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India's trusted business house loses
sheen
By Raju Bist
MUMBAI - A
few years ago, Tata Timken Ltd, a joint venture, had its
IPO on all prominent Indian bourses. The issue met with
a thundering response and was oversubscribed an
overwhelming 4,017 times in Mumbai alone.
The
American giant, Timken Company, was one of the world's
largest manufacturers of needle roller bearings.
But not many Indians had heard of it then. The credit
for the enthusiastic response to the issue was
attributed to the strong brand equity enjoyed by the
Tata Group, the Indian joint venture partner and India's
then-largest business house. The group's 80 companies in
seven business sectors had a turnover of Rs 410 billion
(US$8.5 billion) last year.
For many decades,
the Tata name had come to symbolize trust and integrity.
Customers blindly bought Tata consumer products,
confident that they would be getting top-class quality.
Overseas partners did not think twice before signing
joint venture agreements with the Tatas. Financial
products, such as fixed deposits bearing the Tata name,
were snapped up overnight.
There is history and
nostalgia behind this devotion. Jamshedji Tata planted
the seeds of the business house when the country was
firmly in the hands of the British, and Indian
independence was a blip on the very distant horizon.
True-blooded Indians never tire of recounting the story
of how the pioneer, stopped at the entrance of a "whites
only" hotel, vowed to set up his own inn one day. The
result, Taj Mahal Hotel in Mumbai, was the precursor to
the Indian Hotels Company, one of the largest hotel
chains in Asia today.
Again, it was the Tata
Institute of Fundamental Research that helped India
launch its atomic energy program. Jamshedji Tata was
followed by J R D Tata, who built a strong reputation
for integrity even as he diversified the group into
consumer products, chemicals and heavy engineering.
Ratan Tata, the present chairman, retains the pioneering
spirit and has successfully launched India's first
locally made car, the Indica, even after the doors of
the industry were thrown open to foreign carmakers.
"This admiration for the Tatas extends to
foreign shores and there has never been a dearth of
foreigners willing to get into business tie-ups with the
Tatas," says corporate historian Feroze Bahadurji. Thus,
German engineering giant Lurgi GmbH has a long-standing
technical tie-up with Tata Sponge Iron Ltd. Tata
Honeywell Ltd is a joint venture between Honeywell Inc
USA and Tata Industries. Software giant Tata Consultancy
Services' strategic alliance partners include American
Express, General Electric, Swiss Air, Oracle, IBM and
Hewlett Packard.
Consumer goods manufacturer
Voltas International Ltd has strategic alliances with
Bahrain Electromechanical Services Co, WLL (Bahrain) and
Saudi Ensas Company Ltd (Saudi Arabia). Tata AutoComp
Systems Ltd has ventures with the likes of Johnson
Controls (US) and Toyo Radiator (Japan). Finally, Tata
Cummins Ltd is a 50-50 joint venture with Cummins Engine
Company Inc (US), to manufacture fuel-efficient,
low-emission, environment-friendly diesel engines.
Similarly, Tata Group companies have a presence
in many countries abroad. Tata AG, which promotes the
worldwide export of a wide range of Indian commodities,
finished products and non-traditional industrial items,
is headquartered at Zug, Switzerland. Representing
Indian companies in the United Kingdom is Tata Ltd. It
undertakes purchasing activities, such as the
procurement of goods and services.
Singapore-based Tata Precision Industries
focuses on precision tool-making and has been
co-promoted by the Singapore government. Tata Tea Ltd
was established to meet the demands of health-conscious
US consumers. Located in Florida, it has catered to the
tastes of the fast moving US markets for the past 15
years through its range of instant and anti-oxidant
brands of tea.
But of late, the Tata image has
taken a beating, and the Indian public, which once swore
by the Tata name, is now having second thoughts. A
series of events has shaken the long-standing confidence
in the Tata Group.
These include controversial
business decisions taken at a telecom carrier shortly
after the Tata Group bought out the Indian government's
stake in it; ongoing legal battles with chiefs of former
group companies; shoddy performances at flagship
companies and aborted attempts to get into manufacturing
detergents and floating an airline.
The most
talked-about has been the fiasco at Tata Finance Ltd
(TFL). It is a long-drawn complex affair, one that has
badly besmirched the fair name of the Tata Group. In the
process, it has also shredded the reputations and
careers of senior officers in the company.
It
all began after the Tatas uncovered big holes in TFL's
accounts. In-house investigations revealed that managing
director Dilip Pendse had authorized the transfer of
large funds to a subsidiary company which invested
heavily in the stock markets, leading to a Rs 5 billion
loss for TFL. Pendse and five other senior executives
were shown the door. Later, he was also accused of
indulging in insider trading by passing on "unpublished
price sensitive information" about the company to his
wife, Anuradha Pendse.
J E Talaulicar, a
director on the TFL board, was also charged with insider
trading. In this case, he had sold 100,000 TFL shares,
his entire holding in the company, on a single day, just
before the company's rights issue. Apart from being a
director on the board of TFL, Talaulicar also held
directorships on the boards of Tata Sons and Tata
Industries, the two premier holding companies of the
Tata Group.
Talaulicar had to move out of the
group. TFL chairman Freddie Mehta quit from the company
accepting "constructive moral responsibility".
The head honcho at TFL being asked to resign was
the latest in a series of highly publicized exits of
chieftains at Tata group companies. Earlier, Russi Mody,
the legendary head of Tata Steel, was forced to leave
after he fell out with Ratan Tata. Similarly, Ajit
Kerkar, who built Indian Hotels Company into an
international chain, was shown the door under unpleasant
circumstances. Darbari Seth, the long-time chairman of
Tata Chemicals, too, had to leave the group under a
cloud.
If the TFL crisis put the spotlight on
the problems within the group, the buyout of a quarter
of telecom carrier Videsh Sanchar Nigam Ltd (VSNL) and
its subsequent aftermath proved once again that the
Tatas continue to be bad at, as one industry observer
puts it, "managing the political environment in the
capital city of New Delhi".
No sooner was the
deal over that the Tatas got into a public spat with
Minister for Communication and Information Technology
Pramod Mahajan over, first, VSNL's decision to invest in
a Tata Group company, and second, its resistance to a
revenue-sharing agreement with the government-controlled
Bharat Sanchar Nigam Limited (BSNL). The matter has
still not been resolved and at one stage Mahajan even
threatened to pull the plug on VSNL by deciding to route
BSNL's international calls through other private
operators.
Apart from a dip in public
perception, all this ignominy has also led to some
serious business consequences. Indian financial
institutions are not willing to subscribe to a proposed
convertible debenture issue of flagship Tata
Engineering. At another company, Tata Chemicals, the
group has been trying to sell off its detergents
business, but, in the face of negative all-round
publicity, has been unable to get a correct price.
The wearing away of the once-bright sheen has
also led to some heavy hammering in Tata Group stocks,
particularly in the past six months. Over this period,
software major Tata Infotech has plummeted from Rs 235
to Rs 149 and Tata Telecom from Rs 168 to Rs 121. Tata
Power, the utility that supplies electricity to the
important business city of Mumbai, has fallen from Rs
124 to Rs 97. IT hardware supplier Tata Elxsi has seen
its share price slide from Rs 109 to Rs 84. Finally,
Tata Tea has sunk from Rs 172 to Rs 149. Clearly, the
1.5 million Indians who hold Tata shares are not too
enthused by the group's performance, as well as its
sullied image.
Investors who put the magnifying
glass to the balance sheets of group companies and took
a longer view of things were also not happy with what
they saw. "Over the last five years, the Return On
Capital Employed [ROCE , a measure of how efficiently
the group has been using its money] has fallen," says
Padmini Subramaniam, an analyst with Mahesh Rathi &
Sons. This has been true in the case of Tata Tea, Tata
Engineering, Tisco, Tata Power, Tata Chemicals and of
course, Tata Finance.
Normally reticent about
airing his views publicly, group chairman Ratan Tata
actually spoke about the group's difficult period in an
exclusive interview to a Mumbai-based finance newspaper.
"The group's position on Tata Finance is basically that
the chief executive [Pendse] was responsible, which of
course he was," he said. He agreed that the fiasco had
led to his group paying a heavy price in terms of public
image but added, "If you ask me would I do it again
[pursuing such policies in any Tata company], the answer
would be absolutely yes."
R Gopalkrishnan,
executive director, Tata Sons Ltd and the man tipped to
take over from Tata after two years, went a step further
and called a press conference where he grandly declared,
"The reputation and image of our group is being sullied
deliberately by [competitors] through use of half truths
and untruths. The Tata reputation will stand the test of
time," he went on.
"The Tata brand is very large
in value and is a respected name countrywide. It
represents assurance, reliability, a sense of
nationalism, value for money, and such other attributes
that have been built over several decades, irrespective
of the product, whether it is a wrist watch, tea, salt,
a piece of software or a car. Every large corporate has
to go through these setback periods and this group is no
exception. Even MNCs like Johnson & Johnson and
Nestle had their setback years ago when everyone wrote
them off. They have bounced back. And so will the Tata
group."
But it may not be an easy job. For the
investing public is well aware that apart from the TFL
and VSNL imbroglios, there have been other occasions
when the Tata Group has found itself in a mess. Last
year, a former secretary of Titan watches had a sexual
harassment case slapped against him.
On the
performance front, two group flagships, automobile
manufacturer Tata Engineering and steelmaker Tisco, are
doing very badly. For the financial year ending March
2002, Tata Engineering reported a Profit After Tax (PAT)
of Rs 2.2 billion as compared to Rs 2 billion last year.
Over the same period, Tisco continued to bleed, with its
PAT of negative Rs 5 billion last year being converted
into a minus Rs 537 million PAT in the latest financial
statement - a continued loss.
Attempts to
diversify into new areas have come to naught. It was the
Tata Group's cherished dream to get back into aviation,
an activity that Jamshedji Tata had pioneered, having
personally flown the first Indian flight from Karachi to
Mumbai. The company he floated, Tata Aviation, was later
taken over by the government and re-christened
Air-India. With the Indian skies once again being thrown
open to private participation, the Tatas tried their
best to launch their own airline and even roped in
Singapore Airlines as a joint venture partner.
But dogged resistance from an established
player, Jet Airways, whose promoter Naresh Goyal is
known to be close to several important politicians,
including minister Mahajan, stymied all their efforts.
In fact, observers point out that Mahajan, whose son
once worked with Jet Airways as a pilot, is a major
stumbling block in the progress of the Tatas.
With such external pressures and its group
companies no longer the darlings of the stock markets,
is there a possibility of a revival for the Tata stocks?
From analysts and fund managers, the surprising answer:
Yes.
Here are their reasons: excellent corporate
governance standards at the group; the high personal
integrity of the Tatas; lofty creditworthiness of the
companies.
So, for the time being at least, a
clean image and a history of trust seems to have saved
the day for the Tatas. But for the future, what is
needed is improved performances at their companies.
After all, there is a limit up to which one can
cash in on the fair name of a legendary business family.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication
policies.)
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