News: Tatas to up stakes more aggressively

(DNA 10/07/2006) Mumbai - The Tatas are understood to be working on a multi-pronged strategy to start pushing up their stakeholdings in key group companies.

While preferential issues to Tata Sons and other group companies will be prime route, mergers with group companies and stockmarket purchases are two other options being weighed within the group.

The group’s stake currently varies from a low 25% in Titan to nearly 84% in Tata Consultancy Services, but key flagship companies such as Tata Steel, Tata Motors, Tata Power, Tata Chemicals, Tata Tea and Indian Hotels are in the 27-34% range - the upper end of which is the minimum threshold the group seeks to achieve in the medium term.

Last week, the Tata Steel board approved a plan to issue preferential shares and warrants to the promoters that will allow the group to raise its stake in the company from 27% to 34% over the next one year for a total consideration of around Rs 2,800 crore, depending on market conditions. That’s almost equal to the Rs 2,978 crore the group has spent over the last 15 years to bring holdings in all flagship companies above the crucial 26% mark.

The group recently raised its stake in telecom flagship VSNL by just under 2% to 46% through market purchases, and there is a strong possibility of the Tatas exercising their call option to buy out the government’s balance 26% stake this year.

In Tata Motors, the group hiked its holding by 3% after it merged Tata Finance with it. More group mergers are in the offing, especially in the telecom space.But while the increase in stakeholding will be achieved through multiple routes, one thing is certain: it will not be cheap.

The group’s listed companies are valued collectively at Rs 1,97,000 crore. TCS, VSNL and some smaller companies - where the group shareholding is already above or near the 51% watermark - account for around Rs 1,00,000 crore.

Every 1% increase in stake by the Tatas in the remaining companies will cost them around Rs 1,000 crore.

Finding the cash will not be easy despite the fact that TCS is a cash cow which can be tapped occasionally for funds. That’s because the group has huge expansion plans.

According to an internal management presentation made last April, over the next five years the group, which has combined revenues of Rs 97,200 crore currently, aims to more than double its turnover to Rs 2,25,000 crore (US $ 50 billion).

It proposes to achieve this by bolstering its presence in steel, automobiles and hotels. The group’s goals include securing a leadership position in the domestic communications industry and spurring its power venture to secure pole position. All these businesses - steel, power, and telecoms - are capital-intensive cash guzzlers.

In the information technology services segment, TCS aims to ram into the top 10 club in the world.

“For us as a group, our revenue of around US $ 6 billion in 1991 has climbed to US $ 22 billion over the last 15 years,” said Ratan Tata, group chairman, in an interview recently to the deputy dean of the Hyderabad-based Indian School of Business.

If it doubles that figure to $50 billion over the next five years, it will mean raising the compounded annual growth rate from just under 15% over the last 15 years to 18% over the next five - on a much larger base.

Simultaneously, the group is planning to expand its footprint in new sunrise sectors, including retail, real estate, financial services and alternate energy.

The group is recapitalising its real estate development company - Tata Housing Development Company - even as it ramps up investments in its retail venture. Having exited the consumer electronics segment nearly a decade ago (Nelco), the Tatas are re-entering the business through a partnership with Woolworth in retailing.

The plan is to set up four stores of 20,000 square feet each during this fiscal year. And in five years, the group has set a target of 60 stores and aims to earn revenues of Rs 3,500 crore from this joint venture.

If this was not all, Trent, its organised retail venture, will by 2009-10 have 90 stores, growing revenues five times its current size.

Titan, its third retail venture, will by that time almost double its retail footprint, from the current 287 stores in 108 cities to a 2009-10 target of 500 stores in 150 cities.