The National Company Law Appellate Tribunal’s (NCLAT’s) move to reinstate former Tata Sons chairman Cyrus Mistry will trigger a knee-jerk reaction in related stocks. It will keep them under pressure in the short-to-medium term till there is clarity on the issue, say analysts.
The NCLAT also termed the appointment of N Chandrasekaran (Chandra as he is popularly known as), the current chairman of Tata Sons, as “illegal.”
Chandra had been appointed chairman in February 2017. The appellate tribunal gave four weeks to implement its order on Wednesday.
The decision came at the fag-end of the trading session and saw most Tata Group stocks react to the development. Tata Motors, for instance, traded near seven-month high in intra-day deals on Wednesday. It ended the day as the top Sensex laggard, down 3 per cent. Tata Global Beverages and Tata Chemicals lost 3.52 per cent and 1.53 per cent, respectively.
“NCLAT’s decision comes as a surprise and will impact the stocks in the near-term. There can be a knee-jerk reaction to the development once the markets open for trade on Thursday. A long-term disruption is ruled out as each company in the group has a separate management structure and operating environment.
Among the lot, TCS, Tata Global Beverages and Titan are on a stable footing. Tata Steel and Tata Motors continue to be impacted due to their global business segments,” said G Chokkalingam, founder and managing director at Equinomics Research. “Today’s reaction was driven by sentiment but the focus may shift to fundamentals in the coming days. Besides, a final decision on the matter could take a couple of years if the Tatas move Supreme Court,” added Rajesh Cheruvu, chief investment officer, Validus Wealth.
At the bourses, most Tata Group stocks have been underperformers so far in calendar year 2019 (CY19). While the Sensex gained nearly 15 per cent year to date, only Tata Global Beverages, Trent, Titan and Voltas have managed to outperform the benchmark index with a gain of 18 per cent to 42 per cent.
On the other hand, TCS, Indian Hotels, Tata Motors, Tata Chemicals, Tata Steel and Tata Power are some of the marquee group stocks that have underperformed.
The S&P BSE Midcap and S&P BSE Smallcap indices have lost around 4 per cent and 9 per cent, respectively, during this period. “As a business strategy, Mistry wanted to prune operations in loss-making entities and that’s where the conflict was on. The philosophy of the Tata Group has always been to protect the interest of its employees. Thus, I feel, Tata Motors and Tata Chemicals will remain under pressure at the bourses if Mistry was to assume charge, as these two entities remain a sore point for the group. The rest of the businesses are in a relatively stable footing,” said A K Prabhakar, head of research at IDBI Capital.
According to Deepak Jasani, head of retail research at HDFC Securities, key decisions of the Tata Group on mergers, demergers and capex could get impacted in the event the Supreme Court upholds NCLAT’s decision.
“Mistry was quoted as being uncomfortable with a large debt overhang and the likely write-offs that the overseas acquisitions made by Tatas could end up in. He had also changed the corporate governance structure of the group. Investors would normally be happy with a Tata being at the helm of the group. But they would not mind if there is a higher focus on return ratios and better capital efficiency as well as allocation at group companies,” said Jasani.
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