Tata group looks to redefine profile

Mumbai: The Tata group, emerging from the clutches of a credit squeeze, has been investing for the future by pouring money into new businesses that could redefine its profile as these new-generation firms turn profitable.

Tata Sons Ltd, the holding company of the $65 billion (Rs3.13 trillion) group, infused about Rs2,755 crore into these initiatives in the fiscal year that ended in March, while it invested about Rs3,896 crore in the listed firms that have traditionally dominated the group such as Tata Motors Ltd, Tata Communications Ltd and Tata Steel Ltd. In the year, Tata Sons made a profit after tax of Rs3,054 crore, a decline of 19.2% from Rs3,780 crore in the year before.

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“The investment strategy pursued by Tata Sons signifies its confidence in the growth potential of its subsidiaries," said a Tata group spokesperson who didn’t want to be named. “The individually listed Tata companies have independent boards who are responsible both for fund-raising and the delivery of their respective growth strategies."

Big-ticket investments made in the last fiscal include Wireless-TT Info Services Ltd, in which Tata Sons bought a 40.31% stake for Rs800 crore. It invested Rs481 crore in its life insurance business and Rs55 crore in its general insurance business, the two joint venture companies where it has cash-strapped American International Group Inc. (AIG) as its partner.

Tata AIG Life Insurance Co. Ltd made a net aggregate loss of Rs418.27 crore while Tata AIG General Insurance Co. Ltd registered a net aggregate loss of Rs3.13 crore in 2008-09. Tata Sky Ltd, the direct-to-home television services provider, had a net aggregate loss of Rs806.36 crore. Infiniti Retail Ltd, which runs Croma stores, posted a loss of Rs86.40 crore against Rs82.58 crore.

The holding company provides group firms with funds and managerial inputs and steps in whenever any of them is in trouble financially. Some compare this with Warren Buffett’s Berkshire Hathaway Inc. in terms of the “holding company structure" as it controls a diverse set of businesses with strategic stakes. Also, the Tata insurance businesses still need to be nurtured and build up a cash reservoir. Tata Sons gets most of its income from dividends of group companies such as Tata Consultancy Services Ltd.

Crisil Ltd, a leading credit rating agency, in a 24 July report affirming the holding company’s triple AAA debt rating, had said: “With increasing participation in the group’s acquisition and expansion programmes, Tata Sons’ business profile will depend primarily on the return on these investments, which carry risks associated with execution and integration."

In a Mint interview that appeared on 1 March, Ishaat Hussain, finance director of Tata Sons, alluded to a game plan within the group of spawning new businesses. “We have a philosophy. We want to be in businesses that are into national priorities. Thus, we won’t go into cigarettes or liquor. For instance, we have a small start-up that is building supercomputers."

Hussain was referring to Computational Research Laboratories Ltd, the firm that is working towards creating Asia’s first supercomputer. Tata Sons has invested Rs100 crore in the company, and in 2008-09, there was no incremental increase in investment in the supercomputers business. In the last fiscal year, Tata Sons almost doubled its investment in Tata Capital Ltd, its wholly owned non-banking financial company, with an infusion of Rs492 crore. The book value of its investment is Rs1,062 crore, against Rs570 crore earlier.

Tata Sons invested Rs200 crore in Tata Petrodyne Ltd, a company that is into oil and gas exploration, but didn’t put more money into Tata Realty and Infrastructure Ltd, the new company that specializes in infrastructure projects. Its holding in Tata Realty remained at 725 million shares with a book value of Rs725 crore.

According to an investment banker who has dealings with one Tata group firm and, therefore, preferred not to be identified: “The Tatas have been husbanding their resources rather well into new projects. They will not miss out on opportunities and business commitments need to be fulfilled as per the long-term business game plan as, otherwise, the businesses will be hampered."

“They have no choice but to go ahead with the schedule of making those investments as per plan," he added. For instance, on Tata Petrodyne, “the group has taken some bets and they have to fulfil their obligations or otherwise it would be a lost opportunity".

“The investments made during 2008-09 are required to grow the new businesses and made on the basis of long-term commitments," said Bijal Shah of IIFL, the institutional arm of India Infoline Ltd. Shah tracks the group and earlier this year made a detailed balance sheet analysis of the Tata group.

Shah believes that some of the subsidiaries would have received the last round of funding from the group as they have gained enough traction to manage on their own. He cites Tata Teleservices Ltd (TTSL) as one instance.

NTT DoCoMo Inc. came in as a partner with a 26% stake for Rs13,000 crore, while Tata Sons infused Rs162 crore, indicating that the telecom subsidiary, the sixth largest service provider in India, is more or less financially stable. Tata Sons owns a 33.68% stake in TTSL, with a conservative book value of Rs3,553.93 crore.

“They would have taken more debt and invested," said Shah, who pegs the company’s borrowing during 2008-09 at Rs2,000 crore.

He said the group is now less financially stressed than a year earlier, when chairman Ratan Tata described it as a “bone-dry situation in terms of access to credit" in an interview with the UK-based Sunday Times on 10 May.

“Incrementally, there will be less need for cash infusions in group companies this year (2009-10)," Shah said. Except for the two insurance joint ventures and Tata Sky, whose capital may need to be reinforced before they attain a commercially viable scale, subsidiaries such as TTSL, Tata Realty and Tata Capital are well capitalized to fund their future growth.

Graphics by Sandeep Bhatnagar / Mint