Mckinsey Cautions Tatas On Steel

Management consultancy McKinsey & Co has recommended sweeping changes in the structure and operations of the Rs 30,000 crore Tata group which, if accepted, would lead to the group exiting from all but five or six major industries.

Presented last November, the report calls for a reduction in the number of group companies from around 90 to between 25 and 30. It projects a bright future for the group in its tea and coffee businesses, but is pessimistic about prospects in the groups flagship business, steel.

The report has suggested classification of all Tata group companies into three broad categories: industries from which the group should exit, industries in which it should consolidate and industries in which it should explore expansion and diversification.

 

The report says the group should combine operations in chemicals and pharmaceuticals to achieve greater synergies, thereby hinting at the possibility of a merger between Merind Ltd, Tata Chemicals and Rallis India.

The Tatas had commissioned McKinsey to suggest ways of restructuring the unwieldy group. The report has asked the Tatas to focus on five core businesses: automobiles & auto components, consumer products, infotech and software, services which include power generation & distribution, and hotels & real estate. The report has predicted a bright future for the groups tea and coffee companies, namely Tata Tea and Consolidated Coffee, and has recommended that the Tatas should strengthen them. This runs contrary to popular perception that the Tatas may shed their stake in Tata Tea to Hindustan Lever as they do not want to be in the consumer non-durables business. Companies recommended for the auction block include Campbell, Forbes Gokak and Hi-Tech Drilling, and Voltas.

The group is taking a hard look at restructuring white goods company Voltas. It may hive off the companys white goods and chemicals business and retain the air-conditioning and precision tools division. The management of Tata Electric Companies is already integrated and further integration is being planned. Plans are also being drawn up for TECs entry into oil to turn it into an integrated energy company

TEACHING A GIANT TO DANCE

l Three-pronged recast suggested, involving consolidation; expansion & diversification; and withdrawal

l Focus on five core businesses

l Tata Steel advised to slash workforce and diversify

l Thumbs down to aviation plans

l Sale of Campbell, Forbes Gokak, Hi-Tech Drilling and Voltas suggested

l Bright future seen for Tata Tea and Consolidated Coffee

l Reduction in number of companies from 90 at present to 25 or 30 recommended

Grim forecast for Tisco, flagship urged to diversify

McKinsey & Co has forecast a bleak future for the Rs 6,400 crore Tata Iron and Steel Company as the steel industry is highly cyclical and faces competition from a number of substitutes in the long run.

In its voluminous report, submitted to the Tata brass late last year, McKinsey has recommended that Tata Steel should diversify into other areas to avoid the volatility of the steel business cycle. The consultancy firm argues that steel, as a commodity, has a poor future and could be replaced by other commodities like aluminium.

To prepare for the future, Tata Steel should slash its workforce and diversify into other areas, says McKinsey. Tata Steel currently employs over 60,000 people in Jamshedpur (Bihar), which has eaten into its efficiency. Many new private sector companies like Essar and Nippon Denro operate with much smaller workforces.

McKinseys pessimistic outlook on steel is bad news for Tisco, which has not been having very good times recently. Poor prices, sluggish demand for products and high fixed costs have squeezed the companys margins and lowered shareholder value over the past two years.

Globally, steel has fallen out of favour with analysts, punters and management experts. Many global steel companies have suffered an erosion in their shareholder value and the business has been too volatile for anybodys liking.

Tisco, the flagship of the Tata group and one of Indias oldest companies, has long been a stockmarket favourite. However, McKinseys recommendations have cast a question mark over Tiscos future. Investment bankers have already started speculating about the Tatas future course of action.

In a faxed response to Business Standards query, a Tata spokesperson declined comment on the issue. The McKinsey recommendations are an internal matter for discussion and debate. These are at a preliminary stage and when decisions are arrived at, in due course of time, we will communicate the same to you, the spokesperson said. Tisco is understood to be already considering diversification into areas like power and mining, besides increasing its strengths in engineering and consultancy services to provide a buffer against the volatility of the steel business.

Tisco sources had earlier said that with steel being a cyclical industry, its bottomline is likely to suffer during a downturn. Diversification into relatively steady areas like mining will help the company to absorb some of the cyclical jolts. They said, Tisco will continue to look for areas of diversification, not just to settle its bottomline but also as an alternative resource. There is also a plan to merge Tiscos engineering subsidiaries, with Tata Technodyne functioning as a holding company.

In the past few years, Tisco has also begun pruning its workforce. The company is also looking at adding value to its products and is considering a foray into high-end products like electric grade steel.