Warm-Up Over, N Chandrasekaran’s Marathon Begins...
N Chandrasekaran has his job cut out at 149-year old Tata Sons.
N Chandrasekaran’s elevation as chairman was seen as an attempt by Tata Sons Ltd. to bring back credibility after the company’s image-bruising boardroom battle with his predecessor Cyrus Mistry.
Yet, it’s the Mistry’s letter to Tata Sons board after his removal that has served as a “charter” for Chandrasekaran, Nawshir Mirza, independent director at Tata Power Company Ltd., told BloombergQuint. Mistry had warned of writeoffs of Rs 1.18 lakh crore from what he called “legacy hotspots”, referring to debt-laden and non-performing companies within the group, besides the $1.17-billion dispute with Japan’s NTT DoCoMo.
Hundred days into the job, Chandra, as he is called, has started addressing some of these “hotspots”. The DoCoMo dispute is out of the way with the high court paving the way of payment. He is now working on a cluster model to restructure the $103-billion Tata Group. Barring the five companies where he is the non-executive chairman, Chandra plans to divide the rest into six clusters.
Each cluster will have its own head who will be responsible for the governance and financial performance of the companies in that vertical. Cluster leaders are expected to be named in the next few weeks, a Tata Sons insider familiar with the development told BloombergQuint requesting anonymity.
The cluster approach will create a second rung of leadership that will help streamline the management of the group that has over 100 companies spanning businesses as diverse as software services to steel.
“Chandra will have to create the management bandwidth to look at such a large number of companies, at least the major ones and their restructuring, internal restructuring or debt rejig,” said Kavil Ramachandran, clinical professor and executive director at Thomas Schmidheiny Centre for Family Enterprise at Indian School of Business.
The TCS Experience
The Tata Sons chairman had successfully deployed the cluster model at $17.6-billion Tata Consultancy Services Ltd., the group’s largest company. He had divided the IT major into key verticals like retail, manufacturing, banking and financial services, each of which were serviced by its business process outsourcing and digital divisions. The digital division in fact grew into a $3-billion revenue stream by 2016-17.
Replicating the structure at the holding company makes sense, according to Amit Tandon, co-founder and managing director at proxy firm Institutional Investors Advisory Services. “You always talk of a salt-to-software group, but all these businesses need to have synergies,” he said.
Some of them are sucking out cash; and if not cash, then management time. Do they need them or do they need to sell some businesses?Amit Tandon, Co-Founder and Managing Director, Institutional Investors Advisory Services
Group Synergies
The Tata Group insider quoted above cited the example of Tata Motors to explain how Chandra wants to drive growth through synergies. Nearly 80 percent of the Tata Motors’ vehicles are financed, but the share of group’s finance arm, Tata Capital Ltd., is hardly 10 percent of these sales, he said. The cluster approach will ensure that group companies collaborate to boost profitability.
Core Team
Chandra has started building a core team of dealmakers and restructuring experts to help him reorganise the group.
He hired two investment bankers, Ankur Verma from Bank of America-Merril Lynch and Nipun Aggarwal of Standard Chartered Bank, besides Suprakash Mukhopadhyay, the former global treasury head of TCS. All three were appointed to the chairman’s office. He also brought in Saurabh Agarwal as the chief financial officer at Tata Sons. The former Aditya Birla Group executive is said to be the man behind the Vodafone-Idea merger.
Tata Sons also named Shuva Mandal, one of India’s top corporate lawyers who advised Tata in the dispute with Mistry, as the group general counsel.
Moving The Needle
Outside the clusters will be five group companies TCS, Tata Steel Ltd., Tata Motors Ltd., Indian Hotels Corporation Ltd., and Tata Power Ltd where Chandra is the non-executive chairman. TCS contributes the biggest share to Tata Sons’ dividend earnings, and Chandra will have to ensure that it keeps growing at a steady pace.
The biggest challenge, however, will be paring debt at Tata Steel, Tata Power, Indian Hotels, and Tata Motors, along with Tata Teleservices Ltd. The five companies together accounted for a debt of over Rs 2 lakh crore at the end of March 2016.
The debt burden is high and they will have to find ways to reduce it, said Ramachandran. But at the same time, profitability of the companies needs to be taken care of, he said.
A turnaround at these companies will indicate how effective Chandra has been in driving the change at the group.
These are the “hotspots” that need resolution, said Tandon. “There has been some progress. There were issues with respect to return on capital. If you remove TCS, returns are relatively low and therefore each of these companies needs to be far more profitable than it is now.”
Tata Trusts
As chairman of Tata Sons, Chandra will be accountable to the principal shareholders – Tata Trusts, which owns and controls two-thirds of the company. One of biggest causes of differences between Mistry and Tata Sons was the payment of dividend to the Trusts.
In 2015-16, Tata Trusts received a total dividend of Rs 1,312.2 crore compared to Rs 565.8 crore in the previous year. The jump was, however, primarily due to an interim dividend paid by Tata Sons in the last week of March 2016. This income is expected to normalise in 2016-17. Currently, Tata Sons receives over 90 percent of its income from TCS dividends.
Chandra’s objective would be to improve profitability of group companies so the Trusts are not dependent on TCS alone for dividends, said Ramachandran.
To push all these changes at the group, Chandra does not have Mistry’s advantage of an inside view of the group holding company before being named the chairman. The ousted head of Tata Sons was on the board of Tata Sons for five years before he was elevated, and then was mentored by his predecessor Ratan Tata for a year before taking over at the helm of India’s largest group. And yet, he found himself at odds with the Trusts.
“Chandra will have to adapt and grow from a certain type of role in which he excelled and made TCS such a great company to a very different role, that of a group chairman. And the main challenge would be Tata Group’s reputation and ethics,” said Tata Power’s Mirza.