Can Tatas Lift the Gloom on the Investment Horizon?
The Indian government’s anxiety, on the death of private capital investment, was reflected in the Union finance minister urging the private sector to shed its reticence to commit big dollops of investments to supplement the commitments the government made in the Budget presented early this year.
 
Quite possibly, the bigger groups will be harangued to come up with investment plans to create a positive mood in the economy and counter the common carping of the independent observers that the investment climate in the country is lackadaisical.
 
Tata group, as the premier industrial conglomerate, would be under public gaze in the coming days for the commitments it makes towards mega investments. The group has also made some strides in the fast-emerging spaces like electronics, renewables and electric vehicles (EVs) in the recent period. 
 
Besides the above, their takeover of Air India at a cost of Rs18,000 crore and the large-scale plans to increase their footprint in the aviation sector with large investments is a commitment already needing adequate support funding.
 
The group has expressed an interest to enter the production of semi-conductors which, in recent months, has attracted investment interest of a few large corporates, given the global shortage of chips and the availability of subsidy through PLI (production linked incentive) schemes.
 
In the past five-odd years, the Tata group has been overshadowed by the likes of the Adani group and Reliance Industries in terms of big investments in fields like infrastructure, ports, airports, power, telecom, retail, etc.
 
Tata group, under the present leadership, may seek to regain its status as prima donna of the Indian corporate sector. The media is abuzz with talks of their proposed plans to invest up to US$90bn (billion) in the coming few years.
 
How realistic and feasible is it for the group to make big commitments to match what a couple of other big businesses have been doing?
 
Profits and Cash
 
A snapshot of the top companies of the group is provided below. The figures pertain to the latest completed year 2021-22.
 
 
The performance of the steel business has been most impressive in the year gone by and the free cash generated of more than Rs100bn is the opportunistic outcome of a time when commodity prices were ruling high. The sustainability in the current year looks doubtful as the hot-rolled (HR) coil prices have come down to a three-year low of about Rs34,000/tonne, a sharp downturn due to the current global slowdown. 
 
Debts
 
The businesses have, over the years, picked up significant debts as exhibited below. Both Tata Steel and Tata Motors, more particularly the latter, have suffered the consequences of the slowdown in the overseas leg, affecting the overall leverage in the group which, until a year ago, posed serious concerns on the sustainable growth for these businesses.  
 
 
The group is still a few miles away from the safety of a comfortable gearing though the amount of cash that Tata Consultancy Services (TCS) generates is a major comfort to address any major cash crunch in the group.
 
The group has an albatross around its neck with the unfinished subject of settling the dispute between the Tata family and SP Mistry group. The most sudden and unfortunate demise of
Cyrus Mistry, a few weeks back, lends a degree of urgency and inflexibility to bring the cleavage to a close.
 
The family of Mr Mistry may see little relevance to keep a minority stake with no apparent powers or influence. The family may wish to precipitate the closure and seek a meaningful and equitable exit.
 
The overall valuation of the group is greatly loaded in favour of the sizeable holding in TCS. This is the main currency for the group to generate liquidity to effect a settlement. Even a conservative value of the 18% stake of the Mistry family may be of the order of Rs1,00,000  crore to Rs1,20,000 crore.
 
The lack of agreement on what constitutes the correct value for the minority stake, in an unlisted private company that holds the entire group investment, has kept many experts engaged with no answer materialising yet!
 
 
In a nutshell, the financial health of the group is certainly no cause for concern but there is a doubt if investments, of the order spoken of in public domain, are feasible. Unlike the other conglomerates, Tata group may be less adventurous and may not resort to large-scale borrowing for a greenfield fab project where the servicing of debts may not be easy, given the likely negative cash-flow in the initial years.
 
Further, the prospects of the twin cash cows, TCS and Tata Steel, may be muted in the next couple of years due to global factors. Tata Motors and Tata Power may be lucky if they fend for themselves and not pressure the other two with their cash-flow issues. They also have the prospects of significant investments in existing businesses like steel, power and automobiles to meet with emerging global concerns on environmental changes.
 
The shareholder returns have been quite competitive in the period 2021-22. However, the prospects of steel and software—with threatened global depression, if not an outright recession - is a fair question to pose. 
 
 
Tatas are perhaps the most trusted name in the country as an institution and their ability to raise funds both locally and globally may not pose great challenges. However, the cost of capital is on the rise globally and, given that big capital investments will carry significant uncertainties especially in the light of the global slowdown, the prospect of the proposed investments adding to overall shareholder value will be a big question.
 
If Tatas decide on their investment plans purely based on hard-nosed professionalism, they are unlikely to be the ones to light the night skies during the coming festival months!
 
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
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