Tata group firms' leverage has fallen since FY10

At 15 per cent, the Tatas earned one of the highest return on capital employed (RoCE) among the country’s top family-owned diversified business groups. During FY16, the top 17 group companies collectively earned profit before interest and taxes (PBIT) of Rs 63,889 crore, with nearly Rs 4.25 lakh crore worth of capital (debt plus equity) employed in their business on average.
 
Tata Motors and Tata Steel, the most asset-heavy Tata companies, accounted for 60 per cent of the group’s total capital employed in the previous financial year. They are followed by Tata Consultancy Services (TCS) and Tata Power. The shine in Tata’s group balance sheet, however, is largely due to TCS, the group’s most profitable company. In the previous financial year, TCS accounted for nearly half of the group’s combined PBIT and nearly 70 per cent of the combined net profit.
 
Excluding TCS, the group’s return on capital employed drops to 8.7 per cent, only 15 basis points higher than the previous low of 8.56 per cent seen during FY13 and just a notch above the group average interest cost. In the past financial year, based on their average gross debt and interest expenses, group companies’ average interest cost stood at 6.3 per cent. Group companies (excluding TCS) had average gross debt of Rs 2.36 lakh crore last year and it cost them Rs 14,787 crore in interest cost.
 
The group’s big capital guzzlers such as Tata Steel, Tata Power, Tata Chemicals, Indian Hotels and their telecom ventures continue to earn sub-par return on their capital, making Tata Sons increasingly dependent on TCS to keep the group financially solvent.
 
The silver lining is the declining leverage of the group. The combined net debt (net of cash and equivalents) declined to a nine-year low of 0.74 in the past financial year. At its peak, the leverage ratio was nearly 1.3 in FY10. This is largely due to the growing cash pile of TCS and Tata Motors, and a slowdown in group’s capital expenditure. The group’s fixed capital grew only eight per cent last year.
 
While this is encouraging, the group will have to work hard to earn more returns from large-ticket investments made in the past.