Tata Sons Ltd may invest $1.5-1.8 billion in the proposed airline behemoth created by the merger of Air India and Vistara, two people aware of the development said.
On 29 November, Singapore Airlines and Tata Sons said they plan to merge Air India and Vistara, with Singapore Airlines holding 25.1% of the merged entity. The merger is expected to be completed by March next year.
“The board (of Tata Sons) has to decide on the exact amount to be invested in Air India-Vistara, among other initiatives by Tata group. A significant portion could be set aside for investment into Air India-Vistara combined," said one of the two people cited above, both of whom spoke on condition of anonymity.
Both people said the investment would be primarily utilized to expand fleet; raise its market share beyond 30%; enhance customer service quality; increase global slot facilities and achieve the highest flight service quality worldwide.
“The investments by Tata Sons will be done from the proceeds received as dividend income from TCS (Tata Consultancy Services) and other group firms. About 80% of Tata Sons’ dividend income comes from TCS. Aviation is one of the key businesses under Tata Sons. The capital being considered to be infused into the entity is equivalent to 50-60% of the dividend income received from TCS in FY23," the person cited above added.
As part of its strategy, Tata Sons may begin infusing capital in tranches, beginning in the first quarter of FY24.
“Most plans regarding funding requirements for various areas of the aviation business are ready. Once the regulatory approvals for the merger come in and the allocation is budgeted formally, the work will start. A total infusion of around $3 billion in phases should be good enough to start with. Further funding can be done after FY24 if the current investment works as per the plan," the person cited earlier said.
According to regulatory filings, Tata Sons earned a total dividend income of around $2.92 billion from TCS alone in FY23.
Tata Sons is the principal investment holding company of Tata group. Public charitable trusts hold 66% of the share capital of Tata Sons, which is registered as a core investment company with the Reserve Bank of India.
According to an 8 December 2022 report by Crisil, Tata Sons’ financial strength comes from its ability to raise funds by the sale or pledge of its large portfolio of investments, mainly equity shares in TCS. Tata Sons holds equity stakes in many other Tata group firms, such as Tata Motors Ltd, Tata Steel Ltd and Tata Power Co. Ltd. As on 6 December 2022, the market value of Tata Sons’ investments was ₹11 trillion, of which TCS accounted for around 80%, according to Crisil.
Even though the dividend is Tata Sons’ income and is not part of any plan to fund specific projects, there are several initiatives under Tata group that need funding, according to the two people. And the aviation business is one of the primary initiatives expected to receive a major share of Tata Sons’ FY23 dividend income, they said.
A Tata Sons spokesperson said the company does not want to comment. TCS, Air India and Singapore Airlines did not respond to queries.
“The merged entity may receive at least $1.5 billion from Tata Sons, apart from an investment of almost an equal amount from Singapore Airlines," said the first person.
Apart from the aviation business, the conglomerate may invest a significant amount of its FY23 dividend income in renewables, semiconductors and the group’s ambitious digital initiative Tata Neu, according to the two people.
For Tata Sons, TCS, India’s largest IT and software services company, has been the cash cow over the past decade.
Tata Sons, which holds around 73% of TCS, earned a dividend income of ₹19,832 crore in the third quarter of FY23. This is over and above income from two interim dividends of ₹8 per share each, announced in the preceding two quarters.
According to the two people, Tata Sons may also utilize another portion of the dividend income from TCS to strengthen the Tata Neu app. Tata Digital has been taking a number of initiatives to give Tata Neu a makeover so that it can compete with the likes of Reliance Industries Ltd’s Jiomart, Amazon and Flipkart.
However, it could not be ascertained how much Tata Sons will set aside for its business ventures other than aviation.
“The company (Tata Sons) remains adequately resourced, which, along with regular dividend/buyback income from TCS, provides sizeable cash flow for debt servicing. Annual proceeds from dividend/buyback were over ₹20,000 crore in the last fiscal. Crisil Ratings believes Tata Sons will continue to manage its liabilities and cash prudently. Proposed investments this fiscal are likely to be funded largely through dividends from group companies," said the Crisil report.
On 12 January 2022, the TCS board approved a proposal to buy back up to 40 million equity shares of the company for an aggregate amount not exceeding Rs.18,000 crore, or 1.08% of its total paid-up equity share capital, at Rs.4,500 per share.
In the recent past, Tata Sons has invested by way of preferential issues and rights issues in Tata group companies such as Tata Motors, Tata Steel and Tata Power.
“It is also investing in new growth businesses, such as Tata Digital, Tata Electronics and Air India. Over the past few years, the Tata Group has been reorganizing businesses by function under various clusters to enable synergies and to simplify its structure," said Crisil.
Examples include the completed merger of the defence businesses of various group entities into Tata Advanced Systems Ltd and the acquisition of the branded foods business of Tata Chemicals Ltd by Tata Consumer Products Ltd (formerly Tata Global Beverages Ltd). Similarly, Air India (owned by Tata Sons through its wholly owned subsidiary Talace Pvt. Ltd) subsumed Air Asia India Ltd as its wholly owned subsidiary.
“The management is focusing on increasing the contribution of the digital, electronics and aviation businesses (Air India, Vistara, AirAsia) to the group’s profitability, which may require funding from Tata Sons towards growth capital in some of the entities. CRISIL Ratings believes that the investments will be funded largely through dividend/buyback income, with standalone debt remaining stable or even declining," added Crisil.
Earlier, Tata Sons had dipped into its dividend income to invest ₹5,882 crore in Tata Digital in April 2022.
Further, Tata Group has plans to foray into the semiconductor industry, for which a part of the Tata Sons dividend income will be used, according to the two persons.
On the aviation front, Air India and Vistara will need approvals from a number of countries, apart from India’s Director General of Civil Aviation, Competition Commission of India, and Reserve Bank of India, in order to complete the merger.
In addition, the merger requires the sanction of the National Company Law Tribunal and redemption or conversion of certain outstanding liabilities owed by the Airports Authority of India to Tata Sons (and/or its affiliates) on or before the filing of the merger scheme.
Vistara is a 51:49 joint venture between Tata Group and Singapore Airlines. It typically takes six months for all the requisite approvals.
According to the proposed merger agreement, Singapore Airlines’ 49% interest in Vistara will translate into approximately 20.6% of Air India after the merger. Singapore Airlines will pay cash amounting to Rs.2,058 crore at the time of completion of the merger to acquire an additional 4.5% stake. It has also agreed to invest up to Rs.5,020 crore for the various plans put in place by the Tata Group in FY23 and FY24 for fleet modernization, aircraft induction and other purposes related to Air India operations.
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