FE Editorial : Cyruss challenge

Written by The Financial Express | Updated: Dec 27 2012, 07:06am hrs
Navigating a slowdown, rejigging complex empire

Inheriting a $100 billion empire, as Cyrus Mistry will do tomorrow, must be intimidating. More so when youre 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 Groups FY12 PAT/sales of 6.95% is not too different from Reliance Industries 7.07%, and thats when RIL isnt 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 thats getting tougher by the dayTCS accounts for a tenth of group turnover but a third of profits and half of market capitalisation; remove TCS and the groups ROCE falls by around 40%. Mistrys obvious advantage is he has the boards approval, unlike in the case of Tata when he joined, despite bearing the family namehow problematic a dysfunctional board can be is best seen from Hewlett Packards case. The fact that, much like himself, Mistry is dealing with a young team of committed professionals is another plusso unlike Tata, he wont 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 Mistrys job will obviously revolve around making Corus profitableshorn 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 TCSs equity (market value R245,000 crore) to retire part of Tata Steels R60,000 crore debt. Other parts of the empire, such as the telecom piece, are clear losers and Mistry may want to revisit his mentors stated position of not remaining in an industry if he didnt occupy the number 1 to 3 slot. The Nano is a non-starter and the passenger car business hasnt 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 ventureslike Indian Hotelsthat look promising.

That, ironically, could be the easy bit. Unlike Tata who made his real mark in an unprecedented global boomover half of group revenues come from overseas operationsMistry will likely see a 4-5 year period of global slowing. Given the complex global and local politicswitness 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 Indiamuch of Mistrys 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 Tatas back up and dealing with one Raja hurt the groups reputation. Mistry will have to deal with many more, and across the globegetting the Delhi government to agree to renew the Tajs Mansingh Hotels 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 marketbeing able to deliver on something like that, at a group level, isnt going to be easy given the intense global competition, unless the $100 billion empire undergoes some radical surgery.