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Business Bottomline: Ta Ta, Mistry!

Business If you thought that the Tatas and Pallonjis were brothers in arms, you’ve got it all wrong. The entry of Shapoorji Pallonji family into Tata Sons was more happenstance. Writings by several who have reported on this over the years seem to suggest that Shapoorji Pallonji group came to acquire its present 18.37% interest in Tata Sons following the acquisition of some shares from a Tata group creditor—the Dinshaw family—and a chunk from the youngest brother of JRD Tata, Dorab, who sold out in a fit of rage.In fact, reports suggest that JRD Tata was never quite comfortable having an outsider on the board of the family business. Shapoorji Pallonji, however, seemingly reached a cordial arrangement by not interfering or challenging any decisions by the board, and strengthening relations with an inter-family marriage—Noel Tata married Aloo Mistry, the daughter of Pallonji Mistry.So, if a separation of Tatas and Mistrys does go through in 2020, it would put an end to what might have been 90 years of unease on the Tata Sons board. And it would decisively end the prospects of any future interference in the affairs of Tata group by the Mistrys. That, for one, will be a big positive for shareholders, as there must never be two aspiring captains for a ship: it results in a rocky boat.WHAT’S THE BIG DEAL?It isn’t quite clear whether the expression by Tatas during proceedings in court that they would be willing to buy out the Mistrys’ stake in Tata Sons was just an impulse exclamation or a clear indication of intent. My hunch is, that such statements are usually not made without some thinking. And if that is so, one expects several minds in the group would have already worked out and discussed various options and weighed the implications well before the Mistrys announced they would take the exit door.Some of the popular options being mentioned are Tatas finding long-term institutional investors to step in and buy out the Mistrys (because there are certain complications in Tata Trusts or its companies doing so); the group offering shares or control in some Tata companies as consideration; selling of stake in the group’s cash machine, Tata Consultancy Services (TCS); pledging shares of the IT services major. Speculation is rife.It may well be one of these or none of these. Given that the group has had long experience in structuring large transactions, you can’t rule out structured deals with buyback or put options that are less disruptive and give the group time to explore alternatives. You can now let your imagination run wilder.One touted option, pledge of shares, I expect should not go through, as rough math would indicate it would build stress on the finances. The other of selling a little over 16% of TCS shares can be a clean, low disruption alternative. Given the optimism around the future prospects of IT services post-COVID and the high liquidity in the markets, such an offer could well sail through. Besides, the concerns expressed around the big hit to Tata Sons’ cash flows as a result of such a move, and it crimping group growth prospects et al, I think are a little overdone.NOT SO STRAPPED FOR CASHOne doesn’t know if the group’s single-minded, well-articulated focus on deleveraging and generating positive free cash flows across businesses, repeated on several occasions by Tata Sons, Chairman, N Chandrasekaran, has any connection whatsoever with anticipated developments on the Tata-Mistry front, but it does put a cap on the capital needs of the group. In fact, it is rare to see such a clear focus in a large group across businesses and is what makes me bullish.Key businesses of the group, Tata Motors, Tata Steel and Tata Power, which had been the cause of some concern on the leverage front, are today all treading a path towards Atmanirbharta. While Tata Power has already seen some fund infusion by the group and its InvIT and asset monetization plans are on track, Tata Steel has clearly put its foot down on infusing more capital in the European operations, in a game of hardball with the UK government. In fact, the company’s helmsman, TV Narendran, has indicated clearly that he won’t hesitate to take tough decisions on European operations.As far as Tata Motors goes, while COVID has disrupted its recovery trajectory, the company is on record that it expects to turn cash positive. I share an extract from a message by CEO, Guenter Butschek, in the annual report: “We are building a profitable roadmap by reducing the break-evens, improving cash generation and deleveraging the business. A cash improvement programme of Rs 6,000 crore (including a cost savings programme of Rs 1,500 crore) has been called out. Our refreshed BSVI product portfolio with customised offerings and enhanced customer experience will help us improve our market share. We expect to end FY21 with positive free cash flows.”Add to this Tata Motors’ plan to rope in a strategic partner in its passenger vehicle business, which has been spun off, and things start looking so much better.
THE FREE CASH & DEBT PICTURE
Company Name
Free Cash Flow
Total Debt
Debt/ Equity
Tata Chemicals Ltd.
6171
4
0.00
Tata Communications Ltd.
-103
546
0.07
Tata Consultancy Services Ltd.
28294
0
0.00
Tata Consumer Products Ltd.
572
35
0.00
Tata Motors Ltd.
-10384
25445
1.45
Tata Steel Ltd.
4410
41423
0.54
Indian Hotels Company Ltd.
297
1943
0.42
Titan Company Ltd.
-660
2133
0.31
Trent Ltd.
128
300
0.12
Voltas Ltd.
356
88
0.02
Total
29081
71918

Note: Figures in Rs cr for FY20So, while some businesses across the group may continue to need support from Tata Sons’ their needs may not be as large as some might anticipate. Besides, as more businesses turn profitable and generate free cash, their ability to contribute to Tata Sons’ dividend income pool will grow.THE DIVIDENDS WILL STILL COMEEven if Tatas decide to opt for divestment of stake in TCS to meet the buyout cash needs, it is not as if the dividends will just vanish. At present, Tata Sons owns 72.02% in TCS and to raise anywhere near Rs 1.5 lakh crore—the number bandied about as a likely valuation of the Mistry’s stake—it may need to divest a little over 16%, leaving it with a tad over 55% in the company. And while this will impact the quantum of dividend payout, Tata Sons would still get about Rs 21,000 crore a year, if we go by the last fiscal’s payout. But if the business is going to get better with large transformation deals coming the company’s way, revenue and profit growth could accelerate, with costs too being rationalized, post-COVID. This could enhance the company’s ability to pay higher dividends.
TCS DIVIDEND PAYOUTS AND RECEIPTS BY TATA SONS
FY
Dividend / Share (Rs)
Dividend Paid (incl Tax)
Tata Sons Stake (%)
Dividend to Tata Sons
At 55.6%Stake
202003
73.0
-37634.00
72.02
-27104
-20925
201903
30.0
-11424.00
72.02
-8228
-6352
201803
50.0
-10726.00
71.89
-7711
-5964
201703
47.0
-9162.00
73.26
-6712
-5094
201603
43.5
-8029.00
73.26
-5882
-4464
So, the shortfalls being anticipated may not actually be that large. In fact, Tata Sons hasn’t always been claiming its full share even in the past. In 2019, for instance, before the tax regime changed to make buybacks less attractive, Tata Sons only participated to the extent of about 65% in the Rs 16,000 crore share repurchase programme (of 7.6 crore shares at Rs 2100 per share). But if its only dividends from here on, Tata Sons will receive cash in-line with its holding.VALUATION IS THE CRUXWhile Tatas are completely tight-lipped on Mistry’s proposal to exit, even as the world speculates on the contours of a deal, what seems at the crux of such a transaction, we learn, is the valuation. While one way is to look at the market capitalization and stakes of Tata Sons in the listed companies and look at the sum of such interest, of course adjusting for taxes that will need to be paid on the proceeds from the sale and further on the payout to Mistrys, given the holding company structure, there are also other assets like the brand value that may need to be considered. To take an example, BrandFinance valued the Tata brand at $20 billion. So there are other aspects too, that will need to be weighed. Besides, there was about Rs 30,500 crore of net debt on the Tata Sons’ balance sheet—as per an ICRA rating note last year—that will need to be accounted for.
BIG BRAND VALUES
TATA – $20 BILLION
RELIANCE – $7.9 BILLION
SBI – $6.4 BILLION
HDFC BANK – $5.9 BILLION
Source: BrandFinance India 100 2020  But more importantly, we need to appreciate the bargaining positions under the current circumstances, and a likely weighing in on the subject by the court. The Mistrys clearly need the liquidity quick, but the Tatas have no reason to rush. What’s more the Articles of Association, we understand from close quarters, limits the options for Mistrys to exit—they can’t just sell to anyone they wish to, Tatas need to decide on who can buy. And no one can dictate to a prospective buyer what something is worth—remember beauty lies in the eyes of the beholder and there are several ways of arriving at different valuations for the same business. So, who is buying and what that buyer is willing to pay will become an important consideration.A LEGACY CALLINGBeyond a possible transaction, what a possible exit of the Mistrys does offer the Tata Sons’ Chairman Emeritus, Ratan N Tata, is an opportunity to put in place an unquestionable governance structure of the highest standards, that business groups across the world can look to emulate. And what can be his legacy? An important piece of this should be the future governance and control of the Dorabji and Sir Ratan Tata Trusts that own ~50% of Tata Sons.While Tata Sons already has N Chandrasekaran, a professional and career Tata hand, as its Chairperson and a line-up of eminent business leaders and executives on its board, transparency in the equation with the Tata Trusts will only cement the governance perception of the group.
THE TATA SONS’ BOARD
Chairman Emeritus, Ratan N Tata
N Chandrasekaran, Executive Chairman
Farida Khambata, Director
Venu Srinivasan, Director
Ajay Piramal, Director
Dr Ralf Speth, Director
Bhaskar Bhat, Director
Harish Manwani, Director
Saurabh Agrawal, Director
KEEPING THE FAITHTo sum up, while the proposed exit of Mistrys from Tata Sons has caused some consternation around the large transaction size and how it could be concluded, if it is done in the least disruptive manner, there’s more to gain than lose.The exit of Mistrys opens up an opportunity to address all governance issues, while also allowing for all energies to be directed towards making each business more sustainable. A single-minded focus on increasing free-cash flows, without unnecessary ownership distractions, should bode well for investors.

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