As many as 88 of the total 98 companies in the Tata Group collectively contribute less than 10 per cent to the total group turnover. But Ishaat Hussain, finance director of Tata Sons since July 2000 and chairman of several group companies, says there is no point losing sleep over this because the group’s strategy has always been to get value out of core assets. In this interview to Shyamal Majumdar and Arijit Barman, Hussain also talks about how the group took several risks with its eyes wide open and how the role of a group CFO is evolving with times. Edited excerpts:
The Tata Group has 98 operating companies, of which just about 10 are contributing to the group’s bottom line in any significant way. Do you think there is a scope for synergy or even possible sell-offs to improve capital efficiencies?
Tata Sons is not distracted by these 80 or 90 companies since most of them are part of larger group companies. Unless there is potential, we do not keep a company. If it has potential, then we try and breathe life into it.
But we are not talking about just the subsidiaries. Many of these are stand-alone companies and are very small. Why keep them?
Our strategy is to get value out of non-core assets. Take Tata Refractories, for example. We hold 26 per cent in the company, the rest (50 per cent) we have divested. It is a profit-making company and needed good technology, and that’s why we have got ourselves a good technology partner. In retail, it’s a similar story. In telecom, however, Tata Communications can’t be merged because after merger, the government will have more than a 10 per cent stake in BSNL and also Tata Communications. There is also a rationale for a reverse merger of TTSL [Tata Teleservices Limited] into TTML [Tata Teleservices Maharashtra Limited], but there are tax-related issues. However, at the operational level after DoCoMo’s entry, these companies are working closely together.
Is Tata Sky core or non-core?
Tata Sky currently is part of our core business. News Corp is a very helpful and an engaged partner. We have created a very solid brand. As and when regulations change, we may re-look our strategy. The rationale for entering this business was that CAS [conditional access system] was to be rolled out throughout the country. However, that has not yet happened. For us, it’s a business of the future.
How has the role of a group chief financial officer (CFO) in a conglomerate like the Tata group evolved? You have separate listed entities and that calls for decentralisation. So how can you have a policy from the top that suits all?
For us as a group, the sovereignty of the boards is a primary consideration. The Tatas are significant shareholders and can influence decisions, but we cannot dictate terms to our companies. We work through consensus. The interests of the group and the companies are aligned. We have only one agenda and that is to create a sustainable company.
What happens when there’s a big acquisition? Corus, JLR, they all hogged the headlines for months and then the aftermath.
In 2007, the world was flush with money. Interest rates were low, assets were on the table and overall it was a great time for M&As. We grabbed that opportunity and we made the big acquisitions. From day one, we were very clear that we would have to recapitalise Tata Steel and Tata Motors. We took these risks with our eyes open. We realised that the rating of these companies could be downgraded, and indeed they were. However, what we did not anticipate, and nobody else did, was the financial crisis in the latter part of 2008.
Fortunately, Tata Sons was liquid at that time and was able to start the recapitalisation of Tata Motors and Tata Steel despite difficult market conditions. Both these companies have now had ratings restored and are reaping the benefits of their acquisitions. The principle that I follow is to encourage each company to determine its debt capacity by aiming for the highest credit rating.
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The fears of a slowdown are back — inflation, high interest rates. Are we panicking prematurely?
Some of our businesses, which are sensitive to interest rates, are beginning to get impacted. I personally feel that, at present, 8.5 per cent GDP growth is not sustainable. My belief is that six to seven per cent growth is sustainable with moderate inflation and I wouldn’t be unhappy with that. Industry should plan how to manage growth and profitability keeping this rate in mind. We can’t expect to see 30 per cent-plus growth in profits year-on-year forever!
So it’s time to pull the brakes on capex spending too. How is the Tata Group dealing with its growth plans in these difficult times?
We have not put any breaks on capex. Tata Steel is implementing the Kalinganagar steel plant. The expansion at Jamshedpur is ahead of schedule and may be on stream in this fiscal. Tata Motors is investing heavily on product development. I haven’t seen any cut there. Tata Power, too, is sticking to its plans. TCS has huge expansion plans this year at Hinjewadi, Ahmedabad and a big investment in Trivandrum. Kalinganagar capex alone is $8 billion. Tata Power, too, will have another $2-$3 billion spending. The average cost of debt of our companies is in the region of nine per cent. If it continues to rise like this, then companies may have to revisit their capex plans. But I am not seeing that for the next two years.
Even in the interest scenario, there is a bell curve. Do you say you would rather focus on costs than cut down on capex?
I answered your earlier question with the short term in mind. Looking at the long-term interest rate scenario, I feel that Indian interest rates are not likely to come down drastically and in any case I cannot see it being less than eight per cent. My reason for being hawkish is the burgeoning borrowing requirement of the government that crowds out the private sector. In my view a fiscal deficit of five per cent is much too high.
Many would argue that instead of deleveraging its balance sheet both Tata Steel and Tata Motors are pumping the cash that they generate back into the business. How does one balance growth and leverage?
I don’t believe the choice between growth and leverage is as binary as it is made out to be. One always has to strike a balance between the two. Various measures were taken to recapitalise the companies by raising external and internal equity, the latter by selling non-core assets.
Further, both companies have undertaken restructuring of their debt. It is against this background that the debt markets have responded so favourably to the debt raising programmes of Tata Steel and Tata Motors. In fact, it is worth noting that even during the peak of the financial crisis, the group generally and Tata Motors and Tata Steel in particular continued to access the debt markets.
What’s your feedback on the recent draft guidelines for the entry of corporate sector into banking? Would you pursue a banking licence?
We will evaluate the opportunity provided by the RBI. The group already has put a flag in the ground by setting up Tata Capital, which is a significant NBFC [non-banking financial company]. We have to study the new rules and come to a decision.