Profit at centre of Chandra’s orbit

Tata Sons chairman wants group companies to show higher return on equity

As Tata Sons Chairman N Chandrasekaran completes 100 days in office on Wednesday, he would want return on equity to be the talking point across boardrooms and offices of the group companies, according to sources. Chandra, as he’s popularly known, is learnt to have told chief executive officers (CEOs) of the group companies that they must focus on profitability without any delay.

The former CEO at Tata Consultancy Services (TCS), is used to leadership and that would help him bring superior financial performance across the group companies, according to a source. “The aggressive push for profitability would be the biggest change within the group, when compared with the last 25 years or more at the Tatas,” he said. CEOs would now have to act at a faster pace to show higher return on equity, he added.

“There’s no shortcut to profitability,” said another source, adding, telecom can never be profitable and must be shut down. Hotels have to quickly monetise dead assets and unprofitable businesses like Croma and Tata Sky need to be sold, he added. But the biggest challenge in India was turning around Tata Motors, according to the source.

The road to profitability was not going to be easy, analysts agreed.

In fact, Tata group financial dependence on TCS and Tata Motors Jaguar Land Rover (JLR) division increased further during the 2016-17 financial year. Excluding TCS and Tata Motors, the group companies reported a net loss of ~1,200 crore in FY17, up from a net loss of ~395 crore in FY16 (ex-TCS & Tata Motors).

In all, five Tata group companies reported net losses in FY17, an improvement from seven loss making companies in FY17. However, the combined losses (of loss makers) was much higher in FY17 than a year ago. The combined net profit of the group’s key 18 listed companies was down 6.3 per cent in FY17 to ~32,714 crore against ~34,921 crore a year ago. Decline was attributed to lower profits by Tata Motors and higher losses reported by Tata Motors and Tata Tele (Maharashtra) (TTML). The group’s combined return on equity or net worth (RoNW) declined to 15.2 per cent in FY17 from 16.5 per cent in FY16.

But, industry watchers are already trying to see signs of change under Chandra. For instance, there was no chief financial officer (CFO) at Tata Sons for four years. Earlier this month, well-known investment banker Saurabh Agrawal was appointed group CFO. He’s coming from the Aditya Birla group. Recently, Tata Sons also named Shuva Mandal as group general counsel. Mandal is an expert in mergers and acquisition (M&A) and he’s coming from Shardul Amarchand Mangaldas. Also, the first major appointment at Tata Sons under Chandra was that of prominent investment banker Ankur Verma, who joined the group from Bank of America Merrill Lynch. All these appointments, with a clear emphasis on finance, indicate a certain direction that the group would like to go from now on, a person in the know of things said. The Tata group did not comment.

While Chandra, after taking over as the chairman on February 21, has been building his own team, changes have begun in group companies as well. Last week, Rakesh Sarna, CEO of Indian Hotels Company that operates the Taj chain, stepped down. Sarna, who was appointed by former Tata Sons chairman Cyrus Mistry, was facing sexual harassment allegations. But he resigned citing personal reasons. Some leadership changes in other group companies were possible, too, sources indicated.

Besides encouraging group companies to focus on business performance and industry leadership, Chandra is believed to have conveyed to them that ethics that the Tata group was associated with should not be compromised.

As for business performance, even in the case of Tata Motors, profits largely came from its JLR division as the company reported a net loss of ~2,480 crore at its standalone business that largely comprise its domestic commercial vehicle and passenger car division. The group continues to face financial headwinds from Tata Steel European business and their telecom venture. Tata Steel consolidated losses widened in FY17 despite higher profitability from its domestic business. Similarly, TTML reported a record loss of ~2,356 crore last fiscal. The group witnessed some deleveraging in FY17 with two per cent year-onyear decline in the combined gross debt of the listed companies. The improvement was largely driven by Indian Hotels and Tata Chemicals. Excluding TCS and Tata Motors, however, the group gross leverage ratio or debt to equity ratio was at an unhealthy 2.2x in FY17, though an improvement from 2.6x in FY16. Going forward, the group fortunes would depend on the efforts to contain losses at Tata Steel Europe and their telecom venture.