Cyrus Mistry's successor will have to fight debt (and maybe the Tatas themselves)

On Monday, Tata Sons shook the business world when it announced that it was removing Cyrus Mistry as its chairman and bringing Ratan Tata back as interim head, while a committee chooses a successor.

Mistry was appointed as the chairman of Tata Sons, the holding company of Tata Group, a $100-billion, 148-year-old business empire, four years ago. He took the reins from Ratan Tata. Mistry, from the Shapoorji Palonji group, the largest shareholder in Tata Sons, was the first person from outside the founding family to hold the post.

His ouster came as a surprise to those outside the Tata Group and several theories are doing the rounds on the reasons for the company board's decision.

Bumpy road

As Ratan Tata takes charge of Tata Sons once again, an arduous journey awaits him as the conglomerate tries to get back on its feet.

On Tuesday, there was a sharp decline in the share prices of several of their companies, including Tata Steel, Tata Consultancy Services, Tata Motors and Tata Power.

Over the last year, the Tata empire has been struggling financially as it seeks to dispose of its loss-making steel business in the United Kingdom, which it acquired by purchasing Corus Group for $12.9 billion in 2007.

The revenues of the Tata Group are not in a good shape. An analysis in The Economist in September found that “seven of the nine-largest listed Tata entities in terms of capital employed have negative economic value added, meaning that their earnings before interest and tax translate into a return below their overall cost of capital”.

The group is sitting on $38 billion in debt, which it has been trying to shed by exiting key businesses and recasting others. Revenues for Tata companies have fallen over the last four years, even as stock prices have soared despite reducing return on equity.

While Tata Sons did not give a reason for Mistry's ouster, news reports, based on inputs from officials within the company and in the industry, said that there were disagreements between him and the board over his claimed micro-management and disregard for the “core values that the group stood for”. In addition, Ratan Tata’s vision of expansion seems to have collided with Mistry’s insistence on discarding loss-making entities, such as Tata Steel UK.

A committee is supposed to decide on Mistry's replacement within four months and the new head of the company is likely to have a lot of firefighting to do – within and outside the company.

Debt control

To clear its debt, the Tata Group will have to pay off about one-third of its total market capitalisation to creditors. Mistry, on his part, had tried to turn around the performances of Tata companies and bring in new faces at the senior management level. With regard to debt, the group had taken several “significant steps towards deleveraging and better utilisation of capital” in the last few years under him, said Citigroup in an internal release to clients on Tuesday, according to the Economic Times.

However, this process of shedding debt, the report said, is likely to take a hit with Mistry's exit as the group's strategy remains uncertain right now.

“...the total debt of listed Tata companies is 7.3 times the total profit they reported in the year to March," a Bloomberg analysis said last year . "That compares with 15.6 times profit for the listed companies owned by billionaire Kumar Mangalam Birla, who runs the closest comparable conglomerate, the Aditya Birla Group.”

The group’s net profits have all but stalled, concluded an analysis by Bloomberg, which pointed out that the group’s net profit fell from Rs 421 billion in December 2014 to Rs 273 billion in December last year. “Mistry has veered too far away from his predecessor’s expansionist strategy,” the report said. "With the pace of capital expenditure down to a 12-month run rate of $2 billion versus $3.7 billion in Tata’s final year at the helm, the group runs the risk of courting irrelevance."

The group’s dependence on a few large subsidiaries is also a cause of concern. For instance, the group derives 63% of its market value from Tata Consultancy Services. Of the total market capitalisation of the Tata Group – Rs 7.45 lakh crore – about Rs 6.74 lakh crore is contributed by five major companies, including Tata Steel, Tata Power, TCS and Titan.