April 1, 2009 TATA

Tatas : Facing Tough Times

Tatas, the largest private corporate group in India had started the year 2008 with a
bang by spreading its wings globally with the big-ticket acquisition of iconic
British marquees Jaguar and Land Rover (JLR) for $2.3 bn. And a year ago, in the
largest ever merger of corporate India, Tata Steel, the world's 56th ranked
steelmaker then, acquired Anglo-Dutch steelmaker, Corus, the ninth largest
steelmaker in the world, for $12.1 bn. That was indeed a stupendous achievement
for corporate India as it was for the first time India Inc. had forayed into the global
arena in a big way. The deal had immediately catapulted the Tata Steel into the big
league of global steel majors, comprising the likes of Arcelor-Mittal and POSCO.

Those two big deals fetched the Tata Group the necessary global clout. But during
the second half of 2008, problems started creeping into many Tata group
companies. Tata's ordeal started when a violent political upheaval forced Ratan
Tata, the Chairman of the Tata Group, to shift the company's prestigious Nano
project from West Bengal to Gujarat. Afterwards, as the global financial meltdown
set in, its various lines of businesses soon got affected. Finally, adding insult to
injury, the terrorist attack on Taj Mahal Palace and Tower have put the Tatas on
the backfoot.

Cup of woes

The Tata Group is the largest private corporate group in India in terms of market
capitalization and revenues. Its business interests span across steel, automobiles,
information technology, communication, power, tea and hotels. The group, with its
headquarters in Mumbai, has a physical presence in more than 85 countries,
spanning across six continents; and the various companies of the group export
products and services across 80 nations.

Whatsoever, despite a successful track record, the group has been severely plagued
by a gamut of problems. Already the global meltdown has hit group businesses.
The group is finding it difficult to access credit and equity markets as a result of
the tight liquidity conditions, a depressed stock market and erosion in investors'
confidence. The year 2008 has indeed been annus horribilis for the Tatas, with
mishaps ranging from the trivial to the very serious. One of the biggest challenges
that the Tatas confronted last year was a violent political agitation in West Bengal
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over land issue, which eventually forced Tata Motors to shift their prestigious
Nano project from West Bengal to Gujarat. The small car project of Tata Motors
started hogging the limelight ever since Ratan Tata had announced that his group
would offer a car at just Rs 1,00,000 for the common Indians. Even the escalating
crude oil prices and the tightening liquidity conditions did not deter the group's
enthusiasm and so the deadline for the car was also intact. But the violent political
protests caused a relocation and delay in the project. Even before the incidence of
shifting the Nano project to Gujarat, the Tata group had been victimized by hoaxes,
though of trivial nature. Last August, a fake press report stated that Tata Steel had
frozen work on an Orissa port. The report said that Tata Steel had suspended work
on the port as it could jeopardize the lives of the Olive Ridley Turtles.

After the Nano imbroglio, the Tata Motors' $2.3 bn deal to buy JLR—completed in
June last year—has backfired. The marquee luxury car maker JLR has reportedly
approached the UK government for a £1-bn loan assistance to shore up its
financials. A business entity, acquired and managed by a company in one country,
seeking a bailout package from the government of another country, is a rarity. This
bailout plea has peeved the British taxpayers, who are questioning its rationality.
And analysts are continuing to give the thumbs down to Tata Motors' stock as the
company's ordeals seem to be never ending. Analysts are skeptical about Tata
Motors' ability to refinance the $3 bn bridge loans to finance the JLR deal with
Ford. However, some analysts are sympathetic to Tata Motors, given the fact that,
globally, the auto industry is going through a rough patch. But the abrupt and the
secretive manner in which Tata Motors' JLR Division approached the UK
government is what is disturbing the shareholders. Tata Motors had come out with
a rights issue in October last year to finance the JLR purchase. But it struggled to
finance the deal due to stock market slump and was bailed out by the founders and
the underwriters. Now it is feeling the heat of slowing demand, and it has also shut
down its commercial vehicle manufacturing plant for three days to avoid buildup
of inventory.

Again, ever since the acquisition of Corus, Tata Steel is riddled with high debt.
Now it is plagued with low prices of steel and dissipating demand. Both Tata Steel
and Corus are now mulling cost-cutting measures. In fact, Corus has already cut
production by 30% and is likely to run into losses. According to the electronic
edition of Britain's Daily Mail, Tata Steel Ltd. may merge Corus with itself in an
attempt to curb costs. The report has further added that such a merger could put
thousands of jobs at Corus in peril. Another serious concern the markets have had
about overseas deals by the Tata group is its agreements with labor unions.
According to an analyst with a foreign broker, the company has an agreement with
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Corus' unions that it will not engage in massive layoffs for a few years after the
acquisition. In fact, this agreement is what is said to have caused the unions of
Ford Motor Co.'s Jaguar-Land Rover to be comfortable with the Tata group. While
such employee-friendly environment may not hurt Tata Steel's Indian operations,
which has a competitive edge thanks to its captive resources, they would backfire
in case of a commodity business like that of Corus. Moreover with the US
companies cutting down on their IT spending or delaying outsourcing orders,
Tata's IT arm, Tata Consultancy Services (TCS), had reported muted second
quarter (July-September) earnings.

Belt-tightening

The $62.5 bn business conglomerate, which repeatedly hogged the headlines with
its big-ticket acquisitions in the past two years, will now "put on hold any plans for
acquisitions unless considered strategically critical," revealed an e-mail from Ratan
Tata to the top management of the group's 98 companies and its elite decision
making body, the Group Corporate Center. In this e-mail, Ratan Tata has also
directed managing directors and chief executive officers of all companies to
"expeditiously finalize pending loan and funding agreements, even if they involve
accepting higher interest rates", while predicting a tough 12 months ahead. "Some
of our companies with substantial foreign operations or those which have made
substantial acquisitions are already facing major problems in raising capital and
establishing lines of credit for their operations," the e-mail stated. According to a
Tata Sons spokesperson, "The senior management of the Tata Group companies
have been advised to be sensitive and conscious of the difficult financial
circumstances existing today and have been requested to be proactive to focus on
cash flow and conserve expenditure wherever prudently possible."

Hope amidst adversity

But as put by the experts, Ratan Tata has managed to sail through many adversities
successfully and proved his mettle in a tough marketplace. His rise to the topmost
position of the group was marked by bitter fights between him and some well-
entrenched senior CEOs in the group eager to protect their own turf. Overcoming
the initial opposition, he then steadfastly transformed the group into one
meaningful conglomerate. However, in recent times, the Group has been battered
by a gamut of problems. Declining consumer demand, problems in integrating
global assets, inadequate funds, and now global terrorism have made the life of
Ratan Tata tougher. However, if there is one man who can steer the Tata ship
through this rough weather, it is only Ratan Tata. As industry observers say, the

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Tata Group will surely rebound. It has great leadership with a steely spirit at the
top and dedicated human resources across all levels of the workforce. And this
became increasingly apparent during the recent terrorist attack, where the Taj staff
worked altruistically to save and comfort the guests. Same kind of dedication and
efforts by the Tata Group are likely to rescue the Tatas this time too.

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