Tata responds to The Economist report, says real drivers of group’s success overlooked

Published: September 27, 2016 6:19 AM

The article in The Economist (‘Mistry’s elephant’, FE, September 24) reproduced by your publication draws preconceived conclusions based on an inappropriate interpretation of selected data.

It is wholly inappropriate to evaluate a diverse portfolio, as the article seeks to do, by taking out the star performing constituents. Such a portfolio will have a mixed profile of companies operating across different business cycles.It is wholly inappropriate to evaluate a diverse portfolio, as the article seeks to do, by taking out the star performing constituents. Such a portfolio will have a mixed profile of companies operating across different business cycles.

The article in The Economist (‘Mistry’s elephant’, FE, September 24) reproduced by your publication draws preconceived conclusions based on an inappropriate interpretation of selected data.

From a shareholder’s perspective, as the accompanying table shows, the Tata group has, at the portfolio level, consistently outperformed the Bombay Stock Exchange Sensitive Index, including over the past one year, three year, five year and 10 year time frames.

The group’s sustained performance in the stock market has been accompanied by a consistent increase in operating cash flows. Over the past three years, operating cash flows have grown at 30% CAGR, and now exceed aggregate capital expenditure.

Significant capital investments in the last three years have been made in sectors such as steel, auto and power, which the article dismisses based on short-term performance alone. These investments, deployed to create facilities such as the new plant of Tata Steel India in Kalinganagar and the Wolverhampton engine manufacturing centre of JLR in the UK, are designed to prepare the companies for future growth, and will yield results in time to come.

tata response graph

It is wholly inappropriate to evaluate a diverse portfolio, as the article seeks to do, by taking out the star performing constituents. Such a portfolio will have a mixed profile of companies operating across different business cycles.

Nevertheless, as a speculative exercise, if the Tata portfolio were to exclude two stars like TCS and JLR, and in all fairness, two of the most challenged businesses, namely Tata Steel Europe and Tata Teleservices, were also excluded, the outcome would still yield a group that continues to be amongst the top three Indian business groups, with a double digit return on capital employed (ROCE).

Moreover, evaluating a portfolio at a snapshot in time, when a number of companies are undergoing a major capex cycle and facing significant global challenges, including the commodity downswing, is misleading. Tata’s strategy has been to hold a diversified portfolio which is balanced and delivers risk adjusted returns over time. To ignore this is short-sighted.

The representation of Tata Steel in the article neglects facts. It does not distinguish between the industry-leading performance of Tata Steel India and the challenges faced by Tata Steel Europe as a result of the prevailing economic environment in Europe. It ignores Tata’s initiation of restructuring efforts in the UK two years ago, and seeks to portray the responsibility and compassion shown to UK stakeholders as a mistake.

The Tata group freely admits that business exits are usually the last resort, and considerable time is invested in evaluating all options before taking such decisions. Nevertheless, the group has exited over 40 businesses in the last two decades, with healthy debate at its boards improving the decision-making process and bringing about a balance with respect to all stakeholders.

When reviewing the performance of the Tata portfolio, a balance is struck between the short, medium and long-term horizons. Financial metrics are evaluated across all three time frames. Longer term metrics such as net promoter scores, the impact of technology investments reflected in patent publications, and brand valuation are evaluated for their contribution in delivering sustainable profitable growth. These metrics reflect a consistent and increasing trend over time indicated, for instance, in the tripling of the number of published patents in the past three years, and the increase in value of the Tata brand (the latest Interbrand study rates Tata as the best Indian brand, with its highest ever brand valuation this year, 118% higher than its closest Indian competitor).

As a result of sound long-term strategies backed by significant capital investment, customer focus, and strong leadership, many Tata businesses have emerged as leaders in both market share and on financial measures in the markets they have strategically chosen to operate in. These include watches, jewellery, air conditioners, commercial vehicles, tea, salt and satellite television, to name a few. It is rare to find diversified business groups anywhere in the world with such a long list of business leaders as part of their portfolio.

In the final analysis, the opinions ventured by The Economist overlook the real drivers of Tata’s success, including its long-term orientation and the quality of its leadership, governance and strategies, that have allowed the group to flourish as a values-driven business enterprise for close to fifteen decades.

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