The stage is set, but will Ratan Tata’s successor live up to expectations?

Cyrus Mistry, anointed successor to Ratan Tata, the chairman of the US$83.3 billion Tata group, is best known as the son of construction tycoon Pallonji Mistry, the largest individual shareholder in Tata Sons, the group’s holding company, with an 18% stake. Except for those at Bombay House in Mumbai, Tata’s headquarters, Mistry’s appointment came as a surprise.

Mistry, 43, is only the second non-Tata (after Nowroji Saklatwala) and will be one of the youngest to spearhead the sprawling conglomerate with interests that include steel, hospitality, power, telecoms and motor vehicles.

Mistry studied civil engineering at London’s Imperial College and management at London Business School before joining his family’s construction business. He replaced his father on Tata Sons’ board in 2006 and he will have a year as Ratan Tata’s apprentice, shadowing the chairman and learning the tricks of the trade, before Tata hangs up his boots in December 2012. But getting up to speed is not going to be easy and observers believe he will have a tough time matching Tata’s successful track record.

Changing of the guard: Ratan Tata has a year to groom his protégé before handing over his empire in December 2012.
Changing of the guard: Ratan Tata has a year to groom his protégé before handing over his empire in December 2012.

A 20-year legacy

By shedding old businesses, launching into sectors such as telecommunications, retail and real estate, taking the group global and even building India’s first indigenous car, the Indica, Ratan Tata radically remodelled the Tata group.

His acquisitions too have enhanced the group’s portfolio. In 2000, Tata Tea bought Tetley Tea, maker of the traditional English cuppa. He splurged on Anglo-Dutch steelmaker Corus in 2007 and British marquee brands Jaguar and Land Rover in 2008. In 2009 he launched what was touted as the world’s cheapest car – the Nano.

Today the Tata group is a multinational company with over 100 operating companies across 80 countries. In the year that ended 31 March, its global revenues totalled US$48 billion, or 58% of turnover. The group turnover was US$5.8 billion with negligible overseas revenue when Ratan Tata took over as chairman in 1991, at the age of 54.

“Under Ratan Tata’s leadership, the group became more streamlined, more global and highly competent in desirable skills such as branding and marketing,” says Gita Piramal, a business historian who has watched the group closely. These changes, she adds, “took place even as Tata held onto traditional values and embedded them even deeper into the old and new companies’ DNA.”

Mixed inheritance

Despite the group’s huge business strides, Mistry will face a lineup of challenges. Observers say his key task will be to develop the building blocks that his predecessor assembled.

“The challenges that Cyrus will face won’t be any different from what Ratan is facing,” says Suresh Talwar, a partner at Mumbai law firm Talwar Thakore & Associates. “Remember the role of Ratan and Cyrus going forward is advisory and not operational.”

Mistry’s appointment comes at a time when global and domestic issues have led Indian business houses through a tumultuous patch. As the flow of incoming foreign funds this fiscal year has fallen from US$1.44 billion in April to US$616 million in October, investors have begun to doubt the robustness of the India growth story.

Mistry must also tend to some of Tata’s ailing businesses. “Cyrus takes over a large and complex group, and I’m sure he will receive advice to concentrate on the big group companies,” says Deepak Parekh, chairman of HDFC Bank, who has had business dealings with the Mistrys for over two decades.

Adds Piramal, “While huge strides have been made in these areas, much is left to be done by Tata’s successor.”

Financial setbacks

One key task for Mistry will be to generate more from each of Tata’s companies. Many of the companies’ core businesses are grappling with generic economic issues of falling demand and profitability both at home and overseas. And in some cases, a huge debt burden.

Mistry will have to examine the acquisition financing in many of these companies, and find ways to invest more in them, say analysts. In the current scenario, borrowing is expensive as the Reserve Bank of India (RBI) has been driving up interest rates to contain inflation. The rupee has tumbled to a record low against the greenback, putting pressure on imports.

The equity markets too have dived 17% since April, more than other Asian markets. Analysts attribute the market volatility to corruption scandals in the government and perceptions of inertia in decision making. This has dented Indian stocks including Tata’s crown jewels. In the past six months, Tata Motors shares slid 29%, Tata Steel 38%, Tata Power 30% and Tata Consultancy Services (TCS) is down 7.5%.

Mistry will have the capable and strong counsel of Ratan Tata for a year, but he still has to learn to steer the group through the turbulence. TCS, Tata Steel, Tata Motors, Tata Power and other group companies have competent and young management teams in place, but they are facing economic headwinds both at home and globally. “Mistry will have to get more out of people,” says Parekh at HDFC.

TCS, India’s largest IT services company, in which Tata Sons holds a 74% stake, has been a consistently strong performer. The company contributes 10% of the group’s revenues and 34% of its profits. As upstarts nibble at the outsourcing pie, Mistry will have to ensure that TCS remains at the top of the IT and business process outsourcing (BPO) heap, say analysts. Over the years, TCS has been extending its geographical reach. But with stiff competition the company will have to hold on to existing clients and enter new sectors and destinations.

A new face: Cyrus Mistry will be only the second non-Tata name to head the Tata empire.
A new face: Cyrus Mistry will be only the second non-Tata name to head the Tata empire.

The US and Europe may be the epicentres of the current global economic slowdown, but India is feeling the tremors as its domestic IT sector derives nearly 60% of its revenues from US-based clients. NASSCOM, the industry association for the IT-BPO sector, has been urging companies to explore new destinations and reduce their dependence on Western markets because of uncertainties in the global market and currency volatility at home, which are impacting earnings.

TCS’s growth and deals like the recent US$2.2 billion contract from British financial services company Friends Life will come in handy, but Mistry must find avenues to further increase revenue growth, say market experts.

The promoter stake in Tata Steel, the world’s eighth-largest steel maker, is 31%. The company accounts for 31.3% of the group’s revenue and 24.5% of profits. Tata Steel, however, has a huge debt burden of US$13 billion, most of which was slapped on its books after the US$12 billion acquisition of Corus. Added to this, the high price of raw materials, weak demand and a decline in global steel prices are all taking a toll on Tata Steel’s European operations.

In India, things are equally sensitive. There is poor demand for steel with the auto sector slowing and infrastructure activity almost at a halt. Reducing the debt burden and pushing ahead with delayed greenfield projects are critical for the new head of the group, say analysts.

Another group company, Tata Motors, which accounts for 32% of the group’s revenues and 34% of profits, has to confront a sluggish market. Indian auto sales fell 16% in July, the first drop in three years, magnifying concerns that the economy is slowing. Sales slumped on the back of higher fuel prices and the RBI’s anti-inflationary measures to curb consumer spending.

In the September quarter, Tata Motors’ car sales were down 28%, while Jaguar Land Rover contributed 59% of the consolidated top line revenue and 76% of profits. Tata Motors’ commercial vehicles are doing well but Nano sales have been disappointing. To boost sales, the Nano has recently been driven into Sri Lanka as a taxi.

The overcrowded telecom sector will be another challenge for Mistry. The sector, has been embroiled in corruption scandals and is reeling under high costs, stagnating revenues and declining profits. Tata Communications, once the giant in international long distance telephony, is struggling to become profitable again. While it is making foreign markets more of a priority, funding problems and land sale disputes with the government have stalled expansion plans.

Meanwhile,Tata Teleservices is battling it out in the ring with over half a dozen players. Tariff wars and regulatory issues are big hurdles. The company recently restructured to bring its CDMA and GSM technology services under one roof to cut costs and drive efficiencies. “Mistry’s task will be to turn around our telecom operations in future,” says a Tata manager.

Structural challenge

But Mistry will need to do more than fix glitches in Tata’s existing businesses. He will also have to grab opportunities. Arun Maira, a member of India’s Planning Commission, the erstwhile head of Boston Consulting Group and an alumnus of Tata Administrative Services, believes that taking the group forward into new areas may not be a cakewalk. “Managing the financial portfolio of Tata Sons, with continuing expansion of the companies in the group into new areas … will remain a challenge as it has been in the past few years,” he says.

This is partly because the Tata group structure is different from other global conglomerates where chief executives make decisions. Tata Sons is a holding company that guides and oversees operating companies run by professionals. Tata Sons has a stake in all the major group companies, the largest being 74% in TCS. There are also cross-holdings. Apart from Tata Sons, Tata Steel too holds a 5.5% stake in Tata Motors. The group chairman is more than a chief executive as he is also answerable to the charitable Tata trusts that own 66% of the shares in Tata Sons.

Not so daunting?

The general consensus is that Mistry is too young and lacks the international experience required to appreciate the complexities associated with managing Tata’s empire. According to Talwar, there is no reason why Mistry should be overwhelmed since most of the Tata group companies are listed entities, and each has a board with a managing director and a team of executives. Tata “can look to the non-executive board for guidance and support. In that sense Cyrus will play a limited role in the day-to-day operations of each company. It won’t be burdensome,” he asserts.

Saugata Ray, dean of the Indian Institute of Management Calcutta, says it will be interesting to see Mistry take the Tata group and make it truly global. “It is one of the best groups to take up this challenge,” says Ray. “For that they will need diversity of management.”

Ray points out that the safeguarding of Indian values and the Tata ethos are the group’s unique selling proposition. “It’s a different brand of management – more participatory and shareholder friendly. That will give it a distinct advantage in the global marketplace,” he adds.

Moreover, Mistry is young, and according to Parekh, adaptable – attributes for a long innings. “It sure is a happy ending to a long awaited issue.”