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Tata Sons – Hanging on by a thread - Views on News from Equitymaster
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  • Jan 1, 2001

    Tata Sons – Hanging on by a thread

    Tata Sons Limited, one of the key holding companies for the Tata Group (the other being Tata Industries), is a Rs 22 bn entity with revenue streams from management consultancy, computer software and financial services. The company derives a major part of its revenues from Tata Consultancy Services (TCS), India’s largest software service provider.

    What we have attempted in this special report is to bring out several points affecting the market valuation of the Tata group of companies and their real value based on certain factors.

    An interesting fact to note from the share holding pattern given in the table is that the combined holding of Tata Sons and Tata Industries in various group companies is less than 26%**. The question arises, who owns these companies? Are the public and financial institutions the real owners of the Tata group? Or is it that the holdings of various other investment companies like Tata Investment Corporation, Kalimati Investments, Sabras Investments and Tata Trusts give the Tata Group a control over their companies.

    Among the companies in which Tata Sons owns a significant stake are Tata Engineering, Tata Steel, Tata Infotech, Tata Power, Trent and Indian Hotels. Most of these companies have failed to post a good performance over the last few years. This is largely due to the economic slowdown. Take the case of Tata Infotech, Tata Sons’ only listed subsidiary. The company is not doing well despite being in the lucrative software services business. Its net profit in 1HFY01 declined by more than 65% YoY. The company was adversely affected when its joint venture partner, Unisys, walked out.

    ** The significance of 26% arises from the fact that any person having control over 26% of the votes can successfully block any special resolution.

    Holdings of Tata Sons and Tata Industries in other companies
    Companies Tata Sons Tata Industries Total
    Tata Sons - 1% 1%
    Tata Industries 27% - 27%
    Tata Infotech 73% - 73%
    Tata Elxsi 2% 19% 21%
    Andhra Valley 6% - 6%
    Tata Power 31% - 31%
    Tata Hydro 6% - 6%
    Tata Chem 10% - 10%
    Tata Tea 12% - 12%
    Telco 12% - 12%
    Tisco 18% - 18%
    Tata Telecom 1% 8% 8%
    Tata Donnelley 5% - 5%
    Trent 21% - 21%
    Tata Finance - 18% 18%
    Tata Honeywell - 11% 11%
    Indian Hotels 14% - 14%
    Titan 7% - 7%

    If you see the table above, the diversity of the Tata group's business interests comes to the fore. They have a presence in steel, hotels, finance, software, durables, automobile, utilities and fertilisers. And this list is not exhaustive!

    Why did the Tata’s diversify in the first place? What was the need? The 'Licence Raj' and the other restrictive trade policies followed by the government takes much of the blame. The government made sure that none of the big business houses in India dominate a particular business, as there was a fear that monopolies would emerge. Hence, groups such as the Tata's and the Birla's were forced to invest their surplus cash generated from their core businesses into other non-related businesses. This resulted in these groups having a large number of companies in different industries. Of course, sometimes the reason for the diversification would have been an opportunity in a sector rather than the government control.

    In effect, they were simply diversifying into other businesses in order to deploy their funds. Their strategies were not wrong initially. It is in the current era of liberalisation and globalisation that these diversifications have become a double -edged sword for them.

    However, realising the importance of core competence, the Tata group is looking at exiting from several businesses. For example, they sold TOMCO to Hindustan Lever and they have exited from the cement business by selling off their stake in ACC to Gujarat Ambuja. But not all deals will be as simple as ACC. The group's numerous cross holdings discourages any outside party from buying them out.

    More than 65% of capital employed in Tata Sons is blocked in investments in subsidiaries and group companies. However, the return on these investments is mere 9%, which is, less than its return on capital employed of 19%. Even the markets have discounted the value of Tata Sons’ investments in the group companies.

    However, if one were to value the assets of these companies, they are significantly more than the current market capitalization. For example TEC has a capacity to produce 1,777 MW of power. Recently the company acquired 20% stake in Manglore Power at Rs 43 m per MW. The replacement cost of its total capacity at the rate of Rs 43 m per MW comes to around Rs 98 bn! The current market capitalization of TEC (Tata Power, Tata Hydro and Andhra Valley) however, is just Rs 11 bn. Thus, one of the jewels in the Tata crown, TEC is trading at a more than 80% discount to the value of its assets.

    Time for a re-look
    (Rs m) Replacement
    Discount to current
    market cap
    Value of
    TEC 97,911 -88% 41,123
    Indian Hotels 24,406 -61% 3,329
    Tisco 56,440 -20% 10,114
    Total 178,757   54,566

    It seems from the above comparison that the markets have accorded the conservative Tata management a low valuation. In the current era, markets are valuing only those companies with good corporate governance and on the basis of their ability to consistently increase shareholder wealth. While Tata’s score well on the first (viz. corporate governance), they disappoint in case of the second.

    The Tata Jewels
    (Rs m) Market Cap Tata Sons
    Market Value
    of stake
    Tata Infotech 4,007 73% 2,925
    Tata Elxsi 2,995 2% 57
    Andhra Valley 3,690 6% 203
    Tata Power 6,056 31% 1,894
    Tata Hydro 2,463 6% 138
    Tata Chem 8,882 10% 900
    Tata Tea 12,374 12% 1,458
    Telco 22,212 12% 2,563
    Tisco 45,678 18% 8,185
    Tata Telecom 1,096 1% 5
    Tata Donnelley 1,404 5% 64
    Trent 1,036 21% 219
    Indian Hotels 10,533 14% 1,437
    Titan 2,420 7% 180
    Total 124,848   20,229
    * Market value as on December 28, 2000

    The primary objective of any business is to create wealth for its owners. However wealth creation has its own necessary conditions.

    It will be very interesting to see whether shareholder value will be unlocked if there is a hostile attempt to takeover any of these companies. Which way will existing shareholders vote? Will the public and financial institutions still back the Tata management or would they give a new management and control to somebody who can truly unlock the value in these companies?



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