Changing scenario: Debt-free Tata Sons has firepower for newer biz

Tata Sons is a debt-free company on a net basis for the first time in 18 years.

The Tata group’s main holding and promoter company reported a gross debt of Rs 363.2 crore at the end of March this year, down sharply from Rs 22,176 crore at the end of FY23.
 

Against this, the company reported cash and equivalents worth Rs 3,042 crore at the end of FY24, up from Rs 1,534 crore a year ago. This translated into a negative net debt of Rs 2,679.2 crore.
 

At its peak, Tata Sons had an outstanding debt of Rs 31,603 crore at the end of March 2020 and a net debt-to-equity ratio of 0.56.
 

A combination of a debt-free balance sheet and a steadily growing dividend income from group listed companies such as Tata Consultancy Services, Tata Motors, Titan, and Tata Consumer provides financial firepower to Tata Sons to scale up investment in new ventures or step up dividend payouts. Last time when Tata Sons was debt-free on a net basis in FY06, it was followed by a string of large cross-border acquisitions, which transformed the group.
 

Historically, there is a high correlation between the Tata Sons balance sheet leverage ratio and the pace of its equity investment in various ventures.
 

A low leverage ratio, such as in 2005-06 and 2014-15, has been followed by a spurt in Tata Sons’ equity investment in various listed and unlisted ventures. (See the adjoining charts.)

 

For example, at the end of March 2006, Tata Sons had reported a gross debt of Rs 2,316 crore and cash and equivalents worth Rs 2,471 crore.

Interestingly, in October 2006, Tata Steel made a $8.1 billion bid for Corus Group and acquired the British firm for $12.1 billion in a bidding war with Brazilian steelmaker Companhia Siderúrgica Nacional (CSN).
 

This was the biggest ever overseas acquisition by an Indian firm. It was followed by the $2.3 billion acquisition of British luxury carmaker Jaguar Land Rover (JLR) by Tata Motors in January 2008. The post-2006 period also witnessed big-ticket overseas acquisitions by Tata Chemicals, Indian Hotels Company, and Tata Global Beverages (now Tata Consumer Products).
 

These acquisitions were funded by individual companies and were largely through debt. Tata Sons was, however, indirectly involved in acquisition. It provided additional equity capital to these companies, enabling them to raise large debt without any sweat. For example, between 2006 and 2011, Tata Steel cumulatively raised equity capital worth Rs 17,500 crore through instruments such as preferential share issues to promoters, rights issues, and a warrants conversion. This fund raising enabled the company to continue to service the debt it had raised to fund the acquisition of Corus Group despite deterioration in its earnings after the 2008 Lehman crisis.
 

Similarly, Tata Motors has raised nearly Rs 4,200 crore through a rights issue in 2008 to part-finance the JLR acquisition. The issue was largely subscribed by Tata Sons due to poor response from non-promoter shareholders.
 

Tata Sons also provided equity funding to Tata Chemicals and Indian Hotels during the period.
 

In the post-2006 period Tata Sons made additional equity investment in unlisted ventures in retail (Infiniti Retail), broadcasting (Tata Sky), telecom (Tata Teleservices), and aviation (Tata SIA Airlines and Air Asia).

Tata Sons’ equity investment in listed companies was up nearly six times between FY06 and FY13 from Rs 3,881 crore to Rs 22,799 crore. In the same period, its equity investment in group unlisted ventures jumped from Rs 5,218 crore at the end of March 2006 to Rs 18,914 crore.

Ratan Tata, who died last week, retired as Tata Sons chairman in December 2012.

In recent years, most of the incremental investment by Tata Sons is going in unlisted ventures in new sectors such as retail and ecommerce, electronics and semiconductor manufacturing, defence, and aviation.

In the last three years (since FY21), Tata Sons cumulatively made equity investment worth Rs 38,300 crore in the group’s various unlisted companies, while little additional capital has gone into the group’s listed ventures. Tata Sons’ equity investment in unlisted equity has jumped from around Rs 33,000 crore at the end of March 2021 to around Rs 71,300 crore at the end of March this year.

The company also repaid debt worth Rs 30,000 crore during the period.

Meanwhile, Tata Sons’ annual income/revenue through dividend, proceeds from share buybacks and brand fees from group companies has increased from Rs 19,500 crore in FY21 to around Rs 43,800 crore in FY24. As a result, Tata Sons’ net worth jumped to Rs 1.25 trillion at the end of FY24 from Rs 51,820 crore at the end of FY21 and Rs 31,200 crore at the end of FY13.

Now that there is no debt to be repaid and most listed companies are in a financially strong position, Tata Sons will have even greater firepower to make even bigger bets on new projects.