At the end of 2018-19, the Tata group had a consolidated debt of Rs 2.77 trillion. Tatas not only plan to avoid big-ticket acquisitions for now, the group's main focus will be on improving key metrics and reduce debt, say Shally Seth Mohile & Dev Chatterjee.
Tata Sons, under the leadership of chairman N Chandrasekaran, will focus on improving the operating metrics of group companies and reducing debt.
The group will also avoid big-ticket acquisitions, preferring to grow businesses organically.
This is after group company Tata Steel made big-ticket, successful acquisitions of Bhushan Steel and Usha Martin last year.
“Tata Steel, Tata Motors, and Tata Power will be cutting debt in the near future,” said a senior group official.
“He (Chandra) is sharply focused on improving the operating metrics of all the firms, as economic conditions have changed since September last year, with consumer spending slowing,” said the executive.
He also pointed out how marathoner Chandra used analogies related to running to drive home the point.
“You have to fix your heart rate, pace, and posture. Without that, you will finish the marathon somehow, but you will not enjoy the journey,” he said, quoting Chandra.
At the end of 2018-19, the Tata group had a consolidated debt of Rs 2.77 trillion, according to statistics collated by Capitaline.
Of this big chunk, close to 88 per cent came from Tata Steel (including Bhushan Steel debt), Tata Motors, and Tata Power.
Tata Steel, which had a gross debt of Rs 1.19 trillion at the end of the September 2018 quarter, reduced it to Rs 1 trillion in March 2019.
The plan now is to reduce debt to Rs 90,000 crore by the end of the current financial year and to Rs 70,000 crore over the next few years.
“This is a significant milestone, much more than what we had targeted and much earlier than what we had targeted,” Koushik Chatterjee, chief financial officer and executive director, Tata Steel, told investors last month.
Tata Steel will continue to focus on deleveraging as a primary strategic initiative to rebuild its balance sheet strength, even as it continues to grow its broader long-term strategy, including its organic growth in Kalinganagar, added Chatterjee.
The Tata group official quoted earlier said it would be achieved by way of a sharper focus on the domestic operations, which have seen brisk growth in its earnings year-on-year.
Tata Steel was banking on its deal with ThyssenKrupp to reduce debt and deleverage the balance sheet.
With the deal failing to get the European regulators’ nod, the two companies had to call off the joint venture.
With Europe accounting for a small share in the total 28-million tonne capacity, Tata Steel is not worried and plans to sharpen focus on the domestic business and gradually reduce the contribution of the European operations in the total pie, said the person quoted above.
“The problem is only of the 3-million tonne in Europe.
"There are two ways of tackling it - to get rid of the problem, or make it small by increasing contribution of the good portion,” said the official. He added that the Netherlands plant within the European operations is doing well.
Tata Power, another group company with debt of Rs 45,000 crore, is also doing its bit to deleverage its balance sheet.
Praveer Sinha, chief executive officer (CEO) and managing director, Tata Power, said, “We have been taking lot of steps, especially in terms of debt reduction.
"We have initiated discussions to divest from our investments in international locations, especially the ones in South Africa and Zambia, and we hope that within this financial year, we will be able to close some of these,” he said in an analyst call after the earnings.
Tata Power officials told the analysts that Mundra plant alone has put the company under a lot of pressure.
Sinha is hoping like Adani’s Mundra plant, the compensatory tariff is provided for Tata Power.
This will bring closure to the uncertainty on the Mundra tariff.
“Mundra is still unresolved as the state distribution companies have still not implemented the Supreme Court order due to their own issues,” said the Tata official quoted earlier.
Tata Power will have to take a call on increasing its footprint in the renewable energy sector, where the industry is shifting to from coal, the official said.
Meanwhile, Tata Motors, which was a jewel in the group’s crown till two years ago, because of its highly profitable UK subsidiary Jaguar Land Rover (JLR), is now struggling with high debt as JLR faces headwinds from uncertainties related to Brexit, shift in consumer preference to diesel in Europe and slowing sales in China.
At the end of March quarter, Tata Motors’ consolidated debt was Rs 91,124 crore.
In its domestic business, Tata Motors’ commercial vehicle business is bringing cash flow of Rs 12,000 crore a year, while the passenger car business is at a negative Rs 2,000 crore cash flow.
The JLR negative free cash flow is another £1 billion.
“Till September last year, our passenger car sales were doing extremely well.
"But since then, sales fell in line with rest of the industry.
"This is mainly to do with lack of consumer confidence rather than any liquidity issues,” he said.
Rahul Gangal, partner at consulting firm Roland Berger, says a lot of the growth engines of the group, such as steel and automobiles enjoy the benefits of a robust domestic market and will substantially gain from operational efficiency improvement and debt reduction exercise.
“A corollary to this is that we believe the group will benefit from the robust operational performance, coupled with acquisitions of new businesses capabilities only where needed or profitably viable, in the long term,” says Gangal.
Chandra’s sharp focus on improving the performance of the domestic business comes at a time when India is facing a slowdown in consumption spending.
A rural distress coupled with a liquidity crunch that followed the Infrastructure Leasing & Financial Services meltdown has hit India’s non-banking finance companies (NBFCs) and sapped demand across consumer durables, packaged goods, and automobile sectors.
“It appears that the group is becoming somewhat shy on pursuing growth now.
"If one is looking to make a company fit, one has to forego growth which involves some degree of volatility and uncertainty,” said Mahantesh Sabarad, head-retail research at SBICAP Securities.
As the group is monitoring the debt levels so closely, it also means that Tata companies will be averse to debt capital.
“The idea seems to be not to bulk up, but cut down on fat,” said Sabarad.
One can see that some companies like Tata Motors are already following that path, with no big capital expenditure or projects being announced, and are just focusing on what they have and setting it right, Sabarad added.
As the NBFC sector reels from crisis, Chandra wants the group’s financial services companies to not chase blind growth but pay attention to risk and operating metrics.
The group’s financial services businesses are working on changing their business mix, and reduce the share of sectors where they have high exposure, the official said
Investors in Tata group companies are taking note of the steps underway.
“Under the leadership of Chandra, the group has seen a sharper focus on the business metrics, which are independent for each company,” said A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund.
The vertical approach and the alignment were the first steps and now the alignment to business goals versus the balance sheet is being built.
“Such focus on financials creates shareholder value,” Balasubramanian added.