MAGNA TATA
After years of tortuous restructuring, the House of Tata is embarking on an unprecedented expansion. The group’s battle-hardened CFOs hold the keys to its success.
By Justin Wood

Walk along Homi Mody Street in downtown Mumbai and you’d barely notice Bombay House. A four-story colonial-era office block, the 81-year-old building has
an unassuming, even drab, exterior.

But step into its air-conditioned halls, and the dynamism inside is impossible to ignore. Home to India’s Tata group, Bombay House is abuzz with change and ambition, for the diversified conglomerate – with interests ranging from IT services to hotels to heavy industry – is in the throes of a quite staggering expansion. A few minutes with some of the group’s finance leaders shows just how staggering.

On the first floor of Bombay House, for example, sits Praveen Kadle, CFO of Tata Motors, a US$3.8 bn-a-year maker of cars and trucks. “Over the past three years, we’ve more than doubled our revenues,” he says. And with a string of foreign acquisitions in recent months, and plans to launch a new ultra-cheap car for India’s rural masses, “we’re looking to double our revenues again by 2010,” enthuses Kadle.

On the second floor, Koushik Chatterjee, CFO of US$3.5 bn-a-year Tata Steel, is even more bullish. “Currently we’re producing 5m metric tonnes of steel a year,” he notes. “By 2015 we want it to be 25m tonnes a year.”

Up on the fourth floor, Ishaat Hussain, the finance director of Tata Sons – the holding company of the Tata group – extends the picture. Bold plans and big thinking, he says, are happening right across the Tata empire.

“The opportunities we face, both in India and internationally, are enormous,” explains Hussain. “We are encouraging our companies to grasp these opportunities, to think globally, and to grow dramatically. It’s the same for me; at the holding company level we must grow dramatically.”

In telecoms, for example, Tata Sons has invested US$2 bn over the past ten years but is now ramping up its investment rate. A further US$2.5 bn is earmarked for the next 24 months. In IT, Tata Sons floated Tata Consultancy Services (TCS) last year in India’s biggest-ever IPO, raising billions of rupees to help fund much of its planned investments.

Not that the House of Tata is small. Its revenues last year of US$17.8 bn were equivalent to 3% of India’s GDP, and its international business – at US$3.1 bn – accounted for 5% of the country’s exports. The market capitalization of its listed companies makes up almost 10% of the Bombay Stock Exchange.

But despite its current size, the Tata mantra today is simple: grow more and grow faster than before. All of which puts the group’s cadre of finance chiefs firmly in the spotlight, for much of the success or otherwise of this bold new era of expansion will depend upon the talents of Hussain and his team of CFOs. The challenges will be huge. On the one hand, they must encourage and support the push into new markets and unfamiliar territories, executing acquisitions, raising mountains of money, and managing giant investments. On the other hand, they must keep a tight control on governance and risk, guiding the planning process, preserving profitability, and championing the tenets of financial discipline. Never before has India seen expansion on this scale, and Hussain and his colleagues will be blazing a trail that finance teams across the subcontinent will be following closely.

Ratan the reformer

In many ways they have been blazing a trail for some time already, for the new focus on expansion at “Tatas” is just the latest phase in a long program of change and upheaval.

Back in 1991, two important developments radically switched the direction of the Tata group. First, Ratan Tata took over as chairman of Tata Sons, bringing with him the ambition to pitchfork his family firm out of what he saw as a deep rut of lethargy and decline. Second, Manmohan Singh – India’s finance minister at the time and now the country’s prime minister – set in motion his now-famous program of liberalization. After decades of closed borders, stifling bureaucracy, and economic stagnation, Singh opened up the country once more and ushered in a new era of more business-friendly government.

But after years of socialism and operating in cosy, protected niches, the Tata group was in no shape to face this brave new world of opportunity and competition. Companies within the group had suffered years of under-investment, cost structures were inefficient, technology was old, and managers were unprepared.

What’s more, Ratan Tata – a Cornell-educated architect who has spent his whole career with the Tata group – inherited an empire that had all but disintegrated. The stakes held by Tata Sons in many of its publicly listed companies had dwindled into the single digits, cooperation and synergy across the group had evaporated, and central control had become tenuous at best. The once-proud Tata Sons, set up in 1887 by Jamsetji Tata – the father of India’s industrialization – was in danger of falling apart.

So it was that the new chairman of Tatas embarked on a restructuring effort of giant proportions. First up, he concentrated on raising the stakes held by Tata Sons in its component companies. That meant having at least 26% of the equity, explains Hussain, “so that we can block a special resolution. Nothing can be pushed through without our consent.” In all, Tata Sons has spent upwards of US$1 bn raising its stakes, with most of the funds coming from the dividend income of its holdings, although US$100m was raised via a controversial rights issue in 1995, whereby group companies were encouraged to take a stake in their parent.

To further cement the group, Tata Sons introduced a “Brand Equity and Business Promotion Agreement”. All companies wishing to use the Tata name and brand must sign the agreement, pledging to pay an annual royalty to Tata Sons equal to between 0.1% and 0.2% of their revenues. The agreement also forces companies to adhere to the Tata Code of Conduct and to adopt the Tata Business Excellence Model, a quality management system based on the Malcolm Baldridge Model used in the US. The result has been the creation of a much more unified corporate culture across the group.

Ratan Tata further set up a Group Executive Office in 1998 to formalize the management of the Tata Sons holding company and hired Hussain as one of its six members, making him finance director in the process.
The group’s portfolio of holdings was also drastically reshaped. Unprofitable businesses and those that lacked the necessary scale were disposed of, including interests in cement, textiles, toiletries, and pharmaceuticals. What remained was reorganized into seven key sectors.

The group pushed into new areas too. In telecoms, for example, Tata Sons has invested US$2 bn since the mid-1990s, buying stakes in VSNL and Tata Teleservices (Maharashtra), and setting up new operations from scratch, most of which now operate under the Tata Indicom brand.

Steely resolve

Perhaps most important of all, the restructuring at Tata Sons has also seen a wholesale overhaul of the individual companies within the group. Cost-cutting, productivity improvements, and capital efficiency have been the watchwords, and with impressive results.

Take Tata Steel, where Hussain worked as CFO before moving up to Tata Sons. Over the past decade, Tata Steel halved its workforce, from 75,000 to 40,000, and yet doubled its output, from 2.5m to 5m metric tonnes of steel a year. Ten years ago, the company consumed 4.5 tonnes of raw material to produce 1 tonne of steel; today it uses just 3 tonnes of raw material. In June 2005, World Steel Dynamics, a US-based industry research group, gave Tata Steel ten out of ten for its operating costs in a survey and named it “the best steel company in the world”.

Koushik Chatterjee, the current CFO, says that in recent years the restructuring has turned from driving out cost towards “value enhancement”. That’s meant shifting the company’s product mix from low margin areas like hot-rolled steel coils to higher margin ones such as galvanized steel. And it’s meant concentrating on raising customer service levels and building brands, such as Tata Bearings, advertised with the slogan: “Happiness depends on little things.”

Similar success stories can be found across the group, and the role of the Tata CFOs in driving that turnaround has been crucial. As Hussain notes: “One area where we’ve really benefitted has been from improving capital productivity, especially working capital management. Our turnover has doubled in the past five years while our working capital has remained constant.”

Better IT, in particular new ERP systems, has helped promote capital efficiency across the Tata group. Equally, though, a program of value-based management centered around measuring and managing economic value added (EVA) has played a vital part. First rolled out in 2000, all parts of the group are now strict adherents to the notion of earning a return on capital greater than their cost of capital.

“We’ve been drilling down the concept of value-based management into our capital allocation and investment management processes,” says Chatterjee. “Even at the operating level, everyone at Tata Steel now understands the effect of downtime at one of our plants on the value of the company.” The effort has paid off. In 2005, the spread between Tata Steel’s return on capital and its cost of capital was 24%, generating an EVA of US$500m.

Of course, no restructuring is ever complete, and much still remains to be done at Tata Sons. For one, Hussain says the group would like to increase the stakes in its major holdings to 51% over time to give it even firmer control. Conversely, many of the firm’s smallest businesses have yet to be disposed of. There is also the issue of unwinding some of the more convoluted cross-shareholdings in the group in the name of promoting transparency. And certain parts of Tata Sons, notably some of the telecom investments, still have some way to go to prove themselves.

Nonetheless, observes Amit Chanda, managing director of DSP Merrill Lynch, an investment bank, all in all the restructuring has been a success. “Most of the Tata companies have done the hard work in terms of becoming globally competitive. They’ve really put their houses in order and the confidence levels are up,” he notes. “They’re ready now to go out and take on the world.”

Which is exactly what they’re doing – and on a spectacular scale. Of course, the challenges ahead will be immense, but with Hussain’s army of finance chiefs battle-hardened from a decade of restructuring, the chances of success look good.

A build-up of Tata

Growth at the Tata Group is coming from several thrusts. Domestically, per capita GDP in India has been growing at 4.1% every year since 1991, presenting plenty of opportunity for Tata companies in their home market. Of particular note, while most Asian economies are often driven by exports, India “has a very good consumption story that is increasingly powerful”, says Stephen Roach, chief economist at Morgan Stanley. His analysis shows that consumption makes up 64% of GDP in India. For comparison, he adds, the figure in China is a paltry 42%.

But while the market in India is growing vigorously, Tata Sons is determined to expand it even further by promoting a new philosophy across the group based on addressing “the bottom of the pyramid”. Historically, Hussain explains, Indian companies have catered largely to the wealthy end of the market. But with an emerging middle class, prosperity is starting to trickle down to the huge bottom end of the market.

“We’re attacking the lowest segment on all fronts,” says Hussain, and the evidence from Tata group companies is clear to see. At Titan, for example, a US$249m-a-year watch and jewellery maker, the cheapest watch on offer in India was long priced at 1,000 rupees (US$22). Today it is down to 300 rupees. At Voltas, a US$314m-a-year engineering group, a range of air-conditioning units with less than half the power of traditional machines – and a price to match – are now on the market. And at Indian Hotels Company, a US$190m-a-year hospitality group, the firm’s traditional chain of upmarket five-star properties is being supplemented with a string of budget hotels called indiOne, where rooms start at 1,000 rupees a night.

Just as important to the growth strategies at Tata Sons is a big push onto the international stage. “Our message from the center is simple,” says Hussain. “National boundaries are collapsing. It’s essential to think globally, both for sourcing your product and raw materials and for expanding your market.”

This trend for Tata companies to globalize has led to a gathering wave of overseas acquisitions. It all began in 2000 when Tata Tea, a US$668m-a-year plantations and branded tea producer, bought Tetley Tea in the UK for £271m (US$434m). In the years since then, the pace of international expansion has accelerated swiftly.

Take VSNL, a US$743m-a-year provider of long-distance telephony, broadband, and other communications services. In November 2004, VSNL spent US$130m buying Tyco Global Network, a 60,000 km undersea cable operation spanning North America, Europe, and Asia. And in July this year, VSNL spent a further US$239m buying Teleglobe International, a Canada-based provider of global voice and data services.

Tata Steel has been equally busy. As part of its plans to grow five times bigger within ten years, the firm is not only building new capacity within its home market but expanding overseas too. In 2004, it bought NatSteel of Singapore for S$486m (US$285m), so gaining steel plants in seven nations across Southeast Asia. The company is also looking to build new plants in Iran and Bangladesh.

Shifting gears

One company which epitomizes both the domestic and the international growth strategies is Tata Motors. With a history of making trucks and other commercial vehicles, Tata Motors took the bold step in the late 1990s of moving into passenger vehicles. At first, the US$500m investment looked like being a costly disaster as the company’s cars suffered a succession of teething problems and quality issues, leading in 2001 to Tata Motors’ biggest ever loss. In the years since, though, the firm has ironed out its production problems, improved designs and has rapidly taken a 15% share of India’s car market.

Today, Tata Motors is arguably taking an even bigger bet with the next stage of its car project. By 2008, the company is hoping to launch its “one-lakh car”, so-named to reflect the price point – 100,000 rupees, or around US$2,200 – at which the car will be sold. Building on the “bottom of the pyramid” theme, the idea is to make a car cheap enough to capture a slice of India’s vast motorcycle market where many families can’t afford a four-wheel vehicle.

As Praveen Kadle sees it, with 6m motorcycles sold in India annually, capturing just 5% to 10% of the market would yield extra car sales of between 300,000 and 600,000 units a year. “That would significantly increase our volume and change our revenue profile completely,” says the CFO. Ultimately he’d like to export the one-lakh car to other emerging markets too.

Vijay Chugh, a Mumbai-based analyst at JPMorgan, an investment bank, says the one-lakh car project is exciting, but challenges remain. In particular, he notes, engineers at Tata Motors will need to concentrate on improving fuel efficiency. While the up-front costs of buying a car are part of the equation in persuading motorcyclists to trade two wheels for four, running costs are just as key. Currently, motorbikes do around 60 kms to the litre whereas cars do just 10 kms. “The one-lakh car will need to be somewhere in between,” he says.

But Tata Motors isn’t just a domestic growth story. The firm has been expanding globally too. In February 2004, it paid US$102m to buy Daewoo Commercial Vehicle of South Korea, the country’s second-biggest heavy truck maker. And in February 2005, it splashed out a further US$14m to buy 21% of Hispano Carrocera, a Spanish bus maker, with an option to buy the rest.

“Our strategy is not to rely on one country but to grow and spread our risk and to get cost advantages through our growth and to access new technologies,” explains Kadle.

At JP Morgan Chugh reckons the strategy is sensible. “Tata Motors will be able to improve the operations of these companies, but the deals are also about buying technology and product development that can be leveraged back in India,” he explains. “Foreign competitors are all eyeing up the Indian market, so buying Daewoo, for example, gives Tata access to technology in higher horse-power trucks that it can use to compete at home.”

Testing times

Inevitably, though, making sure that all these growth plans progress smoothly and profitably will present the managers at Tata Sons with unprecedented challenges. And no one will feel the weight of those challenges more than the group’s finance teams.

Rapid growth and financial discipline rarely go hand-in-hand, notes Kadle at Tata Motors, and that will be the biggest test he and his peers will face. In particular, he highlights the need to keep up the strict management of working capital achieved across the group in recent years. And then there’s the job of underpinning all expansion efforts with precision planning and analysis, followed by post-investment evaluations to ensure that projects are on track. “We can’t lose our discipline,” stresses Kadle.

Just as difficult will be drumming up the funding required, particularly given the scale. At Tata Steel, the firm has pledged to invest US$23 bn over the next ten years, or roughly US$2.3 bn every year, although the actual timing of the investments will naturally be more lumpy. By comparison, the company invested US$580m last year, and US$410m the year before. “Sequencing the borrowing and the projects and ensuring that our project-to-cash cycle is efficiently done will be vital,” says Chatterjee.

To broaden their financing options, many companies within the group are expected to seek listings on foreign stock exchanges in coming years. Indeed, Tata Motors did exactly that in September 2004 when it listed depositary receipts in New York.

Culture and consulting

Quite possibly the next firm to list in New York will be Tata Consultancy Services, a US$2.2 bn-a-year IT services firm. Set up in 1968, TCS is the oldest and largest of India’s rising IT services stars. In fact it was TCS that first championed the “global delivery model”, whereby cheap but highly-educated workers in the subcontinent are put to work writing software and managing computer systems and business processes for clients in the West.

With revenues growing at an average rate of 36% every year for the past five years, TCS is also firmly at the forefront of the Tata group’s growth drive. Its ambition is to be among the top-ten biggest business consulting and IT services groups in the world by 2010, standing shoulder-to-shoulder with the likes of Accenture and IBM.

In 2004, Tata Sons floated TCS, selling 19% of the company and creating a stockmarket giant with a market capitalization of US$16.2 bn (as of September 30) – equivalent to more than 40% of the market value of Tata Sons. Now New York beckons, although the motive for TCS is more about raising its profile than raising money. “You can’t be a global company and not have investor interest from global locations,” says Seturaman Mahalingam, CFO of TCS.

With fully 88% of its revenues coming from outside India, TCS is unquestionably the most global part of Tata Sons, which gives Mahalingam a unique insight into the issues his fellow CFOs are likely to face in the future. Chief among them, he says, will be problems of integrating teams and operations in India with those in other parts of the world, especially the US and Europe.

At its most basic level, those problems can center on tensions over pay differentials, especially as Indian managers move abroad and want to earn the same as their Western colleagues, and then aspire to bring those wage levels back to India with them on their return home. “This is a big issue that will only get stronger,” says Mahalingam.

More fundamentally, integration efforts frequently founder on cultural differences. One common problem, says Mahalingam, centers on working practices. “If you give an Indian a job to do, he works night and day to get it done,” notes Mahalingam. “But in more developed countries, say Singapore, people don’t want to work on the weekends or at night. Rightly or wrongly, Indians can look upon that as a lack of commitment.”

Another area where Tata companies will have their work cut out is in building their brands overseas. Within India, the Tata name carries huge weight and kudos. Thanks to well over a century of history, and a reputation for honest dealing and quality products, any company stamped with the Tata logo often has a headstart over its rivals no matter what sector it operates in. But step beyond India’s borders, and the Tata name can be more of a liability than an asset.

Consider the move by Titan Watches to break into Europe during the late 1990s. “They fell flat on their faces,” recalls Hussain. “They realized that if you want to sell watches in Europe, you need a Swiss brand. You can’t do it with an Indian one.”

At TCS, the Indian heritage is no doubt a positive aspect, given the country’s reputation in the IT field for low-cost labor and high-quality service. Nonetheless, TCS is pushing aggressively to move up the value chain, away from low-end application and development work and into higher-end IT and business consulting services. Making a name for itself in areas not normally associated with cheap Indian labor will call for sustained brand-building.

“We’ve built the capability to be a global consulting player,” says Mahalingam, “but the customer has to recognize that capability. We’re repositioning ourselves so that our relationships with customers are automatically at the board level.”

Trouble at home?

And, of course, the risks don’t only center on Tata companies going global, they also arise from foreign companies muscling into the Tatas’ home territory. Globalization, after all, is a two-way process.

In IT services, for example, the likes of Accenture, HP, and other consulting players are rushing to build cheap back-office processing operations in India and other low-cost centers just as TCS charges in the opposite direction to create high-end consulting services in the West. Competition will inevitably get stiffer. “In the next few years we will see substantial pressure on our margins,” concedes S Ramadorai, CEO of TCS.

“We are facing exciting times,” says Hussain. “All our companies are growing, many are going global. Will we pull it off? I think the risk is well-managed. That really is the role of myself and my colleagues: to encourage managers to grasp the opportunities, and then to manage the risk.”