SP Group exit likely to stretch Tata's finances for years to come

Tata Sons had liabilities of Rs 33,500 cr and debt-to-equity of 0.7x last year

Tata Sons may have won the legal battle against its former chairman Cyrus Mistry, but the financial cost of buying out SP Group stake could stretch the holding company’s finances for years to come. The total financial liabilities, including borrowings, of Tata Sons was around Rs 33,500 crore at the end of March last year. It had a debt-to-equity ratio of 0.7x. This makes Tata Sons one of the most indebted holding companies in the country.
 
The market value of Mistry’s 18.4 per cent stake in Tata Sons is pegged anywhere between Rs 80,000 crore and Rs 1.7 trillion. This is nearly double the Tata Sons’ net worth of Rs 45,868 crore at the end of March last year.
 
If Tata Sons raises cash by paring its stake in Tata Consultancy Services (TCS), it will forego a significant chunk of all future dividend income from the company. The dividend and share buyback from TCS have accounted for nearly 95 per cent of Tata Sons’ revenue in the past five years.
 
“Raising funds won’t be difficult for Tata Sons, given the market value of its equity stake in TCS. It can even sell a part of its holding in TCS or invite large investors, such as sovereign wealth funds in Tata Sons. All these options will, however, reduce its financial flexibility and put performance pressure on the group,” says Amit Tandon, founder and managing director at Institutional Investor Advisory Services India (IiAS).
 
In September last year, IiAS had valued SP Group’s 18.37-per cent stake in Tata Sons at around $20 billion (Rs 1.4 trillion).

 
The latest financial commitment has also come at a time when Tata Sons’ financial liabilities have grown faster than its profits and net worth due to mounting losses notched up by its unlisted subsidiaries, such as Tata Teleservices, Tata SIA Airlines, AirAsia India, Tata Housing Development Company, Infiniti Retail (that runs Croma stores), and Tata Realty and Infrastructure, among others.
 
The group holding company also had stump-up cash to infuse fresh equity capital into its some its biggest listed firms, such as Tata Motors, Tata Steel, Tata Power and Indian Hotels.
 
Analysts say this had a knock-on effect on its profitability and balance sheet. In the past five years, Tata Sons’ revenues have grown at a compound annual growth rate of 13.5 per cent and nearly doubled from Rs 13,200 crore in 2014-15 (FY15) to Rs 24,900 crore in 2019-20 (FY20), thanks to a big jump in dividend payout and share buyback by TCS. Most revenue growth, however, went into covering the losses of its subsidiaries. And Tata Sons’ net profit has been stagnant in the past five years. The company’s net profit of Rs 2,680 crore in FY20 was less than a quarter of its net profits in FY15.
 
Poor profitability translated into little or no growth in the company’s net worth or equity capital, even as its borrowings and financial liabilities more than doubled since March 2015. It reported total financial liabilities or borrowings of Rs 33,505 crore at the end of March last year, against Rs 16,218 crore at the end of March 2015.
 
Tata Sons management has had to contend with a slowdown in TCS revenue and earnings growth in recent years, limiting the potential upside from its dividend payout.
 
TCS net sales were up just 3 per cent year-on-year (YoY) in the first nine months of 2020-21 (9MFY21), down from 7.2 per cent growth in FY20. Its net profits were down 4.6 per cent YoY during 9MFY21, against 2.8 per cent growth in FY20. The software major compensated the earnings slowdown by stepping up its dividend payout ratio — it dipped into its cash reserves and accumulated profits. The company is doing the same in FY21, allowing Tata Sons to maintain its revenue and profits. Analysts, however, say it won’t be possible for TCS to maintain its dividend payout and share buyback rate at the current levels without a rebound in its earnings growth.
 
“For the past several years, Tata Sons’ ability to provide fresh capital to its various listed and unlisted ventures and diversify into new sectors have been largely driven by TCS’ dividends and buyback. Any reduction in cash inflow will greatly reduce its financial headroom,” says an analyst.
 
On the brighter side, analysts say Tata Sons’ financial commitments have peaked, given the incremental improvement in the profitability of Tata Motors, Tata Steel, and the sell-off of its loss-making telecom venture.