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Thursday, 27 December 2012 00:00
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Navigating a slowdown, rejigging complex empire

 

Inheriting a $100 billion empire, as Cyrus Mistry will do tomorrow, must be intimidating. More so when you’re following a Ratan Tata who, while maintaining his reputation for integrity, delivered a scorching growth (20% annually since FY92 and 30% since FY06), and with a reasonable profit margin. The Tata Group’s FY12 PAT/sales of 6.95% is not too different from Reliance Industries 7.07%, and that’s when RIL isn’t anywhere as diversified and has a turnover of a third less. The flipside is much of this is linked to a single company, TCS, which operates in an environment that’s getting tougher by the day—TCS accounts for a tenth of group turnover but a third of profits and half of market capitalisation; remove TCS and the group’s ROCE falls by around 40%. Mistry’s obvious advantage is he has the board’s approval, unlike in the case of Tata when he joined, despite bearing the family name—how problematic a dysfunctional board can be is best seen from Hewlett Packard’s case. The fact that, much like himself, Mistry is dealing with a young team of committed professionals is another plus—so unlike Tata, he won’t spend time gaining control of the empire. It also helps that, as in the case of JLR, the integration and turnaround of several big global takeovers has been completed.

The most important part of Mistry’s job will obviously revolve around making Corus profitable—shorn of asset sales, Tata Steel profits in FY12 were just R1,760 crore on a turnover of R132,900 crore. One suggestion involves selling off part of TCS’s equity (market value R245,000 crore) to retire part of Tata Steel’s R60,000 crore debt. Other parts of the empire, such as the telecom piece, are clear losers and Mistry may want to revisit his mentor’s stated position of not remaining in an industry if he didn’t occupy the number 1 to 3 slot. The Nano is a non-starter and the passenger car business hasn’t delivered a hit for a long time. Power looks a natural Tata fit, but the business is bleeding and, in its current form, can badly hurt the group. Capital is scarce and Mistry needs to get the best value for it. While Tata built the empire, Mistry may need to unbuild it first, so as to infuse cash in the ventures—like Indian Hotels—that look promising.

That, ironically, could be the easy bit. Unlike Tata who made his real mark in an unprecedented global boom—over half of group revenues come from overseas operations—Mistry will likely see a 4-5 year period of global slowing. Given the complex global and local politics—witness the running battle between Lakshmi Mittal and the French government over closing two blast furnaces and the scramble to get mining and telecom licences in India—much of Mistry’s time and skills will likely be used in managing the external environment, something Tata by and large stayed away from. One Singur was enough to get Tata’s back up and dealing with one Raja hurt the group’s reputation. Mistry will have to deal with many more, and across the globe—getting the Delhi government to agree to renew the Taj’s Mansingh Hotel’s lease on a right-of-first-refusal basis was just a small sample. In the past, to deliver on commitments to shareholders, Indian Hotels bought warrants at huge premiums to the market—being able to deliver on something like that, at a group level, isn’t going to be easy given the intense global competition, unless the $100 billion empire undergoes some radical surgery.

 
 

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