Tata 'legacy hotspots' continue to pull down group's financial performance

These firms' finances are far from sustainable and they suffer from poor profitability and high debt

There has been a marginal improvement in the financial performance of the “legacy hotspots”, the companies that Cyrus Mistry had mentioned after he was sacked as chairman of Tata Sons in October 2016.

However, these companies’ finances are far from being sustainable and they, except Indian Hotels, continue to suffer from poor profitability and high debt.

In his letter to the directors of the Tata Sons board and Tata Trusts trustees soon after he was removed, Mistry had pointed out several “legacy hotspots” that were pulling down the group overall finances. They were Tata Power, Tata Steel, Indian Hotels, and Tata Motors’ domestic passenger car business.

Tata Teleservices was another big hole in the Tata group financials pointed out by Mistry. Since Mistry’s exit, the telecom services has lost Rs 60,000 crore with the group holding company paying its dues to banks and the government. This was after Tata Tele transferred its wireless services business for free to Bharti Airtel.

Analysts said the economic slowdown had begun to bite the group’s frontline companies with decline in margins and profitability during the first half of FY20. This is likely to put further pressure on their balance sheet in forthcoming quarters. 

Not surprisingly, the market capitalisation of Tata Power, Tata Steel, and Tata Motors continues to be a fraction of the debt on their books, indicating their inability to create shareholder value.

Together these companies (excluding telecom) accounted for nearly three-quarters of the combined capital employed by the listed companies in the tent and nearly 88 per cent of combined gross debt, but they contributed just one-fifth to the group’s combined net profit (adjusted) in FY19.

For example, Tata Power’s net profit increased from Rs 168 crore in FY15 to Rs 2,190 crore in FY19, but earnings are once again contracting. Its net profit was down 73 per cent year-on-year during the first half of the current financial year while interest liabilities were up 11 per cent y-o-y during the period. 

The company’s Mundhra unit, the single-biggest source of loss, reported a net loss of Rs 1,653 crore in FY19 on revenues of Rs 7,064 crore and remains a cash guzzler for the company.

Tata Power continues to make incremental borrowings and it reported a gross debt-to-equity ratio of 2.7x in FY19, marginally down from FY15, the last year of Cyrus Mistry’s chairmanship.

It’s the same with Tata Steel, which saw a big jump in profits in FY18 and FY19 due to higher steel prices globally and the commissioning of its greenfield Kalinganagar facility; but net profit was down 20 per cent y-o-y during the first half of FY20. The company took on additional debt in the last two years to acquire Bhushan Steel, prompting analysts to doubt the financial feasibility of the acquisition, given a contraction in steel demand and production in FY20.

Meanwhile, the company continues to lose money at its operations in the United Kingdom and Southeast Asia and has announced job cuts in Europe last month. 

Tata Steel tried to transfer its European operations to a 50:50 joint venture Germany’s Thyssenkrupp but the anti-trust authority did not allow it. Top Tata officials told this paper earlier they would continue to find a solution for Tata Steel Europe and the share of Indian operations in the overall revenue pie would go up and make European operations negligible.

Tata Motors’ finances continue to remain under squeeze due to a volume contraction in India and the downturn at its Jaguar Land Rover (JLR) division. The company reported a record net loss of around Rs 29,000 crore in FY19 and its domestic business once again turned loss-making in FY20 after reporting profits in FY19. This is likely to keep the company’s finances under stress. Tata Motors reported a gross debt-to-equity ratio of 1.8x in FY19, up from 1.3x at the end of March 2015.

Indian Hotels has been a bright spot for the group with a sharp improvement in profits in the last two years, along with a nearly 50 per cent decline in outstanding debt. This cut its interest liability, aiding the bottom line. The debt reduction was, however, largely funded through a fresh equity infusion by shareholders through a rights issue rather than internal accruals.

There is, however, uncertainty regarding its finances, given the economic slowdown and rapid expansion of international hotel chains in India, making it tough for Indian Hotels to grow its top line. The company’s net sales are up just 10 per cent cumulatively in the last four years, raising a question mark on the recent improvement in its profitability.