Tata Steel merger is just the beginning! N Chandrasekaran's game is to consolidate further

The decision of Tata Steel to merge seven of its subsidiaries with itself, including four listed and three unlisted companies, has led to expectation that there will be more consolidation within the $128 billion salt-to-software conglomerate. In the past, Tata Sons’ Chairman, N Chandrasekaran has spoken of simplifying the group.

In all, the Tata Group has 29 listed entities across sectors as varied as capital goods, automobiles, infrastructure, hospitality, chemicals, telecommunications, information technology, financial services, iron and steel, power, retail, diamond and jewellery. Just by way of background, last week saw the board of Tata Steel approving the amalgamation of Tata Steel Long Products Ltd (TSL), Tinplate Co. of India Ltd, Tata Metaliks Ltd, TRF Ltd, The Indian Steel & Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Co. Ltd. The view on the street was largely that it simplified the structure with a potential to derive synergy benefits and significant opportunities to save costs.

Analysts tracking the group point to various possible scenarios emerging with the objective of making each of its businesses robust in a dynamic global environment. According to Gaurav Dua, Head (Capital Market Strategy), Sharekhan by BNP Paribas, for the group, the objective will be to ensure there is very efficient capital allocation across its businesses. “That must be accompanied by a high return on equity. Any decision on consolidation of group businesses will be determined to a large extent by this,” Dua opines.

The listing of the companies took place at different points in time depending on the nature of the business and where it was placed then. Vinit Bolinjkar, Head (Research), Ventura Securities, thinks there is merit in merging Tejas Networks, a company that manufactures networking products to telecommunications service providers, utilities, internet service providers, with Tata Communications. Last July, Tejas, a Bengaluru-based entity was acquired by Tata Sons. Tata Communications, a company acquired from the government (it was the erstwhile VSNL), and now positioned as one that enables the digital transformation of enterprises. “There is a clear synergy that can be achieved by doing this,” he says. The other telecommunications entity, Tata Teleservices (Maharashtra), explains Bolinjkar, may not be a good fit since it first will need to wipe out its losses. “In the long-term, other companies like Voltas, which have remained standalone, may remain that way. There is no strategic reason to do anything there.”

The need to be large and draw the benefits out of scale, quite obviously, is a desired objective. “Tomorrow’s world is all about size and the group would want to make itself more robust to make it more competitive globally. More importantly, the larger entity means the reduced chance of business failure,” says Deven Choksey, MD, K R Choksey Securities. Referring to the case of Tata Steel, he says it was on expected lines after it acquired Bhushan Steel and later restructured the business. “That was a clear indication that they were thinking of a larger entity. Any opportunity of synergy existing and the ability to then achieve size and scale in an efficient manner makes the logic sound for consolidation.”

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