Cyrus Mistry, who takes over the captaincy of the Tata Group this Friday, doesn’t have to worry about the wicket. With a team comprising some of India’s best corporate leaders -- all carefully handpicked by his predecessor -- Mistry can surely hit the ground running. For, Ratan Tata is passing on to Mistry a group that is much bigger, more profitable, more diversified and financially stronger than what he inherited from his uncle JRD Tata in 1991.
Mistry will be chairman when Tata Sons is firmly in control, with a shareholding of well above 30 per cent in all group companies. He is inheriting a group that is 51 times larger in terms of revenues and profits than what Tata received from JRD in 1991. The group has grown at a compounded annual rate of 21.7 per cent (see table).
The group’s growth is more than the increase in India’s gross domestic product, which grew at a CAGR of 14.4 per cent at current prices, according to estimates by the Central Statistical Organisation. The group also beat the stock market, with its market capitalisation growing faster than the rise in Sensex during the period (FY 1992 to FY 2012).
The group has four companies in the benchmark BSE Sensex with a combined weightage of 13 per cent, second only to the government-owned companies which are the largest group with a combined weightage of 26 per cent.
Under Ratan Tata’s watch, the group spent over $20 billion –nearly a quarter of the group’s current assets – in acquiring marquee assets, most of which still deliver below-par returns. This opened him to criticism from markets and analysts. “Marquee acquisitions did bring in revenues and global attention but where are the financial returns? ” asks the head of a brokerage house in Mumbai on the condition of anonymity.
The growth in market capitalisation has been slower than headline numbers, but that is not a like-to-like comparison. In 1992, India was in the middle of a bull-run, while the economy is currently in a downturn and valuations are depressed. This is clear by comparing Tata Group’s performance against the benchmark BSE Sensex. At the end of March this year, the group was 15 times more valuable than in March 1992. Even if we exclude TCS, the group’s combined market value is up eight times since 1992. In comparison, the BSE Sensex appreciated by little over four times during the period. (See table).
Despite his costly overseas adventures, Tata is retiring with lower debt-to-equity and higher return on net worth than what he had inherited. This is partly attributed to free cash flow from TCS. “Even without TCS, most of the large Tata group companies are financially well placed and Tata Sons has multiple avenues to raise resources if needed,” says Deep Narayan Mukherjee, director, India Rating. The agency currently rates a dozen Tata companies.
Twenty years after Tata took over, the group is more diversified and less prone to business cycles than it was earlier. In 1992, there were 21 listed companies in the group. This tally has now increased to 29, including subsidiaries and associates of key group companies such as Tata Steel, Tata Motors, Tata Chemicals, Indian Hotels, Tata Power and Tata Global beverage among others. The group holding company directly owns and controls only 14 firms.
To that extent, the group has a clean and well defined ownership structure with one firm in control of all group assets in a particular sector. For instance, all steel and related assets are housed under Tata Steel. This not only caps the risks of minority shareholders, but also gives them the freedom to choose the sector they wish to invest in. This is unlike other business houses such as Reliance Industries and Mahindra & Mahindra where the flagship company holds all the group ventures.
Since 1992, the Tata Group has transformed from an old styled conglomerate, earning 90 per cent of its revenues from industrial products such as heavy trucks & buses, steel, inorganic chemicals and electricity. Now the group’s portfolio includes some of India’s most successful consumer brands such as Titan, Fastrack, Tata Tea, Tata Salt, Tetley, Westside, Tata Docomo, Voltas, Croma, Tata Sky and Jaguar Land Rover among others.
Consumer products now account for nearly 40 per cent of the group revenues while another 10 per cent is accounted for by Tata Consultancy Services. This has made the group highly resilient to an economic downturn in India, which is visible in the group’s stock market performance in the last three years. (See chart).
The transformation is best captured by Tata Motors, which is still the group’s largest firm by revenues, but is now completely different from its avatar in the early 1990s. It is still India’s largest commercial vehicle maker, but that is only a quarter of its business now. Nearly three-fourths of its business now comes from selling passenger cars. This has made the company one of the top performers on Dalal Street in recent years.
Challenges
All this, however, does not imply that Mistry will not face any challenges. Tata Motors could be the first one seeking his attention. The company, which accounts for a third of the group’s revenues, despite its apparent financial success, continues to lose ground to rivals in the passenger vehicle segment in the domestic market. M&M and Hyundai have gained market share at the expense of Tata Motors – the business about which Tata is personally passionate about.
Tata Steel, which came on the global map with the acquisition of Corus (now Tata Steel Europe), continues to make losses in that continent. It is a financial drag on the group balance sheet due to its sheer size. Its other capital intensive business – Tata Power, is also facing headwinds. Its Rs 18,000 crore investment in the Mundra Ultra Power Project has become financially unviable as the backward investment in Indonesian coal mines didn’t move according to the script.
Mistry would need to fix the telecom business too as it continues to bleed and shows little signs of an operational or financial revival in the near term. In all this, he has to demonstrate to the stock market and the minority shareholders that he will provide them with the best bang for their buck. At the end of FY12, only a third of the group’s listed companies reported return on capital employed of 15 per cent or more. At 11.4 per cent, the group’s overall return ratios (excluding TCS) don’t look great either. It goes on to show that either the group over-invested during the boom or there remain a lot of inefficiencies in the system.
To that extent, Mistry’s task is cut out: don’t lose wickets in the rush to make quick runs.
