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A Tale of Two Conglomerates: The Tata Group v/s Berkshire Hathaway

Nov 24, 2016

In this issue:
» TCS, the Biggest Loser in the Tata Group Dispute
» People using Jan Dhan accounts to prevent their cash from turning trash
» ...and more!
00:00
Rahul Shah, Co-Head of Research

In 1962, Warren Buffett began buying shares in Berkshire Hathaway. A couple of years later, he took control of the company. It wasn't a very smart thing to do.

At the time, Berkshire was an ailing textile mill with red ink splattered all over its income statement. It was valued at next to nothing in the stock market. From that starting point at zilch about 50 years back, Berkshire today is worth about US$ 390 billion.

The Tata Group was founded in 1868 by Jamsetji Nusserwanji Tata when he established a trading company in Bombay. From that starting point at zilch 148 years back, the Tata Group today is worth only about US$ 110 billion.

The difference is of night and day.

To be sure, there could be some differences one may be glossing over in making this comparison. But there are enough similarities to make it a very valid one.

At their core, both groups have grown over the years by expanding into a large array of businesses across industries. This central theme is what makes them so similar. It also sets them apart from the rest of the business world, where the average company grows over time from success and expertise in a given business, field or industry.

In that sense, most companies in the world of business are akin to growing trees. Take the Microsofts and Apples of the world. If their good at what they do, the conditions in their industry are ripe, and the tailwinds is behind them, they can go see their value shoot up to lofty highs in a matter of decades. Just like if a tree sapling is of good quality, the soil is good, and the sunshine enough, the tree can shoot up to being very tall in no time.

But not Berkshire and Tata. For groups such as these, growth is akin more to...say...building a castle. A castle is built stone by stone, by ensuring that you choose each individual stone very wisely. Each stone's shape, size and material has to be just right, and so does it placement. How well this activity is carried out one-stone-at-a-time is what determines how big your castle grows over time.

For the Berkshires and the Tatas, each stone is an investment in an individual operating business. Capital investments are not confined to a given industry or field. Rather, for the group as a whole the bulk of the growth comes from smartly investing in a range of operating businesses over the years.

I find businesses of this second type extremely interesting. While good capital allocation is important in businesses of both types, it is of a much more mundane nature in a regular business (of the first type) - Company operates successful business, ploughs back money in the same business, business grows over time. At least relatively speaking, capital allocation here is more 'automatic'.

But in the second case, the skill of capital allocation takes on a whole new meaning. The entire construct of the group becomes predicated on doing this well. Having technical expertise, smart marketing, and a savvy operations is just not enough. The group has a vast array of choices available to plough back each chuck of cash that becomes available to it from each of its operating companies at different points in time. The group's final results are inextricably linked to how smartly and wisely it makes each of these decisions over the course of time.

To that extent, I believe the growth of a Berkshire Hathaway over a longer span of time is directly comparable that of the Tata Group. And the results so far show a stark difference.

Make no mistake, the Tata Group has delivered immense value to Indian society; both to its capitalists as well as to its employees. But could it have done much better on the capital allocation front?

The numbers I started with speak for themselves.

The management's ability to compound shareholder wealth with excellent capital allocation has an overarching influence on stocks over a very long term. Which is why we would never want our recommendations of Buffett-would-buy kind of stocks to fail on this front.

Our ValuePro team, which recommends stocks from five to ten year perspective, assigns one of the highest weightages to the company's track record in capital allocation. And this is precisely the reason the basket of small and midcaps recommended here have outperformed the benchmark index by a big margin. Check the IRRs for yourself.

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02:35 Chart of the day

Nothing's losing value faster these days than the old high denomination currency. Giving this money a run for money -pun intended - are perhaps the Tata Group companies. As a leading daily highlights, Tata companies have lost a whopping Rs 1.2 lakh crores (Rs 1.2 bn) in market cap over the last one month. Before the dispute, the Tata group companies lorded over a market cap of Rs 8.7 lakh crore which has now come down to Rs 7.5 lakh crore. And what has been the damage to retail investors? Well, a month ago retail investors held stocks worth Rs 675 bn and the same now stands at Rs 575 bn, a total loss of Rs 100 bn (Rs 10,000 crores). As today's chart highlights, TCS accounts for a lion's share of the loss, with its market cap going down by Rs 534 bn, nearly half of the total loss borne by the group.

Will we recommend group companies should the prices reach attractive levels or would we wait for the storm to pass? Well, we believe in the principle that waiting for robins to arrive usually results in the spring getting over. And therefore with the dispute not expected to cause a lasting damage to the long term fundamentals of the group companies, over reaction by investors should be capitalized upon.

TCS, the Biggest Loser in the Tata Group Dispute


03:45

Remember the Prime Minister's ambitious bank account opening drive for the poor? Called the Jan Dhan Yojana, it was touted to be a big success story with there now being 250 m Jan Dhan accounts across the country. Now, little did the Government know that it is these very accounts that could be used to work around arguably the biggest financial drive since independence.

With people resorting to innovative ways to prevent their cash from turning trash, the Jan Dhan accounts have been like a godsend. The modus operandi works something like this. Grab hold of a Jan Dhan account holder and deposit the maximum allowable limit of Rs 50,000 only to take it back few months later in exchange for a small fee. Is it any wonder that in the fortnight since demonetization Jan Dhan bank account deposits have swelled a massive Rs 21,000 crores. This is almost 30 times higher than the cumulative amount that was lying in these accounts before demonetization.

While the Government is of course watching this carefully, it will be interesting to see what comes out of this.

Interested in knowing why demonetization matters to us much more than we realize? Well, you could do no better than read my colleague Vivek Kaul's insightful little report on the subject. It has some great information on how demonetization could impact things like your investment and your property.

I strongly recommend you read the complete note here.

04:25

Here's a news that could perhaps cheer up Indian exporters. The Indian rupee has just extended its four day losing streak today and has hit a fresh 9-month low. It is now down close to 3% against the dollar since Donald Trump's surprise victory in the US presidential elections. It is believed that capital outflows as well as dollar's strength in view of an expected US Fed rate hike are the key factors that are dragging the rupee down.

The news will of course be music to the ears for Indian exporters as lower rupee makes them more competitive and also boosts their revenues. The trend though seems short lived and we expect the rupee to recover once the domestic economy shakes off demonetization and goes back to its earlier growth path.

04:48

Indian stock markets are wobbly today with the BSE Sensex trading lower by 90 points at the time of writing. BSE Small Cap index was bucking the trend a bit and trading marginally higher. Amongst sectors, oil and gas and power stocks were facing the maximum selling pressure.

04:56Investment mantra of the day

"In the long run, it's not just how much money you make that will determine your future prosperity. It's how much of that money you put to work by saving it and investing it." - Peter Lynch

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

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3 Responses to "A Tale of Two Conglomerates: The Tata Group v/s Berkshire Hathaway"

parimal shah

Nov 25, 2016

Even if Jan Dhan Accounts are misused and 50000 cash is deposited:
1) The account holder will possibly get 5000/- as his commission
2) This will make that person earn 5000 and reduce poverty of the person to some extant.
3) The remaining 45000 is now back in circulation (although tax may not be paid on that) and the money will be difficult to hide with most of the payments made by digital method.
4) This 45000 has now become white - and put to productive use by investment in securities or production or saving or FD - whatever.

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Prakash

Nov 24, 2016

To compare Ratan tata and Warren Buffett is outrageous. Mr Tata in one stroke has displayed how much he or the group values Corporate Governance , values and code of conduct.Even the lowest level employee who gets fired from any Company is treated as per law and code of conduct. To summarily dismiss Mt Mistry and insult him is a disgrace on the whole Tata empire along with its so called independent Directors (if you would like to call them). One of the directors is Mr Nohria (Dean of HBS). What a shame for a man who is heading an institution renowned for its Corporate Conduct/Governance teaching.
The press in India is Ga Ga over the Tatas because the rest are shameful in this Country. So the true selves of the Tatas are exposed now in broad day light.

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AP Rao

Nov 24, 2016

How can you make comparison of the two groups. Bekshire is purely an investor using the insurance float as a concept in starting the business. Berkshire will not go for green filed projects in steel, software or any business. Berkshire has been investing in companies that are moats and provide a good cashflow and income.

Tata has ambition for self sufficiency before independence and they are more in infrastructure areas which Berkshire will never go into it.

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