- Home market has the fastest growth of any major economy
- Foray into U.K. steelmaking seen as an `expensive mistake'
Ratan Tata built a $100 billion global conglomerate with a series of landmark purchases abroad. His successor, Cyrus Mistry, may find Tata Group’s best prospects are back home.
Tata Steel Ltd.’s March 30 announcement that it’s selling its U.K. assets to focus on the Indian steel market was a recognition that the slump in commodities and shift in global economic growth have created a new world for 148-year-old Tata Group.
India’s $2 trillion economy is growing faster than any other major competitor, prompting Mistry, 47, to reverse some of the global expansion pursued by his predecessor, who stepped down in December 2012. Tata Communications Ltd., Tata Power Co. Ltd. and Indian Hotels Co. Ltd. are among other units looking to offload overseas assets to help pare debt.
“There is a global wave of pulling back to your home turf,” said Saurabh Mukherjea, chief executive officer of institutional equities at Ambit Capital Pvt Ltd. in Mumbai. He said the sale of the U.K. steel assets was simply a recognition of reality. “We’ll need to see now if other Tata group companies will do a similar pullback overseas.”
Ratan Tata multiplied group revenues to $100 billion from 100 billion rupees ($1.5 billion) in 1991. He also increased debt 11-fold in his final 10 years as he expanded abroad, acquiring European steelmaker Corus Group Plc and marquee brands such as Land Rover, Jaguar, Tetley tea and New York’s Pierre hotel.
His media-shy successor has been raising cash, refinancing loans, avoiding acquisitions and selling assets after writing them down, in an attempt to tackle a $38 billion debt mountain. Tata Group will build on the platform created by Ratan Tata and is committed to pursuing growth across the world, a Tata Sons spokesman said in an e-mail. Mistry hasn’t begun giving media interviews, the spokesman said.
Ratan Tata bought Corus in 2007, then the largest-ever acquisition by an Indian company. Tata Steel’s chief financial officer Koushik Chatterjee said on March 30 the book value of the U.K. assets is now almost zero. The steelmaker is now seeing a demand surge in India and is open to acquiring distressed local assets, Chatterjee said then.
Corus was an “expensive mistake,” said Mehul Sukkawala, Standard & Poor’s director of corporate ratings in Singapore. “Acquiring Corus was a change in strategy towards going international and this is about scaling back and focusing more on India, which is one of the few steel markets in the world which is still growing.”
Tata Power, which posted a full-year profit in March 2015 after three years of losses, plans to sell its stakes in Indonesian coal mines and sold half of Indonesian Jakarta-based OTP Geothermal on April 8 for $30 million. In the three years under Mistry, the share of the company’s revenue from outside India has shrunk to 22 percent, from 35 percent.
“Mistry’s been looking to sell non-profitable assets in other companies too, so it seems like a broad theme across the group,” said U.R. Bhat, managing director at Dalton Capital Advisors India Pvt., a unit of U.K.-based Dalton Strategic Partnership LLP. “He is doing what needs to be done without being emotional about historical decisions.”
Tata Communications is looking for a buyer for South African network operator Neotel Pty Ltd. after deal with a unit of Vodafone Group Plc fell through in March. Tata Communications’ data centers have also been on the block.
Indian Hotels, operator of New York’s Pierre hotel, is looking to pare debt by selling a stake of almost 6 percent in Belmond Ltd., owner of the New York’s 21 Club restaurant and Hotel Cipriani in Venice. Under Ratan Tata, it had tried to buy control of the company, formerly called Orient-Express Hotels Ltd., in 2012. It gave up the chase in 2013 under Mistry.
Data on the company’s website show that its subsidiaries, including the overseas hotels, dragged the luxury hotel chain operator into a loss of 88.1 million rupees in the nine months ended in December, even though the parent posted a profit.
“You wonder whether they really need expensive properties across New York and Boston which have been dragging down the company,” said Ambit’s Mukherjea.
Another of Ratan Tata’s landmark overseas deals was the purchase of Jaguar Land Rover, now part of Tata Motors Ltd. The luxury-car unit contributed 83 percent of Tata Motors’ total revenue in the year ended March 2015.
But Tata Motors’ earnings could peak in the fiscal year ended March 2018 before margins are squeezed by lower pricing, higher content costs and technology costs associated with emissions, according to Robin Zhu, a Hong Kong-based analyst at Sanford C Bernstein. The environmental-related costs will eventually become material challenges with most of the pain coming around fiscal 2019, Zhu said in an e-mail.
Mistry, son of billionaire Pallonji Mistry, who’s family is the largest shareholder in Tata Sons Ltd., is the first from outside the immediate Tata family to head the group since its founding in 1868. As part of his Vision 2025, set out in 2014, he wants to propel the Tata group into the top 25 globally by market value a decade and make its products available to a quarter of the world’s population.
Tata Group is currently 58th, with a combined market value of $118.3 billion across its 25 listed companies, according to data compiled by Bloomberg.
In 2014, he earmarked $35 billion in investments and picked retail, infrastructure, finance, defense and aerospace businesses as areas of focus. In 2015’s annual Tata leadership meet, Mistry outlined plans to start an e-commerce venture and focus on big data and digital health platforms.
One major success is Tata Consultancy Services Ltd. which earns as much as 93 percent of its revenue from overseas by sending mostly home-grown specialists to provide software and technology solutions to firms across the U.S. and Europe. It’s Tata’s cash cow, generating 946 billion rupees in revenue in fiscal 2015.
The sale of the U.K. steel assets shows Mistry is ready to take tough decisions, said Hyderabad-based Jagannadham Thunuguntla, head of fundamental research at Karvy Stock Broking Ltd. “He has been pushing ahead with expansion in sectors such as technology, infrastructure and defense, but he is scaling back in sectors which are hit by the global commodity rout.”