The Tata group has always dominated India’s business world with its contributions to economic growth. Some group companies such as TCS, Titan and Voltas have created enormous wealth for their investors. The group has weathered many storms in the past; however, the present economic slowdown seems to be pinching the Salt-to-Software giant conglomerate badly. Will a combination of leadership issues and economic downturn take its toll on its growth prospects?
The purpose of this article is to neither give a recommendation on any of the group companies nor predict the prospects of the business house but to draw attention to key issues that may have a bearing on group’s future.
The year 2019 was quite an eventful one for the Tata group. The one-year return of just 7 out of 25 listed companies of the group was higher in 2019 as compared to their respective 5-year CAGR return.
In 2019, the group identified 5 clusters for future growth—Tata Motors, Tata Steel, TCS, Financial Services and Retail. Tata Sons chairman, N Chandrasekaran, guided on the future growth strategy, “I would like to be in a situation where, from the 10 clusters, at least five clusters give me profits of 10-15% of the group. We're working on it and that's what we want,” he explained while addressing the media.
The company has been gearing up for AI and a data-led future for which it’s relying on 3S (Simplification, Synergy and Scale). The acquisition of Bhushan steel in progress and the amalgamation of Tata Global Beverages and the consumer business of Tata Chemicals is in the last lap. However, the company’s auto and steel businesses are up against the cyclical downturn and are staring at a huge debt-pile and the Telecom business has been the Achilles heel for the group.
Experienced market players would know, TCS has been the cash cow of the Tata group for a long time. However, the expansion plans of the group and stretched balance sheet may potentially put the Auto-to-Aviation giant in an awkward position. Does it require more cash machines? Yes, perhaps.
According to ACE Equity, Tata Steel, Tata Motors, Tata Steel BSL and Tata Power account for 90% of the group’s Rs 2.7 lakh crore debt. Only 12 of the group’s top 23 listed companies generated positive free cash flows in FY19. The management has been hopeful that these companies will be able to pare debt through their cash flows, without taking help from Tata Sons.
At present, TCS contributes nearly 75% of the group’s profits. In other words, the group expects Tata Motors and Tata Steel not only to pare debt but accelerate the group’s growth engine.
All conglomerates that have survived for decades and centuries in India have successfully shifted gears at the right time and have recalibrated their growth strategies based on macro and microeconomic factors. At present, some of them are finding strategic partners to fuel future growth, upgrading technological competencies and cutting debt by selling off non-core businesses. Tatas too are using the same growth template. But are they successful with this strategy? Only time will tell.
For now, NCLAT’s ruling that calls Cyrus Mistry’s eviction illegal is likely to raise uncertainty for the group. Going by just the brand name and investing in Tata group companies based on their past record may not fetch attractive returns in 2020 and beyond.
Seven prominent Tata group companies provide employment to over 6.24 lakh people. Therefore, how they perform has greater implications for the economy.
Addressing employees towards the fag end of 2019, N Chandrasekaran exuded confidence: With all of the heavy lifting we have done over the past few years, I am confident that we are now well positioned to build on the Tata Group's unique legacy to steer the 21st century towards a more sustainable, connected, inclusive and efficient future.
Investors may take this address with a pinch of salt and track the performance of individual companies closely in 2020. Should steel and autocycles turn positive, the group companies might do better. And, on the flip side, a protracted slowdown may make the situation worse. Tighten your seatbelts. It’s going to be a bumpy ride!
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Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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