pednekar

"Apart from managing the companies, how Chandra takes care of the Tata satraps and their friends would be a key challenge," said a former official. Mistry had complained on former chairman Ratan Tata's friends having signed profitable deals with Tata companies resulting in huge losses to, for instance, Tata Capital and Tata Power. The Tatas have denied the allegations. 

The good news for Chandra will be that Tata group numbers look good at the consolidated level. These are among the best financial ratios and one of the lowest leverage ratios in the country's top family-owned conglomerates. The bad news is that if Tata Consultancy Services (TCS) and Tata Motors’ JLR are excluded, the picture becomes hazy for group finances. 

In FY16, group listed companies reported a combined return on equity of 16.5 per cent, nearly double that of other large conglomerates. At 14.2 per cent, return on capital employed was also among the highest. The group net debt to equity ratio at 0.73 in FY16 was a nine-year low and among the lowest in top business groups.

The group picture, however, takes a U-turn if we exclude the numbers for TCS and JLR (see chart).

The group’s big capital guzzlers such as Tata Steel, Tata Power, Tata Chemicals, Indian Hotels and the telecom venture either earn sub-par return or are loss making. Making Tata Sons increasingly dependent on dividend from TCS to maintain group finances.

In FY16, the two profitable entities mentioned earlier had accounted for 55 per cent of the group's combined revenues, 69 per cent of operating profit, 100.5 per cent of net profit and 80 per cent of all equity dividend paid. Excluding TCS and JLR, the group companies reported a net loss of Rs 160.7 crore in 2015-16.

On the balance sheet side, TCS and JLR together accounted for 56.3 per cent of the group average net worth (or equity) in FY16 and 76 per cent of all group cash & equivalents. And, add nothing to the group debt burden. Net of their cash and equivalents, TCS and JLR actually have negative debt.

Excluding TCS and JLR, the group net debt and leverage ratio zoomed to an all-time high of 1.9 in FY16, while return on capital employed declines to 5.8 per cent.

The analysis is based on the financials of 18 listed Tata group companies, excluding their listed subsidiaries. The difference between Tata Motors’ consolidated and standalone financials has been taken as a proxy for its JLR division

The main challenge for Chandra, the new group chairman, would be to pull it away from the financial dependence on TCS and JLR, and turn around the finances of cash guzzlers such as Tata Steel, Tata Motors’ domestic business, Tata Power, Indian Hotels, Tata Communications and Tata Tele (Maharashtra).