Recently Cyrus Mistry, Chairman of Tata Sons Ltd., spelt out the strategy for Tata Group. This statement comes more than four years after he took charge.
Mistry said that he understood the challenges the group was faced with, especially now that some of the group companies had become uncompetitive, and indicated there was a need to take “hard and bold decisions”, especially in pruning the portfolio of the group. It is now interesting to read an article I had written more than two years ago dated June 3, 2014: Can the Tata Group make some tough calls?
It is sad that it has taken more than two years for the group to react, ‘on-ground’, and admit that ‘hard decisions’ need to be taken to regain competitive advantage. Can the shareholders excuse the erosion in shareholder value that has resulted during this period?
Challenges
It is important to put in perspective the position of the Tata Group companies, as the problem they’re faced with is quite challenging. Over the last year, the profile, prominence, and fortunes of the group companies have changed dramatically.
Mistry put up a brave face when he said that 'green shoots' of a turnaround are visible at Tata Motors and Tata Steel. Tata Motors has primarily three businesses — the luxury car segment (JLR), passenger cars in India — which include the ‘low-end’ car segment (Nano) — and, the commercial vehicle segment. Tata Motors’ contribution to the Tata Group’s revenue has grown from around 15 per cent a year ago to around 22 per cent. This growth is primarily driven by the JLR sales in China and other locations overseas.
The volatility in Tata Motors results has been very concerning. In the recent quarter, net profit fell by more than half because of weaker earnings at JLR. The consolidatesd net profit dropped by 57 per cent as compared to a year ago.
“Hard decisions”
JLR was faring well as China market was opening up to luxury cars. Seeing the Chinese luxury market growing, global luxury car majors like BMW, Audi, Mercedes-Benz, Rolls-Royce (owned by BMW) and Bentley (owned by Volkswagen) are pouncing aggressively. These global giants have much deeper pockets than Tata and it is going to get tougher for the JLR unit. More importantly, the Chinese market itself has significantly slowed down in the last few quarters. In effect, the JLR business being a major contributor to the Tata Motors performance is more of a concern than something to be proud of; it has been subject to extreme volatility seriously concerning the investors. However Mistry has stated that the group is proud of the achievements of Tata Motors and its acquisition of JLR.
Tata’s passenger car segment has seriously lost market share in India in the the last five years. Nano has been a disaster in the low-end segment and a viable recovery seems to be a distant dream. In the last five years, Tata’s competitive advantage, as compared to its peers, has steeply deteriorated. Net profit at Tata Motors’ stand-alone operations, that includes its Indian commercial and passenger car business, fell sharply as compared to a year ago. The JLR acquisition, I believe, is a major contributor for the company losing focus on the domestic passenger car business. The big question is, can the domestic passenger car business be revived, or is it a good time to put it on the chopping block?
In the commercial vehicle segment, Tata is still maintaining a respectable market share of close to 45 per cent (competing with the likes of Benz, Navistar, Volvo and Scania). Maybe the company needs to deepen its focus in this segment to build superior capabilities, or else it will quickly lose its dominant market share to global majors aggressively entering the Indian market. Or maybe, exiting the Indian passenger car business can sharpen focus and help Tata gain in the commercial vehicle segment. A courageous decision needs to be taken!
Corus and Goodwill impairment
Tata Steel burnt its fingers through its Corus acquisition in Europe. The company is now selling off some of its UK factories (one factory recently sold for £1) and plans to address the other European operations through a joint venture. Tata Group wrote off about $4 billion (close to ₹28,000 crores) as goodwill impairment across group companies when Mistry took over in December 2012. Goodwill impairment is a term used to signify that shareholder value has been eroded resulting from a combination of high acquisition price and poor ‘post acquisition’ management!
A large part of this goodwill impairment came from Tata steel acquisition of Corus. This technically means the Tata group, which paid around $12 billion to acquire Corus is now of the opinion that it is unable to manage it successfully and wants a Joint Venture partner to manage the same. A serious drain in the shareholder value as a result of incorrect assessment of Corus and its business when it was acquired seven years earlier!
Tata Teleservices is in a poor shape as well. It has a market capitalisation of around ₹1,100 crores, but is burdened with a debt of around five to six times this amount. It has made substantial losses in the recent quarters and to top it all, its joint venture with DoCoMo has collapsed and an overseas court has directed the Tata group to pay more than $1 billion to the Japanese joint venture partner. The case is under further arbitration.
Now with Reliance Jio entering the fray, even telecom leaders like Bharti and Vodafone are feeling the heat; how can a small company like Tata Teleservices react? Can it gain back its competitive advantage? Or should the Tatas have sold this business two years ago? (Refer again to the aforementioned article and you will see that I had recommended an immediate divestment of the telecom business )
New initiatives
The software arm, TCS, the largest contributor to the revenue of the Tata Group used contribute close to 70 per cent of the overall group revenue. This has now reduced to around 55 per cent. This is concerning, as it is possibly the only large company — within the Tata group — which has a competitive advantage as compared to its peers.
With so many challenges on the plate, Mistry has now ventured into the digital space by setting up Tata CLiQ, an e-commerce platform, It will be an omni-channel marketplace that will sell both Tata and non-Tata brands across lifestyle, electronics and other segments. The group is also venturing into ‘third party’ big data initiatives (Tata iQ) and digital health platform. These are good initiatives and futuristic, but will need to be carefully managed as they require large resource allocations in the midst of ‘fire-fighting’ the existing businesses.
In summary, taking another look at the group portfolio with an intention to take tough calls is a welcome move. However, the current bout of initiatives spelt out by Mistry seem to be mere ‘window dressing’ — too little-too late! Time is of the essence and the group needs to take tough calls, at least now, to preserve shareholder value.