In Tata's boardroom battle, TCS has most to lose

At the heart of India’s most contentious corporate battle is a treasured asset that isn’t looking so safe.

A battle that started with the ouster of India’s Tata Sons'' first nonfamily chairman, Cyrus Mistry, has spiraled into mudslinging allegations of billions of hidden write-downs, flouting insider trading rules and brash investment decisions.

For investors, the most important pawn in the battle is Tata Consultancy Services, the largest of the Tata companies by market capitalization, worth $70 billion. The Indian IT services giant has been a cash cow for privately held Tata Sons Ltd., the parent company that sits atop more than two-dozen listed companies, which together are worth more than $120 billion.

Tata Sons owns nearly three-quarters of TCS’ shares and relies on it as its biggest source of dividends—tapping it while Tata’s other businesses, notably Tata Steel have floundered.

The risk is, TCS ends up bearing too much of the burden of its Tata brethren at the expense of minority shareholders. TCS has delivered an average 35% payout ratio over the past five years, save for 2015. But 2015 is important. That was when TCS inexplicably paid out a one-off special dividend, supposedly celebrating the 10th anniversary of the company going public.

That special dividend coincided with Tata’s next biggest company, Tata Motors, skipping its dividend in 2015. It paid negligible dividends in 2016 as it funnels cash to capital expenditure for the Jaguar Land Rover business.

It’s worth considering whether TCS can keep carrying the weight of the group. Profit growth is at its slowest in six years as the broader Indian IT industry faces off with digital and cloud technology. Faced with a broader slowdown in financial services in the West, its main customers are holding back expenditure.

And while TCS sits on a stash of $4.8 billion in cash and short-term investments, it hasn’t put it to work. Cash usage for acquisitions has been declining, hitting 3.9% of its cash generated over the trailing decade. That number was 5.9% in 2014.

Meanwhile, top-tier industry peers like Accenture and other rivals such as Infosys and HCL have focused on acquiring new technology.

It may be hard for investors to complain about a company that pays out healthy dividends, but there is cause to worry that TCS has underinvested. While keeping the dividends up despite slowing cash flow generation, TCS has pared back capital expenditure.

Mr. Mistry’s complaints center around mismanagement of Tata’s disparate parts. He tipped that there could be major write-downs over unspecified periods across the companies. These allegations seem hard to assess without more details.

But what is clearer is that the Tata company with the most to lose is TCS.

Source: The Wall Steet Journal