Why is Tata in the ICU?

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Growing up as a boy or girl turning into a young adult in India, you would have definitely heard about the Adanis, Ambanis, Birlas and Tatas. Perhaps your parents (or teachers) would have told you that the Gujarati Adanis and Ambanis and the Marwari Birlas are corrupt (chors), while the Parsi Tatas are the most ethical business conglomerate in India. Even if you were not told this, I definitely was, and you can ask elder people close to you if they felt the same.

The last individual with the family surname Tata to hold the post of Chairman of Tata Sons (the holding Trusts for most of the Tata Group companies), Ratan Naval Tata, or “RNT” as I will refer to him throughout the rest of this book, turned 81 on June 28, 2018).

As per PM Modi’s openly stated policy for his own cabinet colleagues, RNT should have retired on December 28, 2012, on turning 75. Even though (officially) RNT relinquished all executive powers in the Tata group on that day, and appointed 46-year-old Cyrus Mistry as his successor, this was not to be. Cyrus (now 52) is the younger of the two sons of Pallonji Shappoorji Mistry (who also has two daughters), the largest individual shareholder of the Tata group, owning almost 20% of the Tata Sons shares. The Mistrys are also related to the Tatas, as Pallonji’s daughter Aloo is married to RNT’s half-brother, Noel Tata.

On October 24, 2016, Cyrus Mistry was unceremoniously removed as the Chairman of Tata Sons and RNT (then almost 79) was made Interim Chairman. This shocking decision went through intense media scrutiny. More of this later.

Four months later, the former Chairman of Tata Consultancy Services (TCS), Natarajan Chandrasekaran, took over as the first ever professional chairman of Tata Sons.

RNT was Chairman of Tata Group for 21 years. His Wikipedia page reads: “Under his stewardship, Tata Tea acquired Tetley, Tata Motors acquired Jaguar Land Rover and Tata Steel acquired Corus, which have turned Tata from a largely India-centric company into a global business, with 65% revenues coming from abroad. He was instrumental in the development of Tata Nano, largely dubbed as the world’s cheapest passenger car.

Let’s look at all of these “so-called achievements”. On February 27, 2000, the British Broadcasting Corporation (BBC) announced that Tetley Tea, inventor of the teabag and maker of the traditional English cuppa, was being bought by Tata Tea (now Tata Global Beverages). The deal was worth £271 million, then the biggest acquisition in Indian corporate history.

Tetley’s pretax profits had fallen to £4.98 million in FY 1998-99, compared with £35.7 million in the previous year. So TGB paid 54.42 times Tetley’s (then) earnings for this acquisition. 16 years later, in FY 2014-15, TGB’s pretax profits were a mere £46.15 million. Furthermore, 52.8% of the profits come from the coffee business, much of which was acquired much later.

Tata Motors acquired Jaguar Land Rover (JLR) from Ford in June 2008, for $2.3 billion. While much has been written about the turnaround of JLR, I’m not so sure why we should ignore the fact that the parent Tata Motors’ market share in the passenger vehicles segment in India has come down from 15% in 2010 to an abysmal 5.4% in 2017. In the commercial vehicles segment, the share came down from 68.5% in 2008 to 51.5% in 2014.

In addition, the much touted pet project of Ratan Tata that was going to change the world – NANO – has been one of the biggest failures for any brand/product in recent times.  Only 16,000 Nanos were sold in 2014 (peak sales were 74,527 Nanos in 2011). Launched in July 2009, a total of only 273,900 Nanos were sold in India in 6 years, at an average of 45,650 cars per year, against an installed manufacturing capacity of 250,000 cars per year. In the last 12 months, less than 7500 Nanos have been sold. Given that Tata Motors had invested more than $1 billion in the design and development of the Nano, in nine years of the Tata Nano being sold in the market, each car sold has costed ₹218,000 in capex amortization alone. Can there be a bigger business disaster?

Tata Steel bought Corus (now Tata Steel Europe) in January 2007 for $12.9 billion. This deal made Tata Steel the world’s 5th largest steel group, with a manufacturing capacity of 25 million tonnes.

A majority of stock analysts were concerned that the economics of the deal were based on an assumption that the world steel market will continue its uptrend. The deal promised access to high-end European markets, supported with low-cost Indian manufacturing. Lakshmi Mittal’s $34 billion acquisition of Arcelor in June 2006 was much cheaper, at an EBITDA (earnings before interests, taxes and depreciation and/or amortization) multiple of 4.3 vis-à-vis 9.0 for Tata Steel’s acquisition of Corus.

Corus recorded a 23% decline in EBITDA for 2008-09, followed by a $303 million operating loss in 2009-10. A consortium of four customers pulled out of a 10-year purchase contract with Corus, leading to a loss of nearly 1500 jobs. From 2009 to 2012, the company has retrenched over 3500 employees. Tata Steel made a post-tax profit of only $961 million in 2014-15, of which Tata Steel Europe (formerly the “prized acquisition Corus) contributed just $68.3 million.  The steep price of $12.9 billion therefore was completely unjustified.

The brand Taj Hotels lost tremendous value during Ratan Tata’s reign of 21 years, but that’s another article altogether.  Now it’s up to you learned readers to decide.

If you liked what you read, please buy a copy of the Book from https://www.amazon.in/OK-TATA-WHY-ICU/dp/9386295660/ref=sr_1_4?s=books&ie=UTF8&qid=1534952915&sr=1-4

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