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Cyrus Mistry's three years as Tata Group's head - a tryst with tough times

Nevin John     December 24, 2015

Nevin John, senior editor, Business Today
Three years is not a sizeable time to turn the tide in a vast conglomerate like the Tata Group. However, 47-year-old Chairman Cyrus Mistry chanced to learn some of the searing issues and came out with overarching revival packages in his three years in office. Has the group come back to its golden times in this period? Did it resolve its core issues or, at least, muted the fall? Are they moving with specific targets?

In one line, the answer is that the Tata Group hasn't changed much during the time. The rise and fall continued in line with the global and domestic economies and sectoral issues. Cashing in on the opportunities in the IT sector, TCS upped its revenue at a compounded annual growth rate (CAGR) of 25 per cent in three years. Eclipsing rivals, the company has doubled its profits to Rs 20,000 crore. It continued the rally at the stock market and fortified its top position as the largest company considering the market capitalisation.

In contrast, Tata Steel fell prey to market conditions in Europe and the commodity crisis. The European division (former Corus Plc), which it acquired in 2007 for $12 billion, made huge losses, raising its debts to Rs 80,700 crore in March 2015 from 59,897 crore in March 2012. Despite the dent at the European business, Mistry supported the India division in expansion, which completed construction of the 3 million tonne (MT) steel mill at Kalinganagar in Odisha with an investment of Rs 25,000 crore. The borrowing for the new plant has also increased the debt.

In Europe, Tata Steel plans to sell its long products business. Karl Kohler, Managing Director and CEO of Tata Steel in Europe, earlier told BT that the weak European demand and onslaught of cheap Chinese products affected the prospects of the company. "We are in discussions with the government for better business environment in Europe. The officials are listening to our requests," he added. Tata Steel Europe reported an EBIDTA loss in the September 2015 quarter, a first since 2013. Tata Steel has signed a Letter of Intent with investment firm Greybull Capital for exclusive negotiations for potential sale of the long products business.

It would be ideal to say that the major hurdles during the time of Ratan Tata remained unchanged under Mistry also. For instance, the telecom business failed to pick up despite many efforts. According to the March 2014 financials, Tata Teleservices has a negative networth of Rs 8,029.40 crore. Tata Teleservices (Maharashtra)'s networth stands at a negative Rs 2,968.10 crore.

In Tata Docomo, NTT DoCoMo holds 25.6 per cent stake, which the Japanese telecom major wants to sell to Tata Teleservices. But RBI rejected the deal because the price offered per share was higher than the market price. According to the fair value arrived at by PricewaterhouseCoopers (PwC), the value of DoCoMo's original investment in Tata Teleservices would see a 90 per cent erosion. DoCoMo acquired the stake in TTSL and TTML in 2009 at $2.7 billion, valuing the Indian telecom companies jointly at $10 billion.

Docomo has now moved the London Court of Arbitration to get a valuation of Rs 58 a share, which translates into Rs 7,200 crore for its entire stake in Tata Tele. If it wins, the company could recover 50 per cent of its investment made in Tata companies after about seven years.

In the meanwhile, TTML continues to report losses - Rs 155.67 crore loss for the quarter ended September 30, 2015, higher than Rs 103.31 crore loss in the previous quarter and marginally less than Rs 159.38 crore loss in the same quarter last year. This is the telco's 21st straight loss-making quarter.

Course correction is much needed in the Tata Group. For instance, Voltas had acquired Mumbai-based Rohini Industrial Electricals, an electrical and instrumentation services provider, in four transactions - first 51 per cent stake in August 2008 and the last in October 2013 - for around Rs 110 crore. But the company has a negative networth of Rs 70.9 crore as on March 2015 because of its accumulating losses and negative cash flow every year.

Another issue is at the 75-year-old Tata Chemicals, the second largest soda ash manufacturer in the world. Troubled by its UK and Kenyan acquired operations due to high power costs and an unviable production process, the company is in the middle of restructuring the businesses in these two geographies. The company restructured the UK business by closing the Winnington soda ash facility and close to Rs 900 crore were written off.

"The restructuring operations have been successful and Kenya posted profits after losses for many years (six year continuous losses). The Europe business is also turning around and will be visible in this fiscal", says R. Mukundan, Managing Director, Tata Chemicals.

Sources say the company is also concerned about its fertiliser business, which contributes about 38 per cent of revenues and is plagued with issues like cap on profitability, rising input costs and delays in getting subsidies. "Urea and phosphatics face margin pressure," admits Mukundan, who dismisses recent reports on any move to sell off this business for about $1 billion as "just rumours". The company's profits for last year were affected as subsidy receivables were Rs 1,972 crore as on 31st March 2015.

While the commodity price fall hit Tata Steel, power producer Tata Power benefited from it on the one side. The company generated more electricity at low fuel costs. Generation at the consolidated level increased 6.6 per cent in the September ended quarter. Stand-alone generation was up 4 per cent, compared with an 8 per cent drop a year ago. Losses at the troubled Mundra ultra-mega power plant (UMPP) came down significantly from Rs 274 crore to Rs 74 crore. From $55 per tonne, the price of coal for Mundra plant fell to $48 per tonne. Plant availability improved 10 percentage points and generation at the plant rose 4 per cent. The improved operating performance reduced the losses. However, sales of the coal business slipped south.

"Tata Power reported its Q2FY16 results with both reported and adjusted PAT (profit after tax) above our and consensus estimates primarily driven by a fall in international and domestic coal prices," ICICI Direct said in a note.

The delay in Mundra plant's compensatory tariff order and Indonesian coal mine stake sale are the other issues before the company. But if coal prices trend lower and Tata Power finds enough takers for electricity, losses at the troubled Mundra plant may continue to come down further, helping reduce one headwind.

After Mistry took over the top job, Tata Motors revised its target for passenger car division - two launches every year. The launch of Zest and Bolt helped improve the market perception. The company looks to continue the momentum launching hatchback Zica in 2016. But experts still feel that Tata Motors is far behind considering the aggression of the industry leaders - Maruti Suzuki and Hyundai.

While big issues continue unchanged, the chairman managed to keep an overarching target for the group, outlining a three-part strategy:

1) nurturing group companies by leveraging the parenting advantage of the group centre 2) harnessing synergies to maximise the performance of companies, and 3) optimising its portfolio for sustained future performance.

To maximise synergies, the group is creating a special focus on four new clusters - Defence & Aerospace, Retail, Infrastructure and Finance. The group has set its Vision 2025 as "25 per cent of the world's population will experience the Tata commitment to improving the quality of life of customers and communities. As a result, Tata will be amongst the 25 most admired corporate and employer brands globally, with a market capitalisation comparable to the 25 most valuable companies in the world."

For reaching the target, the group will invest about $35 billion in the next three years. Group Executive Council and Brand Custodian, Tata Sons, Mukund Rajan said recently that they are targeting a market value of $350 billion (currently $134 billlion) by 2025. The group will not shy away from global buyout activity and will continue to make significant investments in both existing as well as new businesses, including in the digital space to meet its vision 2025 targets, he added.

Mistry will need more time to reach the corners of the issues.

(With inputs from P.B. Jayakumar)

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