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Tata's game changers

Tata's game changers

Overseas buys that are beginning to work have helped create value in key companies.

In 2000-01, a devastating recession in the Indian auto sector took the wind out of the sales of Tata Motors, then known as Tata Engineering. Losses mounted to Rs 500 crore. It was around that time Ratan Tata, Chairman of the 90-company group, took a crucial call: The Tatas would henceforth cease to rely on a single market. The group's key companies that operate in sectors like steel, automobiles, chemicals, hospitality and IT services would attempt to grow overseas, too, by setting up outposts organically or by making acquisitions.

That may be one explanation for the 140-year-old conglomerate, which started the decade with a turnover of just under Rs 50,000 crore, ending fiscal year 2010 with sales of Rs 319,534 crore - that is growth of six times on a humongous base. What the numbers do not reveal, however, is the transformation the group has undergone since the dawn of the new millennium.

Back in 2000, most Tata group companies, with the exception of a few like Tata Consultancy Services, derived the bulk of their revenues from the domestic market. Today, 57 per cent of the Tata group's business comes from outside India's borders.

A significant chunk of this transformation can be attributed to the slew of big-ticket acquisitions the group has made. A back of the envelope calculation reveals that Tata group companies have spent about $19 billion in acquisitions since 2000.

Such buyouts, coupled with bright prospects for many of the domestic market-oriented businesses, have resulted in key Tata companies creating dollops of wealth for investors, as the BT 500 illustrates (see Back on the Road).

Take Tata Motors, for instance. In 2002-03, of revenues of Rs 10,855 crore, less than five per cent came from international markets. In contrast, during the last fiscal year, Tata Motors' revenues have increased nine times to Rs 92,519 crore. India's contribution: just 38 per cent. Revenues are just one part of what the company has gained. As you read this, Tata Motors is selling amongst the world's most affordable cars in India, the Nano, at about Rs 1,34,000, and the uber-luxurious Jaguar XJ in Florida for about $77,500, or about 25 times that amount.

As good as that sounds, acquiring some of these large companies has been the easier part for the Tata group. Making those acquisitions work is the tougher task. Tata Motors CFO C. Ramakrishnan can vouch for that. In early 2008, after being on the negotiating table for the better part of a year, and beating half a dozen competitors, Tata Motors was all set to buy the iconic Jaguar-Land Rover (JLR) businesses from Ford Motor Company.

"It looked like a great proposition. What we were looking at was great brands, great technology, and a presence in the premium segment. It would have taken us five to 10 years to build a business of that stature," says Ramakrishnan. "It was a sound business, clocking profits of $600 million. They also had a turnaround strategy, and a product strategy in place." By June 2008, JLR was a part of the Tata stable. "Three months later, the tide turned around and a tsunami hit us," adds Ramakrishnan.

Ramakrishnan recalls the months after October 2008, when JLR factories worked for only a few days. What made things worse was a liquidity crunch. "When we acquired the company, we wanted to put in $500-600 million in borrowing lines for JLR, which we thought would be needed to manage their working capital requirements. We thought we would take 3-4 months to put this in place. In reality, it took us almost a year to complete that task," says Ramakrishnan.

As the recession hit the bread and butter markets of JLR - the US and Europe - JLR seemed to drag Tata Motors down along with it. Within a year of the acquisition, JLR sales fell 37 per cent last fiscal in North America and 31 per cent in the UK. As a result, of Tata Motors' net loss of Rs 2,505 crore for 2008-09, JLR's loss was Rs 1,777 crore.

By the quarter ended June 30, 2010, the situation could not have been more different. JLR went on to register its highest ever quarterly profit, largely driven by an 81 per cent spike in revenues. Cost reduction measures coupled with the encouraging performance of new models like the Jaguar XJ in China and a recovery in sales in North America helped Tata Motors post a net profit of Rs 2,571.06 crore in fiscal 2010.

In comparison, Tata Steel's acquisition of Corus, now Tata Steel Europe, may not look like much of a turnaround story, but it is not without its positives. "Corus's results will show quarterly volatility, but on an annual basis it should be in a position to deliver sustained growth this year and next year," says Prasad Baji, who tracks the Tata Steel stock at Edelweiss Securities. He adds that the company has worked hard on keeping costs down. For instance, Tata Steel Europe's headcount fell from 42,000 to 35,000 last year.

Analysts point out that benefits of fixed cost reduction will show up in the next year or so. Not all acquisitions have had to go through the pain Tata-JLR and Tata Steel Europe have endured. Consider, for instance, Tata Chemicals' acquisition of US soda ash giant General Chemicals Industrial Products, or GCIP. As Tata Chemicals Managing Director R. Mukundan says: "We were clear that we were buying the world's most competitive, lowest cost producer of soda ash.

Even during the worst of times, the unit generated positive returns and as market sentiment improves it's going to perform only better." The acquisition also made Tata Chemicals a 5.5 million tonne soda ash player from about a million tonnes before the acquisition.

"That scale allowed us to enter diverse markets," adds Mukundan. For instance, when the North American market slowed down, Tata Chemicals shipped material to North Africa, Latin America and parts of Asia.

In his new year's letter written to over 3,50,000 employees of the Tata group worldwide last year, Ratan Tata asked employees to brace themselves for "hard decisions". And there were some really painful ones - layoffs at JLR and Tata Steel Europe, and closure of plants of Tata Chemicals and Tata Motors.

Not all stakeholders have benefited from the process of making the buyouts work, but shareholders back home have little reason to complain.