The National Company Law Appellate Tribunal’s (NCLAT’s) decision comes at a time when the group is facing headwinds in most of its key operating companies, except cash cow Tata Consultancy Services (TCS).
The problems have deepened given the slowdown in the domestic market and issues in international businesses. Tata Motors’ domestic business of commercial vehicles and passenger cars faces challenges and Jaguar Land Rover sales, too, have slowed globally.
Tata Steel’s Corus $13-billion acquisition in 2007 has failed to yield dividends and only bloated its debt. Since then, Tata Steel has scaled back UK operations substantially and the proposed joint venture of its European operations with Thyssenkrupp did not get the nod from Europe’s anti-trust authority.
The group’s financial shape is worse than what it was in the financial year 2014-15 (FY15) — the last full year of Mistry’s chairmanship.
The group’s financial ratios look much worse if we exclude the numbers of TCS, its most profitable and valuable firm. Together with Titan, TCS accounted for nearly 80 per cent of the combined market capitalisation of Tata listed companies at the end of March.
Excluding the profits of TCS, the group companies together reported a net loss of Rs 13,000 crore in FY19 — the first loss at the group-level in nearly three decades. If TCS and Titan are excluded, the group companies’ combined market capitalisation is now lower than the gross debt on their books.
Listed group companies, excluding TCS and Titan, had a combined market capitalisation of Rs 2.4 trillion at the end of FY19, against combined gross debt of Rs 2.91 trillion. Tata Power, Tata Motors, and Tata Steel have high debt burden.
Return on equity, which is what shareholders earn, dropped to a sub-par 7 per cent in FY19, against 18.3 per cent in FY15. The return on capital employed, too, deteriorated from 15 per cent in FY15 to 9.1 per cent in FY19.
The group’s balance sheet ratio also looks shaky if we exclude TCS’ contribution, which is debt-free, but accounts for nearly a third of the combined net worth or shareholder’s equity of the group.
Netting out TCS, the listed companies' combined gross debt to equity or leverage ratio ballooned to 1.7 times at the end of FY19.
The group companies’ debt servicing ability, too, has deteriorated, as interest liabilities grew faster than operating profits. As a result, the interest coverage ratio declined to 2.5 times during FY19 from 4.2 times at the end of FY15.
In the past four years since the ouster of Mistry, the group companies’ (excluding TCS) combined interest liability grew at a compound annual growth rate (CAGR) of 6.7 per cent to cross Rs 20,000 crore last financial year.
In the same period, operating profit or Ebitda shrunk at a CAGR of 6.4 per cent to decline to Rs 50,900 crore in FY19 from around Rs 66,300 crore in FY15.
Analysts say that the biggest worry for the Tata’s top management is the growing gap between the financial liabilities of the group's key cash guzzlers — Tata Motors, Tata Steel, and Tata Power, and their market capitalisation. This, they say, indicates market’s dim view about these companies’ ability to create shareholder value.