Well begun is half done. By that measure, N. Chandrasekaran looks set for a successful tenure as chairman of Tata Sons Ltd. In interviews with The Economic Times and CNBC-TV18, he made all the right sounds about consolidating the Tata group’s unwieldy portfolio of companies.
Besides, from the looks of it, his words are matched by some tough actions. The group will soon exit the mobile services business, which will entail a huge write-down. The troubled Tata Steel Europe business has been housed in a new joint venture with Thyssenkrupp AG; although, again, a large portion of the debt related to this misjudged acquisition may have to be written off.
Still, as bold as these steps might seem for the group, it’s far too early to see this as a pattern of things to come. “Chandrasekaran may be making the right sounds, although even the earlier chairman Cyrus Mistry was attempting to prune the group’s portfolio and pursue consolidation. The pertinent question is if the new chair can indeed overcome the legacy problems of the group, that has operated inefficiently for years," says the head of research at a multinational brokerage. It’s worth remembering here that the deal with Thyssenkrupp was initiated under Mistry’s watch.
The decision to exit mobile services is a no-brainer. Tata Teleservices Ltd is burning cash at an increasing rate, thanks to its debt of around $5 billion and the fact that losses are mounting in the current hyper-competitive market. As Chandrasekaran rightly says, there’s no point even attempting trying to revive the business, given the cost that will be involved. For perspective, Reliance Jio Infocomm Ltd has been successful in attracting subscribers after investing over $30 billion in building infrastructure and absorbing losses on account of free and discounted offers.
As such, the Tata group’s hand appears to have been forced because of the high cash burn at Tata Teleservices. It remains to be seen if it will be pragmatic when it comes to other businesses that may not be as big a drain on the pocket, but are still very inefficient. In this regard, Chandrasekaran’s comments on Tata Motors Ltd’s Nano project are a bit disconcerting.
“Nano’s loss on a yearly basis is only about 4% of the losses that our passenger cars make, so whether you shut down Nano or whether you give it a life, the number is not going to change; and this is not a billion dollar question in front of Tata Motors," he told CNBC-TV18. Mistry, on the other hand, had said the only reason this business was being tolerated was for emotional reasons.
Beating around the bush when it comes to the Nano project gives some credence to the research head’s apprehension that the Tata group’s legacy problems may come in the way of a meaningful overhaul.
To be fair, just as the planned Tata Teleservices exit can’t be seen as a sign of all-round pragmatism, the mollycoddling over Nano can’t be seen as a sign of complete inaction. The truth, evidently, lies somewhere in between.
But from a returns perspective, just the fact that some inefficiency is still tolerable is worrying. What often gets forgotten is that in a group where a majority of companies generate sub-optimal return ratios, the spotlight tends to be on most troubled companies, as it is currently on Tata Teleservices.
As a result, companies such as Tata Consultancy Services Ltd (TCS) may be effectively running on auto pilot. After all, they are already doing far better when compared to other group companies; where is the crying need to improve? The group’s decision to appoint TCS’s former chief financial officer to succeed Chandrasekaran as the new chief executive officer suggests a view that the company will cruise along.
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But while TCS cruises along, competitors such as Accenture Plc and Cognizant Technology Solutions Corp. are garnering an increasing share of incremental revenues. Three years ago, TCS had a market capitalisation of $86 billion, 10% higher than the combined market cap of Accenture and Cognizant. Now, its market cap of $74 billion is 16% lower compared to only Accenture’s market value of $88 billion.
TCS may be miles ahead of the average Tata group company, but it has been falling short when compared to some global peers. Considering that this company contributes around 90% to the parent company’s dividend income, it’s clear that Tata Sons should put a lot more weight behind it.
In sum, the Tata group urgently needs to exit some troubled companies, and also invest aggressively in businesses that are doing well. The former will free up the resources to do the latter.