Tackling huge debt, chairman keeps up Tata’s growth trajectory

by Shelton on December 11th, 2015

filed under Debt Consolidation

He is not negating old strategy, just making it work better, said Krishna Palepu, a Harvard Business School professor whos been tracking Tata for almost 25 years.

While Mistry himself is media-shy and has never given an interview, his strategy and management style have become apparent through discussions with a dozen Tata executives, fund managers, analysts and others who have dealings with the group, most of whom asked not to be identified so that they could speak freely. He declined to be interviewed for this article.

Mistry is consolidating and bringing up all group companies to profitability and strength, AS Thiyaga Rajan, Singapore-based senior managing director at Aquarius Investment Advisors, said by e-mail. As long as the companies produce healthy bottom lines, it will speak for itself.

Ratan Tata, in a written reply to questions, defended his acquisitions, saying that investing in Jaguar Land Rover during the global economic downturn paid handsome dividends when the US and European car markets revived.

Automobiles and steel, which he grew through his acquisition of Corus Group Plc in 2007, are cyclical and vulnerable to changing business cycles, he said. Corus made respectable profits for a period following our acquisition, but this changed when the European economy collapsed.

Spokesmen for Tata Motors and Tata Steel declined to comment on Mistrys actions or goals. At Tata Sons Ltd., the holding company for the groups larger listed companies, a spokeswoman who asked not to be identified by name, when asked about Mistrys asset sales, writedowns and other actions, said the group has issued statements in the past on its focus areas for growth, and added that our strategy and action plans are for long-term value creation.

Mistrys plan for that is called Vision 2025. It means propelling Tata companies into the top 25 globally by market value within 10 years and making their products and services available to a quarter of the worlds population.

Last year, he earmarked $35 billion to carry this out, in part by growing the businesses that do financial services and technology, make military drones, helicopters and missiles, and which target consumers. Those include units that run clothing shops, operate supermarkets in a tie-up with Britains Tesco Plc, and brought Starbucks stores to India.

But Tata companies are also burdened with debt of about the same amount, the bulk of it on the balance sheets of Tata Steel, Tata Motors and Tata Power Co., the countrys second-largest private electricity producer. Others, such as TCS generate huge cash flows. As a result, the total debt of listed Tata companies is 7.3 times the total profit they reported in the year to March. That compares with 15.6 times profit for the listed companies owned by billionaire Kumar Mangalam Birla, who runs the closest comparable conglomerate, the Aditya Birla Group.

Debt was one of the biggest legacy issues, and we havent seen any major changes on that front yet, said Shishir Bajpai, a director at Mumbai-based IIFL Wealth Management Ltd., which has $12 billion under management. Debt consolidation is the most important thing, whether it is reducing the interest rate burden through refinancing or selling off assets.

While four Tata companies fall below investment-grade on Bloombergs default-risk model, even the debt of the riskiest, telephone and mobile operator Tata Teleservices Maharashtra Ltd., carries an A+ rating by the Indian arm of Fitch Ratings Ltd. based on its strong link to the parent group.

Mistry has managed to grow revenue at the conglomerates listed companies by about 9 percent since taking over, while profit has risen 8.4 percent. Tata Power posted its first year of profit in the fiscal year ending in March, following three straight years of losses, and expects to add to its cash flow with the sale of its stakes in Indonesian coal producers. Tata Steel may return to profitability by March 2016 following cost cuts, improved manufacturing efficiency and a demand recovery in India and Europe, according to a Bloomberg Intelligence report in September.

Investors are voting with their wallets. Total market capitalization of 25 listed Tata companies compiled by Bloomberg has risen by 54 percent since Mistry became chairman in December 2012, to 7.45 trillion rupees ($112.8 billion), eclipsing the 33 percent rise in the broader Samp;amp;P BSE Sensex gauge. That would put it at 58th, not even half way to Mistrys goal of being within the top 25 companies globally.

Theres a long road ahead. In 2007, Tata Steel made the largest overseas acquisition ever by an Indian company, paying $12.9 billion for Corus, which included the former British Steel. Its fortunes soon went south, as Europe fell into a demand slump after the 2008 economic crisis and more recently has seen a flood of cheaper Chinese imports. The steelmaker has let go at least 3,700 workers, including 1,200 announced in October, and written down its overseas assets by $2.35 billion.

Comments are closed.