Under Mistry, Tata Group steps up organic expansion

This is largely on the back of Tata Steel's expansion at Kalinganagar, as well as JLR's in China and Brazil

After a decade of inorganic growth, Tata Group has stepped up activity on the organic growth front through the past three years. In 2013-14, the first full year under the chairmanship of Cyrus Mistry, the 10 most valued listed companies of the group saw record capital expenditure of Rs 95,634 crore on organic growth. This was largely on the back of Tata Steel’s expansion at the Kalinganagar plant in Odisha, as well as expansion related to the Jaguar Land Rover (JLR) brand in China and Brazil.

The tenure of former group chairman Ratan Tata was marked by $16-billion acquisitions, including those of Corus ($12.8 billion), JLR ($2.3 billion) and Tetley ($450 million). During that period, the top 10 group companies recorded their highest capital expenditure of Rs 1,08,367 crore (2007-08), following the acquisition of Corus. This was followed by capital expenditure of Rs 63,909 crore on the acquisition of JLR (2008-09).

Before the acquisition of Corus, spending on organic growth was as low as Rs 18,268 crore (2006-07).

“Following the marquee acquisitions, the Tata group took some time to stabilise and nurture these businesses; eventually, some of these, such as JLR, have been extremely rewarding,” says Dhananjay Sinha, head of research and strategy at Emkay Global Financial Services, a domestic brokerage house. After taking over as group chairman in the early 1990s, Ratan Tata spent the initial years in forging an identity for the group. This was also the time when the Indian economy was liberalised and multinational companies were strengthening their foothold in India. As such, Tata spent the next decade providing group companies the advantage of global scale and technology, through marquee acquisitions. Once these acquisitions stabilised, he focused on organic expansion in the last few years of his chairmanship.

In 2011-12, the capital expenditure on organic expansion more-than-doubled to Rs 66,670 crore, as Tata Steel expanded capacity at its century-old plant in Jamshedpur and JLR started spending on new product development such as the now-popular Evoque. The following year, the last under the chairmanship of Ratan Tata, capital expenditure on organic expansion remained high, at Rs 41,771 crore.

This momentum has been accelerated by Mistry. Addressing the group’s top leadership in July, Mistry committed Rs 2,10,000 crore ($35 billion) in capital expenditure through the next three years, the highest by any Indian corporate house.

Mukesh Ambani-promoted Reliance Industries plans to invest Rs 1,80,000 crore ($30 billion) in capital expenditure through three years.

This financial year, the top 10 valued companies of the Tata group are set to spend Rs 62,140 crore, both in India and abroad, to expand facilities. JLR, one of the group’s crown jewels, accounts for the largest capital expenditure this financial year — Rs 35,000 crore. This will be used to develop new products and expand its capacities. Including this, its parent Tata Motors has planned total capital expenditure of Rs 38,500 crore for FY15.

“As the Tata group is increasingly becoming more global, it is finding the opportunity outside India to be much bigger. So, it is consolidating its empire through this capital expenditure to fortify its global position,” Sinha says. The second-highest capital expenditure this financial year, Rs 14,000 crore, is accounted for by Tata Steel establishing a new six-million-tonne steel plant at Kalinganagar. This is primarily aimed at catering to the increasing demand for flat products from sectors such as automobiles. Work on the plant was inordinately delayed, following protests by locals.

“Fundamentally, this group is very strong in knowing the businesses. So, there is very little say-do gap,” says Anil Sardana, managing director, Tata Power, which has lined up Rs 7500 crore of capital expenditure till 2016-17. “At this moment, it is befitting for it to actually do tremendous organic expansion and contribute to the economy.”

Other major capital expenditures in the group include Rs 4,000 crore by Tata Consultancy Services, as the information technology services company seeks to expand into countries such as Japan. A substantial chunk of capital expenditure has also been marked for companies in the unlisted space; Tata Housing has planned Rs 3,000 crore in capital expenditure this financial year. Tata Realty & Infrastructure, along with Tata Projects, is believed to be bidding for infrastructure assets in India, and this is expected to result in substantial capital expenditure. “Tata companies always take a long-term view of business. They make required investments, depending on the needs of the geography concerned, as well as company imperatives,” said a Tata Sons spokesperson.