In 1991, after 56 years as head of the Tata group, J R D Tata stepped down in favour of his nephew, Ratan Tata. The year coincided with the first phase of economic liberalisation. Since then, the economy has changed beyond recognition. How has the Tata group performed under the new dispensation?
Our study shows that although the group is the largest in terms of sales and assets, there is a skew in its 40-odd listed group company contributions. For one, truck and LCV maker Telco accounts for a third of group sales. Second, some of the smaller companies have performed exceptionally well but several larger companies have not. The overall inference from the group financials: the group needs to be leaner and meaner -- something chairman Ratan Tata has acknowledged.
Tata has said he is looking at 10 or 12 core businesses from the current 25 industries the group is currently in. This study focuses on the current businesses to provide possible clues on the future shape of the group. Before the results, a quick word on the method of this study. We have broadly looked at sales and net profit growth and operating profit margins (OPM) . Growth, unless weve said otherwise, has been computed as the compounded annual rate of growth (CAGR) between March 1992 and March 1997.Group sales have grown at a CAGR of 20.25 per cent. We have measured OPM growth on a point-to-point basis.
Metals and associated industries
The largest company in this group, Tata Iron and Steel Company (Tisco) has assets worth Rs 6,300 crore. Apart from steel, it has a cement manufacturing capacity of 1.73 million tonne. The period of this study coincides with a major change in the steel industry, when the government deregulated steel prices and distribution for the first time in decades.
In this period, Tisco's sales have grown at a CAGR of 18.78 per cent which seems reasonable with net profits growing at 16.98 per cent. However, OPM actually declined by 0.72 percentage points to 21.05 per cent. The decline was more severe between March 1993 and March 1995 when OPM dipped to as low as 13.88 per cent.
The company is in its fourth phase of expansion and modernisation after which its saleable steel capacity is expected to go up to 3.2 million tonnes. It is planning a three-phase 10 million tonne steel plant in Orissa which will have a 1.2 million tonne cold rolling mill in the first phase.
Its associate company, Tata SSL (formerly Special Steels), which makes flat rolled products, wires and wire rods, recorded a 19 per cent CAGR between 1992 and 1997 although the last three years have seen a stagnation in sales. OPM has crashed from 16.54 per cent to 4.91 per cent and it has incurred a net loss of Rs 14.25 crore in March 1997. Tinplate Company, the largest producer of tinplates in India, too posted a net loss in March 1997 of Rs 27.02 crore.
Tata Sponge Iron (also a subsidiary of Tata Steel) has a capacity to make 120,000 tpa of sponge, which is being doubled. It achieved a CAGR of 10.59 per cent but saw its OPM drop from 46.52 per cent to 24.92 per cent while net profit dropped by 6.29 per cent.
Tata Timken, the bearings manufacturer, has posted a smart jump of 52.62 per cent CAGR in sales. Operating margins are lower at 21.16 per cent against 30.03 per cent, but net profit growth is a high 33.89 per cent. Tata Yodogawa, which makes rolls for steel products, has been one of the better performers with a 8.91 per cent CAGR and a net profit growth of 16.67 per cent.
TRF (formerly Tata-Robins-Fraser), which specialises in bulk material handling equipment, achieved a 10.42 per cent growth. Its OPM improved from 7.37 per cent to 10.8 per cent while net profit too rose from a relatively low Rs 0.72 crore to Rs 4.05 crore.
Automobiles
Telco, which accounts for nearly one-third of the entire group turnover, is pinning its hopes on its Indica small car project to propel growth. Its sales CAGR has been a healthy 26.38 per cent but margins have remained relatively flat, rising from 13.39 per cent to 14.61 per cent. Net profit growth, however, has been impressive at 39.68 per cent.
Energy
The Tata Electric Companies -- Tata Hydro-Electric Power, Andhra Vallery Power and Tata Power Company -- have been consistent performers with an income from operations CAGR of over 16 per cent. Their OPMs too have improved from around 13 per cent to 30 per cent.
Engineering
Voltass problems -- sluggish markets, diversified porfolio, poor management -- are visible in its numbers. It posted a sales CAGR of 9.92 per cent while the OPM, which was already low at 6.11 per cent, sank to 3.8 per cent. It incurred a net loss of Rs 16.82 crore in March 1997. Voltass operations are likely to be streamlined considerably in the next few years. Its refrigeration and washing machines business have been big drains on its cash flow apart from other remunerative businesses on board.
Chemicals and pharmaceuticals
Tata Chemicals has been among the star performers with a sales CAGR of 35.63 per cent and a net profit growth of 31.85 per cent. Margins, however, have been unable to keep pace with sales growth and have declined from 46.88 per cent to 40.62 per cent.
Goodlass Nerolac Paints, the joint venture with Kansai, Japan, too has done reasonably well with a sales CAGR of 21.25 per cent and a net profit growth of 37.72 per cent. OPM has improved from 10.7 to 12.98 per cent.
Drug company Merind has been in the news recently since it is on the auction block. There has been much speculation about the price the Tatas would ask for it. Its sales CAGR is 18.71 per cent and OPM has improved from 8.5 per cent to 9.26 per cent. In absolute terms, net profit growth has been meagre from Rs 1.12 crore to Rs 4.02 crore.
Consumer products
Titan Industries changed the entire face of the Indian watch industry and carved a fine reputation for itself. Titan's sales CAGR was 21.39 per cent while its OPM rose from 22.94 per cent to 25.31 per cent. Its net profit growth has been moderate at 15.94 per cent for a consumer durables company. Its foray into the overseas markets and into jewellery-making has put a strain on its performance.
Lakme : Once a major in the personal care segment, Lakme is now a manufacturing company with the marketing and distribution being handled by Lakme-Lever (a 50:50 JV between Lakme and Hindustan Lever). This has resulted in a steep drop in sales with the CAGR registering a negative growth of 15.05 per cent. Net profit growth has however been high at 37.86 per cent. OPM has risen from 7.61 per cent to 45.75.
Forbes Gokak: Forbes Gokak in itself is a diversified company though with little to show in terms of performance. While sales have grown at a CAGR of 15 per cent , OPM has slipped from 21.55 per cent to 15.49 per cent while net profit has grown only by 5.77 per cent. Apart from mills, communication, engineering, shipping and Patvolk (shipping agency services) divisions, it has a number of subsidiaries in varied businesses. Services
Indian Hotels recorded a healthy sales CAGR of 23.21 per cent, an increase in OPM from 28.2 per cent to 43.9 per cent and a 46.65 per cent jump in net profits. Indian Resort Hotels is another success story with a sales CAGR of 15.16 per cent, an OPM jump from 22.82 per cent to 32.7 per cent and a net profit jump of 37.97 per cent. Oriental Hotels had an impressive sales CAGR of 26.01 per cent. Its OPM jumped from 24.72 per cent to 45.41 per cent while net profit saw a CAGR of 51.72 per cent.
Tata Donnelley (formerly Tata Press), the largest commercial printer in India, had a sales CAGR of 31.2 per cent and a net profit growth of 35.13 per cent. But its OPM has not kept pace, declining marginally from 22.26 per cent to 21.62 per cent.
Hitech Drilling Services is the Tata's venture into the oil sector providing services to oil and gas companies. Its plans include diversification into other upstream oil exploration services related to oil drilling. It achieved a sales CAGR of 30.2 per cent and its OPM increased from 29.2 per cent to 32.55 per cent. It achieved a net profit of Rs 11.84 crore against a loss of Rs 5.29 crore in March 1992.
Agro Industries
Tata Tea, which has one coffee and 55 tea estates in its fold, achieved a sales CAGR of 15.55 per cent. But its net profit growth has been poor at 1.19 per cent and its OPM has fallen from 32.27 per cent to 18.78 per cent. Consolidated Coffee (a subsidiary of Tata Tea) has performed well, with a sales CAGR of 9 per cent, a net profit growth of 43.96 per cent and a smart jump in the OPM from 32.16 per cent to 61.44 per cent.
Rallis represents Tata's presence in the agro-chemicals business. It posted a 27.54 per cent CAGR growth and a net profit growth of 26.53 per cent. Its OPM has, however, fallen from 7.01 per cent to 6.67 per cent. There has been a stagnation in profit growth, however, in the last two years.
Information Technology and Communication
Tata Infotech (formerly Tata Unisys) is into software development, networking, hardware manufacture, software distribution and education. It has registered a sales CAGR of 25.98 per cent and a net profit growth of 22.46 per cent. But its OPM has dropped from 24.82 per cent to 17.24 per cent.
A multiproduct company with interests ranging from business communication to transmission, Tata Telecomwith sales between September 1992 and September 1997 registered a CAGR of 35 per cent. But its OPM has come down from 19.16 per cent to 9.04 per cent. It also incurred a loss of Rs 2.14 crore for the period ended September 1997.
Nelco recorded a negative CAGR of 16.43 per cent while its OPM has improved from 7.54 per cent to 18.77 per cent. The net profit growth has been low at 4.56 per cent.
Finance
Tata Finances income attained a CAGR of 73.75 per cent while its net profit grew by 58.69 per cent. Recently, Telco Dealers and Finance was merged with the company.
The Tata group is obviously under pressure in several of its erstwhile cash cows -- Tisco, Tata Tea, Titan and, to a lesser extent, Telco. Tatas challenge for the 21st century could lie in these companies.
(Data sources: Corporate Database and ASA)
Taking stock
A practical and popular way to measure the performance of a group of companies is to measure the stock returns of the group. Here, we have taken the stock prices of 34 Tata group companies as of end-December 1996 and compared them with those as on end- December 1997. A portfolio of 100 shares each of these companies as in December 1996 was worth Rs 437,651. If one held onto these shares till December 1997, one would have achieved a CAGR of only 4.71 per cent on ones portfolio. To get a comparative performance versus the market, we also compared it against the broadly acknowledged market indicator -- the sensex. The CAGR of the sensex in this period was 10.08 per cent so it outperformed the group portfolios growth rate.
A weakness that this analysis suffers from is of being a point-to-point comparison. Hence, a stock may have appreciated significantly during this period but this may not be reflected in the returns. Another weakness is the fact that some stocks in the group may have performed very badly dampening overall performance. The adjoining table gives a measure of the gainers and laggards.
