Ratan Tata – a hard act to follow

Listen to this article


In March, Ratan Tata, outgoing head of India’s Tata group, addressed the company’s annual meeting of senior executives for the last time. In a packed room in Mumbai’s luxurious Taj hotel, which Tata owns, the 74-year-old tycoon laid out a vision for the business he would soon hand over to his successor, Cyrus Mistry.

Tata this year became the first Indian company to reach $100bn in revenues, more than half of them abroad. But Mr Tata argued it should aim higher and increase annual sales to more than $500bn within the next decade.

It is a bold target, and one which, if achieved today, would place India’s largest company at the very pinnacle of global business, ahead even of ExxonMobil and Walmart. But as Mr Mistry takes the helm on Friday, he faces searching questions about how the goal can be achieved.

Tata is a symbol of Indian capitalism, with a rare reputation for combining fast growth and ethical conduct in a nation still bedevilled by corruption. Its departing chairman is also his country’s most revered business patriarch – making this once-in-a-generation handover one of the most watched events in India’s business history.

More than that, however, Tata has also come to embody its nation’s adventures with globalisation. Facing grinding bureaucracy and pervasive graft at home, Mr Tata took advantage of India’s economic liberalisation to expand overseas, buying big European companies including Anglo-Dutch steelmaker Corus and UK-based luxury car brand Jaguar Land Rover.

“Ratan will be fondly remembered; he has done phenomenal work, growing the group many fold,” says Pradip Shah, chairman of Mumbai-based IndAsia Fund Advisors. “But this is still a major inflection point for India, one which could change this company forever.”

The sleepy, underperforming entity he inherited from his uncle in 1991 was transformed into a global giant, with more than 100 companies operating in about 80 countries. But despite a few star divisions, its financial performance remains uneven and the new chairman faces tricky choices about what to do with the laggards.

Tata matters in other ways, too. The company is set for a second phase of global growth, although one with less emphasis on countries such as Britain and more on fast-growing emerging markets in Africa and elsewhere in Asia. But if its aversion to political dithering and palm-greasing stymies future plans in India, it will send worrying signals about the future of Asia’s third-largest economy, at a time when growth is already slowing sharply.

Tata’s plans are a crucial component for the next phase of India’s topsy-turvy growth story. But the company is also an important test case for a new type of global business organisation. A diversified conglomerate of the type now largely extinct in the industrialised world, it projects itself as equally at home in emerging and developed markets.

If this model proves successful, national champions from other developing markets may follow suit. But if Tata’s ungainly structure and disconnected businesses falter, it will raise doubts about whether companies from emerging nations can truly compete on the world stage.

The conglomerate Mr Mistry inherits is India’s most global but also one of its most peculiar. Founded by Mr Tata’s great-grandfather in 1868, it grew from a 19th-century textile business into a sprawling industrial empire. As well as steel mills and car factories, it launched India’s first airline and built its first five-star hotel.

Having taken control from his uncle in 1991, Mr Tata spent his first decade wresting control from a cadre of entrenched barons who headed its larger companies. He then prepared for the burst of international competition that followed the opening up of India’s economy. These twin efforts “saved the group from a slide into irrelevance”, as one senior executive puts it.

Today Tata’s name appears on a dizzying array of offerings, from undersea internet cables to wristwatches, outsourced software and fancy coffees, the latter via a recent tie-up with Starbucks. But it remains best known outside India for the $21bn series of foreign acquisitions that Mr Tata began in 2000, when he bought Tetley, a British teamaker. More than a dozen big deals followed – including a South Korean truck manufacturer, an Indonesian coal mine and an American chemicals group – culminating in the twin purchases of Corus and JLR. The spree revamped the group and now provides the foundation for its next $500bn growth target.

In an interview with the Financial Times this month, Mr Tata confirmed that his successor, who has kept quiet since his appointment in November last year, shares his ambitious revenue goals. “It wasn’t something that was handed to him, and he himself now feels that this is something that in fact can be achieved, if the environment doesn’t fail him,” he says.

Mr Mistry’s appointment took corporate India by surprise: few had tipped the low-profile 44-year-old son of Pallonji Mistry, a prominent construction magnate, although he had been a director at Tata since 2006.

As he contemplates the task ahead, Mr Mistry can take solace in the group’s best performers. While Tata does not release consolidated earnings, it is easy to identify the main engines of the group’s profit. Tata Consultancy Services, an information technology outsourcer, last year reported net profits of $1.9bn and makes up about half of Tata’s $90bn market capitalisation.

JLR is another dynamo, with earnings of $1.5bn over the same period. Here Tata deserves credit for investing heavily to turn the British carmaker round – although its stellar sales in China and Russia also do much to disguise problems at Tata Motors, its listless Indian parent.

Mr Mistry also has the advantage of control: his predecessor beefed up the stakes that Tata Sons, the holding company, owns in the group’s most important businesses. And while two-thirds of Tata Sons itself is owned by a series of charitable trusts, its largest individual investor fortuitously happens to be Mr Mistry’s father, who holds an 18 per cent stake.

But numerous problems loom. “He has a number of big fires to put out, and he needs to do so quickly,” says the head of one investment bank in Mumbai. The most obvious is Tata Steel Europe, as Corus is now known.

The division lost $884m last year, a rate of haemorrhage even Tata cannot bear for long. Between them, Tata’s steel and car operations also carry a net debt of $13bn, part of increased leverage across the wider group that Mr Tata says should now be reduced.

Back in India, the group’s telecoms and power divisions are also struggling. Tata Telecommunications, its mobile arm, lost $76m in the first six months of this year.

Tata Power, meanwhile, is in the midst of a spat with the government over fuel prices for its troubled “ultra mega” power station, in the state of Gujarat. This cost $3bn to build but is currently economically unviable.

Beyond these immediate problems, Mr Mistry faces a series of more profound strategic challenges about the type of company he plans to lead.

It is no secret that many smaller operations perform poorly, sitting on scarce capital while growing at a mediocre pace. Many analysts feel a cull is needed and that the group must focus only on businesses that can compete globally.

Will Mr Mistry wield the knife? Mr Tata suggests he might. “Cyrus has scope to consolidate and there is nothing to stop him doing that,” he says. “He is the kind of person who would look at divestment, or consolidation with an outside company, as something that would not be offensive to him as such. So I think you might see some of that.”

Those who have worked closely with Mr Mistry talk of his financial acumen and close attention to detail, and suggest he has already spent much of the past year examining the group’s weaker performers.

Even if a wholesale spring-clean is unlikely, such rationalisations could also help solve a few of the new chairman’s most pressing problems. Tata Telecommunications, for instance, is understood to have been in discussions about a potential tie-up with Telenor, a Norwegian mobile group that is eager to secure its own future in India. “They will be looking to become more efficient, even though Tata can still [be] quite an avuncular sort of group,” says Rashesh Shah, chief executive of Edelweiss, a Mumbai-based brokerage. “I think Cyrus is going to take quite a hard-nosed approach.”

His second challenge is where to grow. Last year Mr Tata unsuccessfully bid for ailing British telecoms group Cable & Wireless and Orient Express, a US hotels group.

Under Mr Mistry further mega-deals in the Corus mould look doubtful, partly because of weak economic conditions in the industrialised world and partly because of Tata’s leverage. Instead, the group is likely to look to emerging markets, especially in southern Africa and Asia.

But what of India itself, where Mr Tata so often found his plans frustrated in the face of slothful decision-making and capricious regulation? In public the group tends to deny that it favours foreign forays over domestic.

It now says it will expand its retail, real estate and financial services businesses over the next five years – all of which are domestic concerns even if mostly ones not heavily interlinked with the government.

“Cyrus has a construction and property background. He knows how to operate in India, and I think he’ll be more comfortable here than Mr Tata,” says Suhel Seth, an author and consultant working at the group.

Perhaps Mr Mistry’s greatest challenge, however, comes alongside such moves. In early January Tata’s senior executives will attend a party in another of the group’s Mumbai hotels to welcome their new chairman. Those gathered will seek both leadership and reassurance.

Tata is an inheritance. As Mr Mistry reshapes the group, he must demonstrate that he can deliver the same mixture of growth and probity that employees and investors expected under his predecessor.

This is no easy task. India is becoming no less corrupt. Many of the challenges Mr Mistry faces, meanwhile, invite solutions that run against the grain of Tata’s culture, which sees business in strongly social terms – and which prizes loyalty to workers, communities, and even poorly performing divisions.

“I don’t think he’ll change the soul of the group, even while he definitely will change the body,” Mr Seth says. Striking this balance may prove to be Tata’s trickiest task of all.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.