The Tata group may be the oldest and the largest among industrial groups in the country with presence across multiple segments, but it needs a shift in focus and there are areas for improvement to raise returns, a latest research report by Credit Suisse on the group has noted. For instance, the net debt of close to 45 small and large companies within the group stands at about Rs1.58 lakh crore and 60% of the group companies have an ROE (return on equity) of less than 10%. Also, only a few of the close to 100 operating companies account for a major part of the group’s revenue, profit after tax and market capitalisation. The CS report has said that with a new team at the top of the holding firm Tata Sons headed by the new group chairman N Chandrasekaran, it expects a renewed energy with five key elements of strategy — improvement of return ratios (especially for Tata Motors, Tata Power, Tata Steel & Tata Teleservices), focus on domestic consumption and leveraging brands better, simplicity in structure and holding, ensuring relevance in all sectors it is present in and digital initiatives.
“Only 4 of the top 10 have an ROE in excess of 15%, and about 60% of companies for which we have data have an ROE of less than 10%,” the report said. TCS is the single largest source of cash for the group contributing to around 65% of profit after tax and according to CS estimate its dividends accounted for 85-90% of the total inflow to the parent. Further, 94% of revenues come from the top-ten companies and domestic comprises only one-third of revenue, with domestic consumption (ex-financial services) being less than 10%. The top-10 and top-20 companies (by revenue and including subsidiaries) account for 94% and 99% of the group revenue, 98% and 99% of group PAT and 94% and 99% of the group’s gross fixed assets (excluding goodwill and intangibles), respectively, it said.
Tata Steel, Tata Motors, Tata Power and Tata Teleservices are the most significant contributors to the group’s net debt, and together, accounted for over 90% of the group’s net debt in FY16, according to the CS estimates. Only four companies out of the top-ten in the group have ROE in excess of 15%, the report observes. TCS with 33% in FY17, Tata Motors with 15%, Voltas with 17% and Titan 18%. “While Tata Power (>10%, adjusting for one-off charges) and Tata Steel (9%) have shown some improvement in FY17, their ROE remains low,” it adds. Indian Hotels and Tata Global Beverages’ ROE stands at -2% and 6%, respectively.
Among the companies that have witnessed the most significant improvement are Rallis India and Nelco, as per reported numbers. Rallis’ ROE improved from 21% in FY15 to 30% in FY17 and Nelco’s from low single-digit levels to over 30% in FY17. “Besides operational improvement, this was also helped by higher other income to some extent and absence of losses from the discontinued operations, as per the reported financials”.
Companies such as TCS, Tata Motors, Trent, Titan, Tata Elxsi and the insurance units (Tata AIA and Tata AIG) witnessed a contraction in ROE. Tata Motors’ ROE came down from 23% in FY15 to 15% in FY17, and Titan’s ROE contracted from 29% in FY15 to 18% in FY17. For TCS, cash accumulation may have been one key reason.
The report further notes that there are several companies in the group that are very small in the context of Tata Group’s overall size. “Tata Petrodyne and Tata Realty Infrastructure have high asset intensity and low profitability based on FY16 financials. Similarly, Tata Pigments, Tata Ceramics, Tata Décor and Tata UniStore (e-commerce) are small players in the industry they operate in based on reported revenue in FY16”.