One sunny afternoon nine years ago, Ratan Tata, then chairman of the Tata Group, had described his $13 billion trophy acquisition in the United Kingdom as "a defining moment" for his conglomerate. He explained how Corus, an ailing British steelmaker that was five times the size of Tata Steel at the time of the deal, would equip the group to remain at the leading edge of the steel industry. Mr Tata and his trusted lieutenants perhaps had misread Britain's fickle weather, as the Tata Steel statement last Wednesday said its decision to put the entire UK operations on the block was a "logical way of de-risking its businesses" after the book value turned nearly zero in the last one year. In the last five years, the company has written off more than two billion pounds in impairment costs. Though the decision has created a storm in Britain, as Tata Steel employs about 15,000 workers in that country, it is a prudent decision - which Cyrus Mistry, Mr Tata's successor at Bombay House, has finally taken to save Tata Steel, which has $11-billion debt on its books, from further distress. After all, half the cost of the largest-ever overseas buy for an Indian firm was funded through debt.
In fact, since taking charge a little over three years ago, Mr Mistry has had to take several such decisions - he sold Neotel, mothballed Brunner Mond's premium soda ash-producing unit in Kenya while shutting down the factory in the UK after a significant write-down, and abandoned his predecessor's long-drawn-out bid to acquire American luxury chain Orient-Express Hotels. However, challenges still remain from some of the other "iconic" acquisitions of the past, including the Pierre Hotel in New York. Mr Tata wanted to catapult the Indian conglomerate onto the global big league. While the acquisitions of Tetley Tea and Jaguar Land Rover (JLR) have certainly been successful, others were not. Is it better perhaps to acquire global brands rather than manufacturing facilities? To be fair, some of those decisions were taken in vastly different economic conditions; the boom years of the 2000s called for risk-taking - which is totally contrary to today's more sedate mood, which demands caution and course correction.
Mr Mistry's other task would be to diversify revenue, and reduce the group's continued over-dependence on just one company - Tata Consultancy Services, which brings in more than Rs 18,000 crore annually. Compare this to the Rs 8,000 crore of cash that drains out from the group's other 10 largest listed companies. The 100-company strong Tata group relies excessively on TCS to drive its market value and group profitability - the software company accounts for about 70 per cent of the group's combined net profit and 87 per cent of dividends paid out by the group. This obviously needs to change, particularly when TCS itself is showing some signs of stress and the other group star, Tata Motors, is facing a slowdown in Chinese demand for JLR vehicles. It is reassuring, however, that Mr Mistry is in the midst of reconfiguring and reconstructing businesses to make the group more resilient. India's largest private sector conglomerate has to consolidate vigorously in such a volatile environment.
