The elephant unseats Cyrus Mistry

Tata group shares may pay a price for abrupt, opaque decision to replace Cyrus Mistry with Ratan Tata as interim chairman


The file photo of Cyrus Mistry (left) and Ratan Tata. Photo: Indranil Bhoumik/Mint
The file photo of Cyrus Mistry (left) and Ratan Tata. Photo: Indranil Bhoumik/Mint

Last month, The Economist published a story on the Tata group with the title “Mistry’s Elephant”, where the magazine compared the conglomerate to a ponderous pachyderm.

In what now appears to be a remarkably prescient remark, the magazine said, “That the revered Mr (Ratan) Tata still chairs the Trusts that bear his name may make it trickier for Mr (Cyrus) Mistry to be his own man.”

Was Mistry’s performance so bad that he had to be removed? The Street seems to think otherwise.

One obvious yardstick is the market capitalization of the group. On 1 January 2013, soon after Mistry took charge, the market capitalization of listed companies of the Tata group was Rs4.97 trillion. On Monday, when the decision was announced, the market capitalization stood at Rs8.71 trillion—a massive 75% higher in less than four years.

The Tata group’s increase in market capitalization beats benchmarks such as the Nifty, which has risen 47% and big groups such as Reliance Industries Ltd (RIL) with a market capitalization growth of 27% in the same period. Of course, one cannot ignore the market cap of Tata Consultancy Services Ltd (TCS), one of the group’s premium firms that spews cash, alone is higher than that of RIL. And it does paper over the fact that many of the group companies are not doing so well. But, on key return ratios such as return on equity, the group’s leading firms are on par with peers. As far as revenue goes, compounded revenue growth between FY13 and FY16 of TCS, Tata Motors Ltd (led by Jaguar Land Rover Plc) and even Indian Hotels Corp. Ltd have outperformed their peers.

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Yes, there were some bad eggs in the basket. For instance, Tata Steel Ltd’s acquisition of European steel giant Corus was sinking under its own weight. But its performance has perhaps more to do with the severe cyclical downturn in commodities, with global players bleeding and shutting down plants.

Tata Docomo likewise was caught in a long-drawn and bitter legal tussle, the genesis of which predated Mistry’s taking charge.

If anything, media reports suggest Mistry was trying to put the vast and diversified conglomerate in order. He put Corus’s steel assets in the UK on the block and took firm steps to sell off assets of the non-performing businesses of Indian Hotels and Tata Chemicals. There were also reports that he was telling managers to pull up their socks. At the Tata Motors annual general meeting on 9 August, Mistry was reported to have said, “I think the journey is going to be long and not for the faint-hearted.”

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In any case, analysts and industry experts say that four years is too short a time period to judge Mistry’s performance by or even compare it with that of Ratan Tata, who was at the helm unfettered for three decades. It may also be a trifle unfair to hold Mistry responsible as chairman for the weak performance of some of the companies in his group, considering that he inherited massive problems.

Clearly, Mistry was attempting to change the course of the ship, with a sharper focus on shareholder value. Unfortunately, he was not very communicative about his plans.

What impact will the announcement have on Tata group shares?

It is now up to the board to take immediate steps to restore investor confidence. Unless the uncertainty is resolved soon, Tata group shares may pay a price for the abrupt and opaque decision to replace Mistry and the failure to communicate to investors that the board had cogent reasons for doing so.

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