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Cyrus Mistry or Natarajan Chandrasekaran, Tata group is all about crown jewel TCS

The Financial Express logo The Financial Express 18-02-2019 FE Bureau

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Two years after a change of leadership at the Tata Group, it is abundantly clear that whether it's Cyrus Mistry or Natarajan Chandrasekaran, cleaning up after Ratan Tata is not easy. Today, the sprawling conglomerate is even more about TCS than when Mistry left it.

The software major accounts for 73% or nearly three-fourths of the combined market capitalisation of ten top 10 companies; this share was just 59% in February 2017, when Chandra took over the reins at the group as chairman, Tata Sons.

While TCS has put on a little over Rs 3 lakh crore in market cap in two years, the top ten firms together put on less than that, approximately Rs 2.5 lakh crore. Barely five companies in the group have a return on equity of more than 10%.

This is not entirely unexpected. After all, Chandrasekaran had little option but to continue the clean-up initiated by his predecessor Cyrus Mistry. Mistry had done much of the heavy-lifting for which he got very little credit.

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Chandrasekaran has done well to complete the sale of Tata Teleservices, a millstone around the group's neck, and also restructure Tata Steel with the stake sale in the southeast Asia business. But it's going to be a while before Tata Steel and Tata Motors contribute meaningfully to the group's profits and market capitalisation.

Tata Steel is back on its feet now having sold or mothballed plants in Europe and Asia. In May 2015, under Mistry's watch, the company took a large non-cash goodwill impairment charge of Rs 5,000 crore, the beginning of the clean-up.

The Bhushan Steel buy will boost local capacity as the company looks to generate positive free cash flows of close to Rs 10,000 crore this year; the net debt-equity ratio should improve to 1.1 in 2019-20 from 1.5 times in 2018-19.

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The bigger worry though is Tata Motors which reported a shocker of a loss in Q3FY19 thanks to provisions made for an impairment in Jaguar Land Rover. JLR faces tough market conditions in China — volumes plunged 54% y-o-y in Q3FY19 — and in Europe. Business cycles are hard to predict as are tariff policies so it is unfair to blame CEOs. But the fact is Tata Motors' ROAE will slip into the red this year from 20.7% in March 2016. In the last two years, the stock has lost a whopping 70% of its market value and will likely report a small loss for 2018-19.

The high debt burden of companies like Tata Power will continue to pressure profits even as the under-recoveries at the Mundra plant are yet to be resolved. In the latest quarter, the Mundra UMPP reported a negative Ebitda hit by higher imported prices of coal and a depreciation in the currency. Tata Power is among the companies that has lost market value in the last two years.

Tata Chemicals, which too had been weighed down by a couple of bad acquisitions, is doing well after a bit of a rough patch in 2015-16 and 2016-17. In 2013-14, during Mistry's tenure, the company shut down the Winnington plant and mothballed the Kenya plant.The ROAE is expected to slip to 6.2% this year from 11.1% in 2017-18. Ratan Tata's efforts to expand the group's presence outside India have all but failed with billions of dollars having been spent but virtually every acquisition coming a cropper. Companies such as Titan and Voltas continue to do well and are among the handful of companies that have gained market value in the last two years.

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