Tea break’s over, Tata. Time to sweat capital
India’s $103 billion Tata Group, the maker of Tetley Tea, went on an extended beverage break in October last year, when it acrimoniously fired its chairman.
The ensuing battle for control was distracting, but ultimately proved to be a storm in a teacup.
Now that the saga is over, Tata Sons Ltd, the group’s unlisted holding company, is going back to work by announcing the appointment of a group chief financial officer (CFO), a position that’s been vacant for half a decade.
Saurabh Agrawal, former strategy head at Aditya Birla Group, another large and old Indian conglomerate, has his work cut out. While most group companies have reported a strong quarter, five years of ennui have left their mark.
Excluding the successful computer software unit, the empire has $25.5 billion in net debt. That’s almost unchanged from 2012, when the previous group CFO retired. Leverage, however, hasn’t done anything for shareholders. Then, the group’s return on equity was 33%. Now, it’s 27%.
Agrawal arrives at Tata with a reputation for deal-making, having just merged most of Idea Cellular Ltd’s mobile services with Vodafone Group Plc’s local operations. His new employer will need him to work the Rolodex.
The Tata Group’s wireless business, like everyone else’s, is getting smothered by recent entrant Reliance Jio. Agrawal’s boss, Natarajan Chandrasekaran is new to the corner office. Chairman Chandra could do with some counsel on what to do with the flailing Tata Teleservices Ltd.
That won’t be the new CFO’s only challenge. The $30 billion that billionaire Mukesh Ambani, India’s richest man, has poured into Jio is backed by record cash from oil refining. The Tata Group’s main commodity business is steel, which is only now breathing a sigh of relief as metal prices in China hold up despite a fall in iron-ore costs. That may not last.
The group garners almost one-third of its $15 billion in annual Ebitda (earnings before interest, tax, depreciation and amortization) from writing computer code. As Bloomberg Gadfly noted a year ago, that’s a risky dependence.
Clients are embracing social, mobile, analytics, cloud, and machine learning. Yet Tata Consultancy Services (TCS) Ltd’s revenue from digital technologies is 18%, compared with 45% at Accenture Plc, according to Bloomberg Intelligence. Meanwhile, the cost of doing business in the US, TCS’s main market, is rising because of visa restrictions.
Agrawal might need to make a case for bold acquisitions by TCS. He may also have to recommend asset disposals at Tata Motors Ltd. Sales at Jaguar Land Rover (JLR) — whose 2008 purchase has been the group’s only inspired decision in the past decade — are picking up. JLR’s Ebitda margin has swung back to 14.5%, from just 9.3% in the final quarter of 2016. But the domestic Indian business of trucks and cars is languishing.
This legacy unit is now worth Rs103 a share, according to Karvy Stock Broking Ltd, the same as the per-share net debt. It would make sense to list JLR in London or Hong Kong, and sell the stump at fair value.
Decisions, decisions. The main shareholders of the group’s holding company are charitable trusts that want a growing stream of dividends far into the future. Tata desperately needs to buy growth businesses.
Now the break is over, it’s time to sweat the capital. Bloomberg