Cyrus Mistry, chairman of Tata Sons Ltd., is writing down the value of some of the $15.5 billion assets purchased by his predecessor over two decades to boost the allure of India’s biggest corporate group.
Less than a year after taking over as chief, the billionaire scion has pared the value of overseas assets by at least 95 billion rupees ($1.5 billion) after Europe’s record recession and a global slowdown eroded the value of U.K. steelmaker Corus Group Plc and New York’s Pierre hotel. The $100 billion group has more than 100 companies, including Asia’s top software developer by value, the world’s second-largest soda ash maker and Starbucks Corp.’s India partner.
Reducing the market price of the assets may make them attractive to investors should Mistry choose to sell them, said Shishir Bajpai, a fund manager at IIFL Wealth Management Ltd. in Mumbai. Mistry’s challenge is to revive some of the unprofitable companies in the group as he helps realize his predecessor Ratan Tata’s vision of boosting sales fivefold in a decade.
“It makes you feel more positive as after a spring cleaning,” Alan Greene, a Singapore-based analyst at Moody’s Investors Service, said in telephone interview yesterday on Tata Steel Ltd.’s impairment charge. “If there are overvalued assets on the balance sheet, you may end up hanging onto them. If you are not sure of some of the assets, it creates uncertainty.”
Under Mistry, three of the biggest Tata companies have impaired their assets four times.
Tata Steel Ltd., India’s biggest producer of the alloy which bought Corus for $12.8 billion in 2006, took a 83.56-billion-rupee writedown for the quarter ended March 31, the company had said in a May 24 statement. A few days later, Tata Chemicals Ltd. shaved off 4.84 billion rupees “primarily relating to the European operations”.
Indian Hotels Company Ltd., the unprofitable owner of New York’s Pierre hotel, on Nov. 8 wrote down 2.87 billion rupees, citing net worth erosion caused by “global recessionary conditions.” It had already pruned those assets by 3.73 billion rupees in May.
“There exists a recognition that in its desire to internationalize, the group overpaid for some of the assets or got its timing wrong,” Nick Paulson-Ellis, the Mumbai-based Indian country head for Espirito Santo Securities, said in an e-mail. “They were caught at the wrong end of the demand cycle, and there is now a need to write the assets down.”
Debasis Ray, a spokesman for group’s holding company, Tata Sons Ltd. said in an e-mail that these decisions were taken by individual companies “in consultation with their respective auditors depending upon their assessment of their operations” and the requirements of accounting standards.
“European assets clearly have been bit of a dead weight on Tata Steel relative to the price they paid for them,” said Moody’s Greene. “As part of good accounting practices, they should have done it. And they have done it.”
Mistry, 45, son of billionaire Pallonji Shapoorji Mistry, the single biggest shareholder of Tata Sons, is the chairman on the boards of these three companies. On Dec. 28, he will complete a year as chairman of Tata Group, the position he took over when Ratan Tata turned 75 and stepped down after steering the salt-to-software group for two decades.
Tata Steel shares have risen 26 percent since it took the charge and closed at 383.25 rupees in Mumbai trading, compared with an almost 6 percent gain in the benchmark S&P BSE Sensex. Tata Chemicals has fallen 8.5 percent since it announced the impairments on May 27, while Indian Hotels has declined 10 percent.
Acquiring companies and starting new businesses helped Ratan Tata boost revenue 23-fold from 1993. The group has spent at least $15.5 billion buying companies in the past two decades, according to data compiled by Bloomberg. Tata Motors Ltd.’s purchase of luxury car brands, Jaguar Land Rover, for $2.3 billion in 2008 has buoyed it with better than estimated profit as sales at the luxury unit rose at the fastest pace in four quarters.
“Tata historically has been a very conservative group, not looking to take very leveraged or risky calls in business,” said Mumbai-based Bajpai, who helps manage $1.8 billion of shares as senior vice president at IIFL Wealth Management. “It went after deals so aggressively only in the last 10 years, which was so unlike the group. Unfortunately some of these didn’t work that well.”
Tata Steel Europe’s managing director Karl-Ulrich Koehler said on Nov. 13 the “worst and most difficult times” were over. Group Executive Director Koushik Chatterjee, after reporting profit that beat estimates, said the same day that he sees Europe demand picking up in the current quarter.
The group, which started India’s first airline in 1932 that became state-owned Air India later, announced a partnership in February with AirAsia Bhd and in September with Singapore Airlines Ltd. in its second foray into aviation.
Mistry is seeking to gain a share of air passengers in the world’s second-most populous nation where traffic is projected to triple to 452 million by 2020.
The Tata group has been less active in the last two years, after the global financial crisis brought growth in developed economies almost to a halt. Tata Communications Ltd. dropped out of a race in 2012 to acquire Cable & Wireless Worldwide Plc after failing to agree on a price.
Indian Hotels told the exchanges in a Nov. 8 filing that it was not pursuing its offer to buy the remaining 93.1 percent in Orient-Express Hotels Ltd. after studying “current economic environment and also other opportunities and priorities.” The owner of New York’s 21 Club restaurant and Hotel Cipriani in Venice had in November last year rejected a takeover offer by the Indian hotelier saying the bid undervalued the company.
“Mistry is in some ways going back to the old school Tata thought process. We saw more restructuring announcements, impairments and realigning of valuations in the past year,” said Bajpai. “Ultimately, the benefit will flow to them. It is a sign of prudence and it will be perceived very well by the long term investors of the Tata group.”