A questionable strategy

Selling TCS stake to salvage strugglers isn't a good move

Tata Consultancy Services (TCS) was not one of the group companies ousted chairman Cyrus Mistry mentioned in his bitter letter to the Tata Sons board on October 25. But it is no surprise that this jewel in the crown has been, from some accounts, the source of serious disagreement between him and Ratan Tata. It is perhaps also not surprising that the divergence reflects a key proclivity of promoter-owned groups in India — of leveraging high performers to salvage the strugglers. Mr Mistry had reportedly ignored advice from the Tata Trusts, the Ratan Tata-led entities that exercise majority control over Tata Sons, to sell a five per cent stake out of its 74 per cent shareholding in TCS to recapitalise some of the floundering group companies. 

The Tata Trusts had a reason for this eagerness to sell the stake. As the fastest growing company, in terms of revenue and profits, in the Tata group’s listed stable, even this modest stake sale at a time when the market was peaking could have fetched Tata Sons over Rs 20,000 crore, by some estimates. This is a substantial sum that could have helped companies such as loss-making Tata Steel, with a staggering debt mountain of Rs 85,475 crore incurred for the expensive purchase of Corus, or Tata Motors, with it lacklustre profits, to name two of the group giants. TCS has seen profits grow 75 per cent and revenues 72 per cent between March 2013 and March 2016, which is roughly the period of Mr Mistry’s chairmanship. Tata Trusts would probably argue that growth for this company has peaked principally because of the imminence of Brexit and tightening visa restrictions in core markets, so a partial roll-back of Tata Sons’ dependence on it makes sense, especially when other ailing group companies can benefit at the same time.

But that’s only half the story. As a means of maximising shareholder value for Tata Sons, which must surely be the core concern of its chairman, this is a questionable move, redolent of old groupthink. Rather than trying to milk TCS further by selling stakes, Mr Mistry did take the view that the empire must first shrink – something that his predecessor didn’t like one bit.  The ex-chairman did try to hawk a part of Tata Steel’s European business and a few overseas assets held by Indian Hotels. In any case, the future profitability of several key group businesses is by no means clear. Tata Motors, for instance, has seen profits scarcely grow on account of uninspiring Indian operations and its top line has grown principally because of Jaguar Land Rover’s success in a single market, China, that now looks under threat. Tata Steel suffers all the uncertainty embedded in a commodity stock, apart from the burden of its under-performing British assets. Neither hotels, with their acquisition woes, nor airlines, which are rapidly assuming the status of a vanity business, look like safe harbours for any investor. In such a scenario, selling good assets to keep the underperforming ones alive is not a sensible suggestion. Tata Sons during Mr Tata’s tenure as chairman did not monetise TCS shares even when the group struck big deals through leveraged buyouts. Mr Mistry’s camp could well argue that he was merely following his predecessor’s actions when he ignored the demand on the TCS stake sale.