Opinions

Tata Sons has strong cash flows, now our goal is to fund growth: N Chandrasekaran


Tata Sons chairman N Chandrasekaran says his focus is to broad-base the salt-to-software conglomerate’s pool of profit so as to reduce the dependence on Tata Consultancy Services (TCS). In an interview with Kala Vijayaraghavan and Satish John, he says the group is on track with its three focus areas: simplifying the structure, scaling up businesses and recapitalising companies. Edited excerpts:

Has the exercise to clean up the balance sheet with regard to telecom, auto and steel been completed?

We are pretty much moving along the planned three areas — simplify, synergise and scale. Simplification takes time. You can see the scale theme everywhere. The balance sheet also has to be strengthened across the group. In steel, we said we would look at merging European assets with Thyssenkrupp and scale up in India. We have already scaled up India from 10 million tonnes to around 18.5 million tonnes, and it’ll go up to 24 million tonnes. One of the reasons the company is doing very well is because the India business is very profitable and that is making the European business smaller… we said that we would sell the European business and then scale up in India. From a capital point of view, Tata Sons has also put money into Tata Steel. We bought Tata Steel’s holding in Tata Motors. We are finding ways by which we can put money in the hands of the company so that the company can address all the issues.

Tata Sons is finding ways of putting money into companies either through rights, preferential shares of selling cross-holdings — any combination that makes sense.

All our retail companies are scaling up. In the past two years, the number of stores opened is significant. Some companies in the group have doubled in the past two years, while others have added 40-50% more stores.

The themes which we are stressing are strengthening the balance sheet and recapitalising companies. The process of scaling up and simplification is ongoing. Reducing the number of subsidiaries and getting out of businesses that don’t fit … it is taking time. In terms of capital, we have deployed around Rs 22,000 crore from Tata Sons into operating companies … in various forms, except telecom. We will do more. In this process, we (Tata Sons) have been able to increase our stakes by buying out crossholdings in group companies and through rights issues.

At Tata Sons’ level, if you really look at it, all known direct exposures are sorted out. Many of these companies have huge debt, primarily telecom, which were all direct exposures to Tata Sons, given the group standing. If something comes tomorrow, I don’t know… but as of now, it is sorted out.

If you look at the overall debt of the group, largely the net debt is very comfortable in terms of our ability to service; the total net debt is around Rs 1,70,000 crore and mainly the debt is in three companies: steel, power and auto. If you take the performance of these companies, all the debt can be serviced by them. In Tata Steel while I would have liked the Thyssenkrupp deal to have happened, the good thing is that Tata Steel is strong enough to generate enough cash flows and Ebitda to be able to service the debt.

Tata Power’s gross debt is about Rs 46,000 crore and it can service its own debt.

Tata Power’s debt has to be reduced further so that we can use the funds for growth. I would have been happier if the Thyssenkrupp deal had gone through and the Mundra Power resolution in Tata Power had happened. While the order (the electricity regulator’s order for increasing tariff) is there, it’s not operationalised yet.

Does Tata Sons have the wherewithal to continue infusing growth capital in its operating companies?

Tata Sons has strong cash flows to service its own debt which is not significant. It has net debt of about Rs 27,000 crore and our cash flows are much larger. Now, our goal is to only fund growth. There are three types of investments we will do. Firstly, we will continue to see where we can help companies grow; if they need a rights issue we will subscribe somewhere; we will try to increase stakes if possible; and we will put money in new and growth businesses.

As far as acquisitions go, it will happen in existing companies unless it’s a new business. For example, Tata Steel alone spent Rs 40,000 crore in acquiring Bhushan Steel and Usha Martin. Those kinds of acquisitions will happen. We have 10 segments. We are scaling everywhere. Take our aviation business.We are funding Vistara and AirAsia. By the end of this year, we should have 80 aircraft. Vistara has started international services. Hopefully, the other airline may start international and more domestic routes. We are scaling up all our retail formats, too. If you look at Croma stores, Starbucks and Titan, there has been a significant increase in the last year.

So, scaling-up of businesses will continue…

As long as we are hitting the operating metrics profitably, we are scaling. Financial services, whether it is Tata Capital (or other companies), has been growing at 20-25% a year and both the insurance companies have grown — Tata AIG has jumped five places in market position in the past twothree years and Tata AIA jumped from the fifth to the third position. They are also growing, but growing with a focus on risk, and a focus on profitability.

Now, what we have to do is to ensure that our profit pool is broad-based. One of the thingd that everyone of you writes about all the time is that TCS is the only profit centre. I am not apologetic about that. But the point is we want a broad base. If you take the next 2-3 years, I don’t want to be in a situation where we are heavily dependent on the company. When TCS continues to perform exceedingly well, I would like to be in a situation where from the 10 clusters, at least five clusters give me profits of 10-15% of the group. We’re working on it and that’s what we want. These five clusters are Tata Motors, Tata Steel, TCS, financial services and consumer and retail. We have to exclude new businesses which need to establish themselves and cannot focus on profits. We have created a new company called Tata Digital. The company will create a number of digital platforms. We have already identified the platforms that we want to create. The first platform is already being built and the next two to three platforms will all start to be developed. Each one of these platforms lets us focus on a particular segment and need; some will be B2C platforms, some will be B2B…

The economic scenario looks grim both on the domestic as well global fronts. Some Tata Group operating companies are directly facing global headwinds. How do you describe this predicament?

We need to separate three things here. One, how our companies are performing individually? secondly, what is the market environment? and third is the stock price (laughs)… If the stock price does well, everything is fine. But when the stock price doesn’t do well, everything is wrong and that’s the nature of the market economy.

If you look at Tata Motors, it has three businesses. Commercial vehicles, passenger cars and JLR. I think what we have been able to achieve in the last couple of years in the domestic market is to arrest the decline in our market share of commercial vehicles. Secondly, the financial performance of passenger cars and commercial vehicles businesses has been stronger compared to what it was. It has been profitable overall in the domestic market and also there is a focus on cash flows and positive free cash flows. A lot of improvement has happened and product launches have been well-received. Whether it is a Nexon, Hexa or a Harrier, all launches have been good, but we have a long way to go. The point is that in overall performance, the team has done a pretty good job. On Jaguar, from a product point of view, they have done a fantastic job. You take the Jaguar I-Pace. It has won every award in the automobile industry. However, they have huge exposure to certain global markets and the overall conditions in China and the trade situation within China and to some extent the rest of the world have resulted in a decline in domestic sales in China, much before than what we are seeing in India.

But the current macroeconomic scenario doesn’t look good for global businesses…


I like to take a fairly long-term view of the economy. Even in my TCS days, I never used to present 15 charts on the macroeconomy. At best, I’ll spend half a chart on macroeconomy because that is not in our control. There are so many economists who will give you 20 different interpretations.

You just have to worry about what you can do. If the growth is slowing down, then you need to see how do we still try to grow? where do you get market share? In markets where you are smaller, can you sell a little bit more? How do you control your cost structure? How do you get more optimal?

It’s doomsday and I’m not going to spend any money… we can’t take that call. You need to take the economy over a five-year horizon.You can never view it in a sixmonth, one-year horizon. Take Jaguar, for example. We can take a very tough view, saying that yes, we produce good cars but the market is so tough… so let us completely stop all capital expenditure. Some of our analysts will take that view and especially on Jaguar. But our view has been that, yes, we have to tighten the belt, we have to generate better cash because we can’t run out of cash, but at the same time, we can’t just stop investing. We have to calibrate our investment, but we have to continue to invest because the automotive world is changing, it is going electric. There is a lot of resistance to diesel. And then there are supply chain concerns due to Brexit potential impacts. Markets like China are facing headwinds, but it’ll all come back. You got to be ready when the market comes back. If you’re running a business, you need to withstand that pressure. Sometimes the pressure can be too much, especially when the market is tough, and geopolitical situation is tough, the technology situation is tough. So, I think we’re trying to find the balance … there are internal efficiency programmes running in both companies (Tata Motors and JLR).

Can you elaborate on the statement made at the Tata Motors AGM where you hinted at global alliances for JLR?

We will continue to explore. You saw the Jaguar-BMW alliance. We continue to look for such alliances … the entire automotive industry is going through a transformative time. Partnerships are required for us, partnerships are required for others. There will always be dialogues … all kinds of discussions happen.

Will you consider parting with JLR equity?

When these dialogues happen, you’re trying to get the maximum synergy. In what form and manner will these synergies be achieved, you never know until they are not achieved. We are committed to this industry, committed to building automobiles. It’s our largest in terms of revenue, the largest company, the largest cluster.

At Tata Power, the issue that continues to fester is the Mundra power project. What’s the solution?

The main issue is Mundra because the company has spent a lot of capital putting up the plant. And then our operating losses on the plant are very high — Rs 1,600-1,700 crore every year. Tata Power has to fund the loss and it has been funding the losses for four years. So Mundra has to get solved. Hopefully, we’ll get some relief but even with the relief our losses won’t get totally wiped off, but it will be significantly better.

You talk about synergies. Do you see synergy in merging Tata Elxsi with TCS or even Tata Technologies?

All these companies are doing well. If it has to happen, it will happen but it’s not a priority.

There was some talk about 29 listed companies being pruned…

We have not made that statement. All we say is that wherever possible, we need to consolidate because some of the subsidiaries are very, very small, too small. We need to find the right home (for them). What is important is that we have a portfolio of 10 clusters and which can be reduced synergistically. The other thing, which is very important, is every company in the group has to completely adopt digital and that work is on. That itself is a big transformation.

The government continues to hold a strategic stake in Tata Communications…

The one thing that we have done is we have completed the land demerger. That’s been the pain point for a very long time, for more than 15-17 years. That has been completed. Whether the government will sell its stake or not, I can’t tell.

Why are you scaling up the airline business when it is not profitable?

We had to take a call on Vistara and Air Asia. We signed up with two partners five years ago and now you’re on a highway. You have two choices: completely exit or scale up the business. There is a market and we have a business up and running. We decided we’re going to scale up. At the end of the day If you want to be in that sector, then you got to be a good, solid player. Otherwise, you lose little, little every day. We have to make it work. We’ll see what we do in the future.

Your minority investment in GMR Airports. Is it solely as an investor?

Currently, we are in as an investor. Because that’s what was available. It’s a good airport and this opportunity came. Mr GM Rao (of GMR Group) approached me, I thought, it’s a good asset. We bought a 20% stake and we’re happy with that. We don’t have to own 100% as he has been managing it well.


On Jet Airways, the Tatas were interested initially?

We evaluated it. There were a lot of pros and cons. We decided against it.

The privatisation of Air India is on the cards. Will the Tata group be interested?

Let me put it this way. We are very happy where we are. We’ll see. We don’t want to say or commit on what’s in the future because we don’t know.

On changing focus to India…

We are a global company. The global economy is changing. Indian economy is also going through one of its tough times. But from a group point of view, we need to take a fairly long-term view. India has immense potential. Hundreds of millions of Indians will experience a better quality of life. There are many things that need to be done in this country. So economic growth will be there.

There will always be economic cycles and we just have to wait through the cycles and that’s where we are today. We are also a global company. We have a strong presence in the UK and will continue to be present in the UK. We have a strong presence in America and will continue to expand our presence in America. I hope we will also continue to expand in other markets like China.

Does the overarching image of Ratan Tata in the background as chairman emeritus affect you while taking decisions?


Not really. Many people say many things about this. Let me be pretty candid. When you are managing a group like Tata Sons, every decision you take has to take into account many aspects. I have to carry my board, operating company board and if, for example, I have to take a decision which is very important, it is not that I worry what will Ratan Tata say. I will go and reach out and ask, this is what I think and seek his opinion. Because you have to respect the fact that he has seen this all. But it doesn’t mean I go and ask him for everything. If I feel it is important enough, I will go and ask.

On compensation, there is some heartburn that lateral appointees get more?

Honestly speaking, the Tata Group has a conservative culture. But we don’t have a very uniform package. That’s partly because each of these companies is in a different industry and in a different market. And most of the companies have some sort of a fixed compensation and some sort of a variable compensation and variable compensation depends on metrics. I don’t think that any of our companies are, by and large, over the top.





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