Has India's Most Respected Group Let Down Shareholders? - The 5 Minute WrapUp by Equitymaster
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Has India's Most Respected Group Let Down Shareholders?

Sep 29, 2016

In this issue:
» OPEC agrees to cut down production
» Are PSU Banks making a comeback?
» ....and more!
Rahul Shah, Co-Head of Research

We conducted a small poll back in 2012. The objective was simple. We wanted to find out who our readers perceive as the most trustworthy corporate group in the country. After polling 4,657 readers, a clear winner emerged. With close to 56% of the votes, the Tata Group blew away the competition.

Perhaps the results weren't surprising. The name Tata has long evoked respect and trustworthiness. So how about changing the question a bit? How about ranking India's business groups in terms of shareholder returns over the past few years?

Here, the Tatas are a bit of a letdown. And The Economist has proof. As many as seven of the nine largest listed Tata entities have put in a shoddy performance...not even earning their cost of capital.

This is similar to taking a bank loan at 10% and hoping to create wealth by investing in FDs that yield 8%. No one gets rich by earning less than what one has borrowed.

The only way to stay afloat in this situation is to constantly raise new capital to fill up the gap. Else you risk the gradual chipping away of your capital and ultimately wealth destruction.

To say that a majority of the Tata Group companies have either increased their debt or have destroyed wealth in recent years would be a fair statement.

Radhika, our ValuePro editor and someone who knows quite a bit about the importance of return on capital, agrees. In fact, she's written a full series about which Tata Group companies are investment worthy and which are not. Tata Steel, Tata Chemicals, Tata Power, Indian Hotels, and even Tata Motors do not make Radhika's cut because of their inefficient use of capital.

She is ruthless when it comes to capital efficiency. She checks a company's returns on capital going back many years and scrutinises how the capital is put to use. Size and reputation account for nothing. It is a track record of capital efficiency that matters the most. This is why, barring TCS, no Tata company has found a place in her service.

This is not to say we haven't recommended Tata Group companies in our other services. We certainly have. But it is more in the spirit of buying fair businesses at good prices.

We didn't recommend stocks like Indian Hotels and Tata Chemicals because we thought they were good businesses. We recommended them because they were trading at prices so good that even a mediocre selling price would have given attractive returns.

Investors expect Cyrus Mistry and his team to turn these fair businesses into good ones. Their debt levels need to go down and the return on capital significantly higher.

To be fair to Mistry, he has undertaken some cleaning up of the businesses. But a lot more needs to be done.

Do you agree that Tata Group companies have disappointed shareholders over the past few years? Let us know your comments or share your views in the Equitymaster Club.

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03:00 Chart of the day

The cleanup act in our public sector banks continues, and this time beyond just sour advances. Recent reports suggest that the government has begun cracking down hard on the top brass of both public banks as well as other state run financial institutions. What they're said to be looking for is any signs of wrongdoing, conflicts of interest, and unethical behavior by the heads of these entities.

Some of the investigations have already been initiated. The finance ministry has already begun a departmental enquiry on a former SBI chairman and two serving executive directors at other lenders for various violations. It is doing this in consultation with agencies like the Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI). Action will be taken based on the findings.

Just a couple of days back, the government sacked Bank of Maharashtra chairman Sushil Muhnot with no reason having been made public. And it didn't hesitate to do so despite him being just a few days away from retiring the office. It appears like there may be little leniency to spare. Today's chart of the day pegs some of the top performing public sector banks in the calendar year to date.

And rightfully so. As with the Wells Fargo case in the US we wrote about recently, the banking business is a business of trust. And corruption scandals and a tarnished image can at times deal a permanent blow to an institution if not dealt with sternly and swiftly. The government certainly seems to be making the right moves...for now.

Sentiment in Public Banks Improving?


In its meeting, the Organization of the Petroleum Exporting Countries (Opec) has finally agreed to cut down on production. Notably, this is the first such move in eight years, and has surprised many market participants that expect the cartel to continue with the status quo of maintaining output.

Of course, oil prices have reacted sharply to this rising upwards of 5% since Wednesday. The Opec has agreed to cut production to a range of 32.5 million to 33 million barrels a day. In the days preceding the meeting, Saudi Arabia and Iran had signaled that an agreement may be unlikely. But agree they did. And now an Opec committee is set to recommend limits at the formal gathering in November and it appears that Iran will be exempt from capping output.

Will this mean the end of low oil prices? Only time will tell.


After trading on a positive note in the morning session, Indian equity markets plummeted 500 points in a knee jerk reaction after Indian army claimed that it has carried out surgical strikes along the Line of Control into Pakistan Occupied Kashmir. Major sectoral indices were trading on negative note with stocks from healthcare & realty leading the losses.

04:50 Investment mantra of the day

"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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6 Responses to "Has India's Most Respected Group Let Down Shareholders?"

Sreedhar Krishna Murthy,

Oct 8, 2016

Of course, Tata Group companies, except TCS, may not have paid high dividends. Share prices have fluctuated, widely, especially in Indian Hotels, Tata Steel and Tata Power. The adventure by Tata Motors to acquire JLR and acquisition of biggest steel mills by Tata steel, were daring and enhanced their global image. But did this benefit the shareholders is the mute question. Statistics and charts would would have helped in understanding the issue of ROE/ROC and the debt ratios. The message seems to that in the present day business environment, one who is very ethical cannot make profits and perhaps, breaking rules would be the best strategy reward their shareholders!

Shareholders would look up to the present Tata Chairman to seriously look at the,borrwings, return on investment, optimum utilization of manpower and their assets for maximizing profitability.


Krishna Kumar

Oct 1, 2016

I do not think Tata has ever played to the gallery. The investment horizon is lifetime and you will see only few of tata companies have done exceedingly well.Others get by. Another reason is it is employee oriented and more like public sector. Loss in one tata company has impact on other entities also. It is liike buying memebership in exclusive club for snob value who may occassionally give lunch and drinks.


A. Suresh Babu

Sep 30, 2016

Yes. Tata group companies have disappointed normal investors especially stocks like Tata Steel and Tata coffee.



Sep 29, 2016

It has been said as 2012 review and 4 years have passed.we expect some improvement I tata group of companies.you are reviewing the share markets ups and down I have never seen about review of black money or so.millions of rupees are rotated within India which either the RBi has control or the Centre. Even small real estate owners talk in crores and they transact everything in cash. Is there any way to control this because these are unaccounted money. Everybody knows but none take. It is a pitiabe position. Because for small amounts like 50000 they are asking pan card but for crores in cash there is no action at any level. This type should also be reviewed by giving solutions. I am a small invested with so many restrictions on deposits less than one lakh and depend on the interest we receive


Jal S Mahimwala

Sep 29, 2016

I have fairly large holdings in Tata Steel,Tata Power and Tata Motors.Feel that they have not provided the type of returns one would have expected. Have just held on knowing they are fundamentally ethical and straight companies but performance is below par and disappoints shareholders like me. They need to do something quickly to provide decent returns to this shareholders.



Dinyar Edulji

Sep 29, 2016

This same question was put in the news paper (TOI) and Mr. Mistry has given his rejoinder which clearly showed what the TATA Group was doing. Think you must have also read this. If not please do and you can then change your mind as you have been fairly open in accepting the other side of the story.

I have never felt that TATA's have let down their shareholders. Yes, in this tiring times like others they are also facing the headwinds but KUDOS to the TATA group that they still have a clean slate and that is all that matters and you can have a good night sleep.

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