Debashis Basu:The real Tata issue: Poor capital allocation

What is common between Marico, Bajaj Finance and Sun Pharma? Apparently nothing. These are all owned by different sets of promoters and operate in completely different sectors. One has a strong international focus and the other two are addressing the domestic market. What they have in common is that they are exceptionally well-run companies that have created enormous wealth for shareholders. Their secret: Consistently high returns on capital employed.

Now, why did I choose these companies? In the hair oil business, much before Marico was on anyone’s radar, there was a Tata Oil Mills. Much before Bajaj Finance raced ahead to become a billion dollar business in under a decade, there was a Tata Capital. Much before Sun Pharma became an aggressive, large global player, there was Merind. Note that the second name in each case is a Tata company, two of which have disappeared into history along with a few other Tata businesses. You can sense what I am getting at.

While Harsh Mariwala surprised everyone with extraordinarily high rates of return on capital employed in a commodity business (oil is still its dominant product), Dilip Shanghvi showed what could be done with the pharmaceutical business much beyond India’s competitive advantage. These are the kinds of businesses that the Tatas got rid of under strategic plans that the group has been formulating under Ratan Tata’s leadership since the ‘80s. And while Tata Finance has struggled to survive through multiple scams, without any clear identity or purpose, a quiet and unassuming Sanjeev Bajaj has shown what a finance company can do, having stunned us with astounding growth rates in a very competitive business. 

In setting up this comparison, I can be accused of multiple biases. The first one is selection bias. I have selected these companies to make a point. The second is hindsight bias. We now know the outcomes of the choices the Tatas have made over the years. We did not know the outcomes then. The third could be a narrative bias. We have success stories and we have failure stories and we are drawing conclusions based on the successes. So, let’s look at Mr Tata’s publicly available record of five decades of strategic planning, of which, for a decade-and-a-half he was the commander of the group’s capital deployment, the main job of the group head. 

In company after company, the strategic plans of the Tatas have failed to create much shareholder value, due to poor growth and poor capital allocation. Mr Tata’s early failures were with unlisted stocks like Advanced Materials and Tata BP Solar. Under him, Nelco did show some signs of revival but mainly on orders given to its Industrial Systems Division by other Tata companies like Tata Steel. It’s almost a zombie company now. Mostly importantly, from the late 1990s till 2012, Mr Tata was the unchallenged emperor after having eliminated chieftains like Russi Mody from Tata Steel (1992), Darbari Seth from Tata Tea and Tata Chemicals (1995), Ajit Kerkar from Indian Hotels (1996) and A H Tobaccowala (199) from Voltas. What is his record of capital allocation during his reign?

In 1999 he concluded that the group needed to get aggressive with growth, mainly through acquisitions. So Tata Tea acquired Tetley of UK, two times its size, outbidding Nestle and Sara Lee, for a stupendous £400 million. Almost everyone felt that Tata Tea, now called Tata Global Beverages, had grossly overpaid for the acquisition (no hindsight bias here). It was Mr Tata’s first major (mis)allocation of capital, an act of machismo that probably owed to years being slighted by the satraps like Mr Kerkar, Seth, Mody and Sumant Moolgaokar. The Tata Global stock is up just 2.5 times over 16 years, trying to digest this load. 

What followed were four mega investments. These were the big signature moves of Mr Tata: Two big expansions – into telecom (following the acquisition of Videsh Sanchar Nigam) and passenger cars – and two takeovers, a $12.6 billion acquisition of Corus (four times the size of Tata Steel at the peak of the steel boom) and the acquisition of Jaguar Land Rover. For Corus, the Tatas got into a bidding war and paid 30 per cent more than the original negotiated price — once again a show machismo. The first three of these four are abject failures and textbook examples of poor capital allocation. They remain a millstone around the group’s neck. Mr Tata’s investment approach in telecom also brought out a rather sleazy aspect of the group’s operations, far removed from its carefully cultivated clean public image. 

In short, the largest investments by the Tatas over any decade happened under Mr Tata between 2000 and 2010, and overall, they have lost big money. Who is responsible for these misadventures? It just happens to be the most important question about the group. But have the stalwarts gracing the Tata Sons board ever asked this?

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers