Even as Tata Sons, the holding company of the $22 billion Tata group, has been raising its stake in key group companies, it has been diluting its stake in Tata Consultancy Services (TCS), India’s fifth most valuable firm by market value.
Also India’s largest software company by revenue, TCS had a market value of Rs1.27 lakh crore or about $28.84 billion compared with Rs34,507.53 crore ($7.82 billion) for Tata Motors, the only other Tata group company to figure amongst India’s top 20 most valuable companies.
Analysts say there are three reasons for Tata Sons’ behaviour. They see it as an attempt to strengthen its defences in an environment where big-ticket mergers and acquisitions are becoming the order of the day. It owns under 30% of the total shareholding in group companies. Many of these companies hold stakes in each other.
Some of these companies have also been busy shopping. To help fund these acquisitions, such as Tata Steel’s recent Corus buy, Tata Sons has been subscribing to more shares in the companies. A bigger equity base allows the acquiring companies to borrow more money from banks, needed to pay for large acquisitions.
In many cases, the share prices of the key companies have lagged the rise in the broader stock market as represented by indices such as the Bombay Stock Exchange sensitive index. For instance, Tata Tea, which was trading on the exchange at Rs867.95 on 31 March 2006, has fallen almost 20% to Rs694.60. Tata Sons has during the same period raised its holding in the company from 15.06% to 19.1%.
Tata Sons also increased its shareholding in Tata Steel, from 19.8% as on 31 March 2005, to 23.82% now. In the same period, Tata Steel’s share price rose by 15.14% from Rs400.90 to Rs461.60, while the 30-share Sensex, of which the company is a part, rose by 125.66% from 6,492.82 points to 14,652.09 points during the same period.
Tata Sons needs to maintain its highest safety rating which it enjoys from India’s two leading credit rating agencies Crisil and Icra. According to Icra, the Tata Sons management has agreed to limit loans to prudent levels by selling some of its investments. Since the company can retain control over TCS even by retaining a little over 50% stake in the company, this would mean it could sell another 27.63% stake without any fear of a hostile takeover.
Crisil says Tata Sons’ exceptional financial flexibility arises from its ability to raise funds by sale or pledge of part of its shares held in TCS without compromising its control over the company.
Its shareholding in TCS alone is worth almost Rs98,775.85 crore ($22.39 billion) while the value of its shareholding in nine of the group’s leading companies is estimated at around $27 billion. The various Tata companies have been in overdrive mode, acquiring companies overseas.
In calendar 2006 alone, group companies in which Tata Sons holds controlling stakes have made six large overseas buys worth $1,017 million in all.
Tata Steel recently won a bid to acquire Corus in a deal which valued the company at $13.65 billion, including an assumed debt of $1.55 billion. For the year ended March 2006, Tata Sons saw its profit after tax fall almost 50% to Rs1,612.3 crore from Rs3,273.6 crore in 2004-05.