The Cyrus Mistry Scorecard: Focus on consolidation and debt reduction

Cyrus Mistry
Cyrus Mistry’s tenure at Bombay House was more about consolidation than firing on all cylinders. He inherited a global business empire that grew rapidly under his predecessor, Ratan Tata, through a series of outbound mergers and acquisitions. The growth was largely funded through debt and underwritten by cash flows from Tata Consultancy Services.

Mistry tried to consolidate group finances and stayed away from big-ticket acquisitions and large marquee projects. Despite his apparent financial conservatism, the Tata group did better than the rest of corporate India (BSE 500 companies) during the period.

Since Mistry took over as chairman in December 2012, the combined revenue of 18 listed Tata companies grew at a compounded annual rate (CAGR) of 8.7 per cent, better than the 6.2 per cent growth recorded by BSE 500 companies, excluding government-owned firms.

During the period, the Tata group’s combined operating and net profit grew at a CAGR of 14.5 per cent and 27.9 per cent, respectively, much faster than the BSE 500 companies. (See table)

The group’s investment in fixed assets grew at a CAGR of 10.5 per cent from Rs 2.57 lakh crore at the end of 2012-13 to Rs 3.47 lakh crore at the end of 2015-16. In comparison, the group’s assets had grown at a CAGR of 16.2 per cent during the five years ending 2012-13.

Unlike the previous spell, the Tata group’s growth under Mistry was largely funded through internal accruals. The group’s net debt (gross debt net of cash and equivalents) has remained at Rs 1.38 lakh crore since 2012-13, while the combined net worth of the group is up nearly 60 per cent, growing at a CAGR of 13.5 per cent.

In comparison, the group net debt grew at a CAGR of 13.6 per cent during the last five years of Ratan Tata’s tenure, while the net worth went up by a CAGR of 12.2 per cent.

The result has been a steady deleveraging of the group’s balance sheet. The combined net debt to equity for the group declined to a nine-year low of 0.73x in 2015-16. At its peak in 2009-10, the leverage ratio was 1.3x. This is largely due to the growing cash pile of TCS and Tata Motors and a slowdown in group capital expenditure. The Tata group’s fixed capital grew only 8 per cent last year.

This analysis covers the top 18 Tata group companies but excludes their listed subsidiaries.

TCS accounted for nearly half of the group’s combined profit before interest and tax in 2015-16, and nearly 70 per cent of the group companies’ combined net profit.

At 15 per cent, the Tatas have one of the highest returns on capital employed among the country’s top family-owned business groups. Excluding TCS, the group’s return on capital employed drops to 8.7 per cent, only 15 basis points higher than the previous low of 8.56 per cent during 2012-13 and just a notch above the group’s average interest cost.

Tata group companies had an interest cost of 6.3 per cent on average in 2015-16 based on their average gross debt and interest expenses during the year.

The group’s capital guzzlers such as Tata Steel, Tata Power, Tata Chemicals, Indian Hotels and telecom ventures continue to earn sub-par returns on their capital, making Tata Sons increasingly dependent on TCS.

Under Mistry, Tata companies kept pace with the broader market on the bourses, but the group underperformed rest of the private sector peers. The Tata group’s market capitalisation has grown at a CAGR of 14.8 per cent during the three-year ending in March this year, in line with the 14.3 per cent CAGR growth in the combined market cap of BSE 500 companies. In comparison, the combined market cap of non-Tata, non-government companies grew at a CAGR of 18.8 per cent during the period.