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Tata's global score: 50-50

Source : BUSINESS_STANDARD
Last Updated: Thu, Dec 27, 2012 19:00 hrs
Ratan Tata

It took Ratan Tata a full decade to take the group global. But it was the proverbial lull before the storm as what followed was some of the most audacious deals that corporate India had seen till they happened.

The group became bolder as well – Tetley was acquired for $450 million; JLR for $2.3 billion and Corus for $12.1 billion.

"I would put Tata in the larger group of globalising'companies, that is, ones that have an international presence but still have not made their presence felt everywhere in the world. Tata is strong in Britain, the US and South Africa, but less high-profile elsewhere," says Morgen Witzel, author of Tata: the Evolution of a Corporate Brand.

In terms of sheer numbers, its global operations contributed as much as 58 per cent of the $100 billion (Rs 4.75 lakh crore) group's consolidated revenues in 2011-12. For Tata Steel, the share of global operations is as much as 74 per cent; for Tata Global, it is 70 per cent; for Tata Motors, it is 67 per cent and for Indian Hotels, it is 25.77 per cent.

A snapshot of the companies, which have gone global, reflect a mixed picture. The return on networth (RoNW or return on equity) for Tata Global at 8 per cent is more or less same at the time of acquiring Tetley and now. In case of JLR, it has shot up from negative to a whopping 52 per cent. For Indian Hotels, however, it has declined from 14 per cent to less than a percentage point. And Tata Steel's RoNW has declined from 37 per cent to 7 per cent.

In fact, Tata Steel Europe is hurting the group badly. Even Ishat Hussain, non-executive director of Tata Sons, in response to a story in the Economist, recognised Tata Steel's problems: "The Return on capital employed (RoCE) since 2010 has been highly distorted by the performance of one business: Tata Steel. The RoCE for Tata companies, excluding Tata Steel Europe and the capital work-in-progress of Tata Steel in India, is 14 per cent."

Clearly, a 4 per cent drag on the overall group's RoCE cannot be taken lightly.

Though the financial sector crisis since 2008 has led to slowing down of demand from automobile and construction companies – the key customers of Corus - many say that the deal was expensive. Here's why. Lakshmi Mittal's $34 billion acquisition of Arcelor in June 2006 was cheaper at EBITDA (earnings before interest, tax, depreciation and amortisation) multiple of 4.3 vis-a-vis 9 for Tata Steel's acquisition of Corus.

That is reflected in the performance of the share price. When the deal was announced on June 30, 2006, Tata Steel's share price stood at Rs 473 and market cap at Rs 29,516 crore. In November 2012, the respective figures are Rs 377 and Rs 37,431 crore. The equity base, however, has increased substantially. To fund the deal, the group issued 390 million shares, increasing the equity base from 580 million to 970 million. During the same period, the Sensex went up 82 per cent whereas the company's stock price is down 20 per cent.

The value of the acquisition has eroded considerably. If one considers peers like Arcelor Mittal, which operate in a similar environment, their market cap stands at $26 billion. Tata Steel, Europe which has one-fifth of Arcelor Mittal's capacity should be valued at $5 billion. In other words, the market value of Tata Steel is lesser than the debt ($6 billion) it raised, and half the total price paid at $12.1 billion. Even capacity utilisation has fallen to 14 million tonne in FY 11-12 from 23.1 million tonne in FY 07-08.

JLR, on the other hand, is a completely different story, though there were initial hiccups which forced Tata Motors to post a loss of Rs 2,465 crore in 2008-09. But now, the marquee car company is the crown jewel of the group. In fact, if JLR had not paid a dividend of Rs 1,312 crore to Tata Motors in the second quarter of the current financial year, the parent company would have declared a loss.

Within these two giant deals, there is Tetley which has done quite well. Witzel says, "The Tetley acquisition seems to have gone very well, partly because Tata Beverages has taken a soft approach to managing it. Most people in the UK still don't know that it is owned by Tata Beverages." And the numbers continue to be stable.

Indian Hotels has suffered the brunt of a lacklustre world economy. "The international acquisitions done by Indian hotels have not been earnings per share accretive due to economic slowdown leading to lower passenger traffic," said Rashesh Shah, analyst with ICICI Securities. With the company willing to go aggressive with the Orient Express deal, the results will only show in 10-20 years, say analysts. The numbers, as a result, are not very flattering.

While the jury is still out on how Tata has done in his global ventures, the fact is they have been bold, but not necessarily beautiful.


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