Shakeup at Tata Group May Leave Tata Stocks Volatile

Tata group shocked the Corporate India by sacking Cyrus Mistry and Ratan Tata emerging from his retirement to wrestle back the control of the group of companies that is the legacy of his family and bears their name. Tata Sons is the holding company of the Tata Group and this move has impacted not only the stocks of the Tata Group but also the investors.

The After Effect

Market Experts says that Cyrus Mistry’s exit could stir up a knee-jerk reaction when the bourses open on Tuesday 25th October 2016. The exposé is not proper. One takes a year to recognize the replacement, give all the reasons for why he is the best choice, then he is mentored to perfection and in a minute it is informed that he is replaced. This does not come through well. Some felt the next Chairman would face a tough time steering the group.

According to analysts, the announcement has offered a good opportunity to pick up a few good Tata stocks. The uncertainty for shareholders hikes as there would be conjecture on why this happened. However, one should keep in mind that the Tatas are a well-managed, professionally-run group with good corporate governance practices. There will be short-term volatility but this could be used as a prospect to pick up a few good Tata stocks as they are likely to clarify their stance in the near future.

Uncertainty ahead

Analysts think that it’s more the uncertainty that will be an overhang. Their announcement that Ratan Tata will only be interim Chairman for four months means that they have already shortlisted 2-3 candidates to take over, considering the time they spent finalizing on Cyrus Mistry. The change in leadership is unlikely to have any impact on their stock prices in the long term.

The nine debt climbs:

Cyrus Mystry’s reign has undoubtedly benefitted the investors, but his rule has not been encouraging for the Tata Group of companies due to the compressing Return on Equity (RoE) and the mounting group debt.

Since the commencement of 2013, the total market capitalization of the Tata group companies outperformed the market by 2%. It went up to 15.1% annually in the past three years to Rs 7.78 lakh crore as against Rs 4.43 lakh crore when Mistry become the first chairman outside the Tata family that founded the group in 1868.

Group revenue of Tata companies, a cosmic network of interests from cars to coffee, declined 4.6% last financial year to Rs 6,72,408 crore against Rs 6,58,432 crore a year ago, primarily due to global headwinds. As much as 69% of its total revenues come from overseas.

On the operation matrix, debt seems to be rising with the capital expenditure of nearly $26 billion in the last three years, whereas earnings quality from the group’s cash cows decreasing owing to higher competition and increasing headwinds.

Nine most debt-laden Tata companies, which include Tata Steel, Tata Motors and Tata Power, together saw debt mount 24% to Rs 2.39 lakh crore from Rs 1.91 lakh crore during Mistry’s period in office.

Tata Group M-Cap change:

M-Cap as on Jan 2013 (Cr.)Current M-CapCAGRTotal M-cap4,42,1357,78,00615%TCS2,47,4224,78,36118%Tata Mototrs93,0071,80,11418%Tata Steel42,55941,379-1%Titan25,47133,5187%Tata Power26,43622,624-4%Tata Comm6,92319,05229%Tata Chemical9,06014,73113%Voltas3,53413,02239%Indian Hotels5,20812,79625%Tata Global Beverages9,9449,723-1%

The Debt Picture:

Debt in FY16 (Cr.)Debt-Equity in FY13 (%)Debt-Equity in FY16 (%)Tata Motors7445015391Tata Global11822518Tata Steel86204180266Tata Power41121254225Tata Chemical8264100117Trent3912727Voltas2601611Indian Hotels4781104119Tata Coffee89710475

Unimpressed Investors:

Though most of the Tata Group stocks have outperformed since Cyrus Mistry took over as chairman of Tata Sons in December 2012, retail investors are not stimulated much. During the four years, retail investors in 16 of the 26 listed companies have reduced their stake. For example 1.27 lakh retail investors have exited from Tata Steel since December 2012, while 77,000 small shareholders sold their stake in Tata Teleservices. Indian Hotels, Voltas, Tata Chemicals, Tata Communications and TCS have witnessed the similar situation.

Not all the Tata group stocks have yielded a good return to shareholders in the past. If one stock outperform during a period, most of the others underperformed during the same period. This was the situation many times and hence retail shareholders are not so enthused on Tata group stocks.

The reaction of the Street says it all, Tata Group’s major stocks have opened on a red note- Tata motors share price slipped 0.65%, TCS went down 0.73%, Tata Steel share price tanked 2.12%, Indian Hotels decline 2.51%, Tata coffee share price slipped 2.11% and so on. But it will only be sometime before the market will recover from the shakeup. It will be interesting to see how the future course of the reigns in Tata sons impacts the stocks of Tata Group.