After Mistry storm, calm in the air inside Tata Group under Chandrasekaran
Natarajan Chandrasekaran had no choice. An avid marathon runner, he has had to change his pace and break into a sprint from the moment he was elevated from chief executive officer and managing director of Tata Consultancy Services (TCS) to chairman of Tata Sons in February this year, effectively making him the head of the Tata empire. The unceremonious removal of Cyrus Mistry last October had sent shockwaves across the vast federation of the 100-odd Tata Group companies, which the brief, temporary return of Ratan Tata as his successor did little to quell. Chandrasekaran knew he had to get a lot done quickly to overcome pain points and bring back calm.
His first step was to restore communication with other board members which had practically broken down with Mistry at the helm. It is said in Tata Group circles that Mistry had virtually stopped talking to Ratan Tata towards the end of his truncated term, and that, when he presented the Tata Sons board with two of his most important decisions - the first, to exit Tata's entire steel business in UK which had been bleeding, and the second, to buy the Welspun Group's complete renewable energy portfolio for Rs10,000 crore - he was met with stony silence.
Accordingly, Chandrasekaran has already held three board meetings in his four months in office, against Mistry having convened just eight through all of 2015/16. He has also made it amply clear where his loyalties lie, ignoring all the charges Mistry levelled against the Tata Group after his ouster. Indeed, in a letter to Tata employees, he called Ratan Tata "an inspiration for all of us in the group", adding that he looked forward to working closely with him and "taking the group forward in the same spirit".
Change in the Air
February 21, when Chandrasekaran took over as chairman, was also the day Tata Sons finally resolved its two-year long legal dispute with partner NTT DoCoMo, agreeing to pay $1.18 billion to buy out the Japanese mobile operator's stake in Tata Teleservices Ltd (TTSL). Alongside, the TCS decision to buy back Rs16,000 crore worth of its own shares, taken just before Chandrasekaran moved to Tata Sons, resulted in a gain of over Rs10,278 crore for Tata Sons, which holds 73.26 per cent of TCS. (The fall in income at Tata Trusts, the majority stake holder in the holding company Tata Sons, which comes from group companies as dividend and other benefits, had been cited as one of the reasons for Mistry's ouster.)
A third key decision has been to sell 51 per cent stake in Tata Power's loss-making coal-fired power plant in Mundra, Gujarat, for a nominal Rs1 to the state government, its principal procurer, though no deal has materialised yet. A fourth is a new approach to Tata Steel's ailing business in the UK and Europe, which Mistry wanted to get rid of entirely, but which Chandrasekaran is now planning to merge with ThyssenKrupp AG in Germany. He has also begun disentangling the cross holdings among Tata companies, starting with Tata Steel's stake in Tata Motors. He has brought in a range of fresh talent at the top to equip the group better for tackling challenges.
Chandrasekaran's appointment has made no difference to the Tata Group's fortunes in the stock market. The market-cap of the 26 listed Tata companies fell 0.3 per cent to Rs8.3 lakh crore in the four months between Mistry's sacking and Chandrasekaran's appointment. With Chandrasekaran's entry, it is down another 2.5 per cent to Rs8.1 lakh crore, thanks mainly to the crisis Indian IT companies are facing with their US business - their prime source of income - following the protectionist policies of President Donald Trump. TCS, the leader among them, contributes around two-thirds to the Tata Group's total profits.
Luck by Chance
It was fortuitous for Chandrasekaran that the Tata Sons settlement with DoCoMo coincided with his taking charge, bringing closure to a long-festering tussle between them. It related to the 26.5 per cent stake DoCoMo had bought in TTSL in 2009, with the proviso that it could withdraw after five years if things did not go right, selling the stake back to TTSL at a minimum of 50 per cent of the price it paid. With TTSL foundering, DoCoMo chose to exercise this option, but with the company's valuation falling steeply, the Reserve Bank of India (RBI) objected to the deal, saying it would have to be at a fair market value.
In response, DoCoMo approached the London-based Court of International Arbitration citing its contract. In June 2016, the court upheld DoCoMo's position and directed Tata Sons to pay $1.18 billion in damages. The two companies then filed a number of cases against each other across India, the UK and the US, until the Tatas finally decided to make the payment. In late February, Tata Sons and DoCoMo jointly approached the Delhi High Court for a settlement, which in turn, in April, upheld the London court's view, overruling the objections of the RBI.
Still more fortunate for Chandrasekaran has been the rise in global steel prices since last year, which has brought down Tata Steel's losses in Europe and given him breathing time to salvage the situation. In India too, demand and price of steel have picked up, with the result that Tata Steel made an overall standalone profit of Rs3,400 crore on revenues of Rs53,000 crore in 2016/17. No doubt, at the consolidated level, it still showed a loss of Rs4,200 crore and continued to carry a whopping debt of Rs83,014 crore as of end-March 2017.
But the situation now is way better than in 2016, when Tata Steel UK had been losing a million dollars a day. It just could not compete with cheaper Chinese steel being dumped on the market. With demand too having fallen, Mistry decided to sell off everything. He did sell the Scunthorpe steel plant and related assets - the erstwhile Corus Plc, which the company had acquired for $12 billion in a bruising bidding war in 2007 that made global headlines - to Greybull Capital for Rs 1. But he was out before any other deals could materialise. Chandrasekaran followed it up by selling Tata Steel's specialty steel business in the UK to the Sanjeev Gupta-owned industrial and metals group, Liberty House, for Rs 100 million (Rs838 crore) in February.
But the rest will not be sold. Chandrasekaran understood quickly that Ratan Tata had not taken kindly to this decision of Mistry's. On the contrary, during Ratan Tata's brief interim tenure as chairman, the group decided to invest another Rs 100 million in the Europe steel business.
The last Tata Sons board meeting in June was also held in London, during which, sources maintain, Chandrasekaran met UK officials for a way out. The merger of Tata Steel's European assets with ThyssenKrupp, one of the world's largest steelmakers, had been in the works for some time, but it was held up by ThyssenKrupp's reluctance to take on Tata Steel UK's workforce, given the commitment-heavy pension scheme they were covered by. Sources maintain Chandrasekaran has convinced UK authorities to allow Tata Steel to shift to a new scheme.
Immediate Challenges
Notwithstanding Mistry's unexpected removal, the Tata Group did not do badly at all while he was at the helm. Despite the mounting losses at Tata Steel UK, TTSL and Tata Power, group profit grew to Rs32,000 crore in 2015/16 from Rs13,000 crore during his three years. The main contributors were TCS and Jaguar Land Rover (JLR). But Chandrasekaran will have to find new avenues of profit and growth, as he can no longer rely upon either to the same extent. JLR is still outperforming the industry but its sales in the home market, the UK, were down 11 per cent in May. TCS is also facing challenges.
Another big and growing headache is debt. The biggest gross debt is that of Tata Steel, but Tata Motors (including JLR) with Rs78,582 crore, Tata Power with Rs48, 820 crore, or TTSL with Rs42,000 crore till the end of 2016/17, are not far behind. The gross debt of the group doubled to Rs2.69 lakh crore in 2015/16 from Rs1.38 lakh crore in 2009/10, according to the Tata Sons annual report. With JLR still going strong and Tata Motors leading the domestic high tonnage trucks and buses market, the debt burden may not bother the company too much. Even so, it has been trimming its managerial workforce - a drive that began under Mistry, and has continued under Chandrasekaran. Already around 1,500 people have been laid off from April 1, reducing hierarchy layers from 14 to five.
But TTSL and Tata Power certainly do have reasons to worry. TTSL, whose debt includes pending telecom spectrum payments, has approached a consortium of banks led by State Bank of India to help it restructure its net debt of around Rs32,000 crore.
Tata Power's woes are primarily due to its 4,150 MW ultra mega power project in Mundra, which had accumulated losses of Rs6,457 crore by end 2016/17, against a paid-up equity of Rs6,083 crore, along with an outstanding loan of Rs10,159 crore. The company won the project after committing to supplying power at Rs2.26 per unit, but its calculations went completely awry when the price of Indonesian coal, which it had intended to use, rose sharply after 2011. Tata Power sought a revision of the tariff, but the Supreme Court ruled against it. The subsidiary running the plant has since approached the Gujarat Urja Vikas Nigam, offering it 51 per cent stake for a nominal Rs1.
Team Building
Chandrasekaran has also begun inducting fresh talent. Five key senior people have joined the chairman's office since he took over - Ankur Verma, formerly with Bank of America-Merrill Lynch, who is expected to work on acquisitions and divestments; Nipun Aggarwal, earlier with Standard Chartered Bank, who will look at overall group strategy; Suprakash Mukhopadhyay, Global Treasury Head at TCS, who is expected to play the same role on a bigger stage at Tata Sons; Saurabh Agarwal, former strategy head at the Aditya Birla Group, who has been appointed Chief Financial Officer; and Shuva Mandal, the lawyer who led Ratan Tata's charge against Mistry, inducted as general counsel. Officially, there was no confirmation of what each one would be doing, with the Tata Group spokesperson merely stating that they would have "diverse responsibilities".
"Given the nature of the Tata Group's operations, Chandrasekaran should look to hire leaders with a global mindset," says Kannan Ramaswamy, William D. Hacker Chair Professor of Management, Thunderbird School of Global Management in Arizona, US. "The temptation of many Indian companies is to hire leaders with an Indian lineage, but Chandrasekaran should fight it and induct people who can strengthen Tata's overseas businesses."
Barring members of the Group Executive Council, comprising close associates of Mistry, all of whom quit - or were asked to quit - along with him, high-profile departures following either Mistry's exit or Chandrasekaran's induction have been rare. A notable exception was Rakesh Sarna, hired by Mistry as CEO and MD of Indian Hotels Company Ltd (IHCL), who quit in May this year. Sarna managed to turn around the company but his tenure was also marred by allegations of sexual harassment, though he came out clean in internal investigation.
Road Ahead
Officially, the Tata Group refuses to provide any insights into Chandrasekaran's future plans. "While holistic comprehensive strategy is being progressively implemented, covering all businesses, it is ultimately the chairman's prerogative to speak about his strategy openly," says the company spokesperson. But it is unlikely that he will follow strategies akin to those that served him well at TCS. One of these was to create clusters - while these were verticals at TCS, they would be companies in Tata Group. Leaving five major Tata Group companies alone - TCS, Tata Steel, Tata Motors, Tata Power and IHCL - the rest could well be clustered as communications and ITES companies, consumer and retail companies, realty and infrastructure companies, agriculture and chemicals companies, service-related companies and financial services companies, as so on.
Simultaneously, Chandrasekaran is also expected to consolidate similar businesses and reduce cross holdings. Tata Finance, Tata Housing Finance and Tata Capital Finance, for instance, do much the same thing and could well benefit from being merged. The same holds for the group's telecom and communications business - TTSL, TTSL (Maharashtra) and Tata Communications (formed with the takeover of VSNL in 2008); its realty business - Tata Realty and Tata Housing; or its beverages business - Tata Global Beverages (TGBL) and Tata Coffee. As for cross holdings, a beginning has already been made with Tata Sons buying up Tata Steel's stake in Tata Motors for Rs3,800 crore - a sizeable sum which could well help Tata Steel meet its impending pension settlement with its UK workers. Other cross-holdings, which may well be reorganised in future, include Tata Power's Rs1,000 crore stake in Tata Communications, Tata Chemicals' Rs700 crore stake in both TGBL and Titan and in turn TGBL's Rs700 crore stake in Tata Chemicals.
Such consolidation would be in keeping with the approach of both his predecessors Ratan Tata and Cyrus Mistry. Tata, in fact, during his tenure from 1991 to 2012, reduced the number of group firms from around 250 to about 100, through mergers. He was also a strong proponent of the promoter having a substantial stake in all group companies, and using a combination of creeping acquisitions and preferential issues, increased the Tata stake in most group firms to over 30 per cent, which were below 10 per cent. Mistry, too, was vocal about consolidation, but was ousted before he could make any substantial move. But he did look for new focus areas of growth such as retail - he set up the e-tailing company Tata CLiQ - as well as financial services, infrastructure, defence and aerospace, to create strong business lines that might one day match TCS.
Stake sales have been made to outsiders as well - and this, too, is likely to continue. Tata Motors and two other group companies have sold 43 per cent stake in Tata Technologies to Warburg Pincus for $360 million (Rs2,231 crore). "In the long run, it is only logical that Chandrasekaran divests the non-core businesses of the group," says analyst S.P. Tulsian. There are indications, for instance, that the group's drug discovery services company, Advinus Therapeutics, is on the block. Private equity funds Kedaara Capital and True North, as well as its peers in the segment like GVK Biosciences and Lambda Therapeutic Research have shown interest in acquiring Advinus. Other companies where divestment is possible include Tata Ceramics, Tata Business Support Services, Tata Asset Management, Tata Autocomp Systems and the fertiliser unit of Tata Chemicals, reports say.
Finally, the group already has substantial stake in aviation, having teamed up with Singapore Airlines to launch Vistara and with Air Asia to run Air Asia India. But a big new acquisition in the sector may also be in the offing, what with a five member ministerial committee having been formed to set the parameters for privatising Air India. The Tata Group is clearly keen, all the more because Air India used to be Tata Airlines before the government took it over after Independence and renamed it. It believes it can make the ailing national carrier soar again despite the Rs50,000 crore load of debt it is burdened with. But acquiring it will be a tough battle given that many other players, both foreign and domestic, are likely to bid for it, too.
While the Tata period was one of rapid expansion for the group, Mistry tended towards downsizing, retaining only the profitable. Which direction will Chandrasekaran take? "He will have to prove that he is both independent and effective," says Kavil Ramachandran, Professor and Executive Director, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, Hyderabad. "Broadly, he is expected to ensure strong financial performance while retaining the Tata traditions and values."
@nevinjl
