Mistry at Tata Helm as Investors Query $500 Billion Goal By Bhuma Shrivastava and Siddharth Philip - Dec 28, 2012

Cyrus Mistry, who takes charge today at Tata, India’s biggest business group, may face an uphill battle if he is to meet his predecessor’s vision of boosting revenue fivefold to $500 billion in the next decade.
Mistry, 44, becomes chairman of Tata Sons Ltd., the holding company for the salt-to-software group, just as slower economic growth damps demand for products from steel to cars. Ratan Tata, who steps down on turning 75 after two decades at the helm, built the business into a $100 billion global conglomerate through acquisitions including the U.K.’s Corus Group Plc and Jaguar Land Rover. Tata succeeded his uncle in 1991 as India’s economy was opening up.
“It is not an easy task to grow fivefold in this global economic scenario,” said Shishir Bajpai, senior vice president at IIFL Wealth Management Ltd. in Mumbai. “The bar is set high for Mistry to deliver. Ratan Tata took a group well known in the domestic markets global, now Mistry has to take it forward.”
The change of guard marks a rare opportunity to shape the group of more than 100 companies, whose expansion has mirrored India’s emergence as a global economic power and ranks Tata above Japan’s Panasonic Corp. and Swiss food giant Nestle SA by sales. At stake is the equivalent of about 6 percent of India’s gross domestic product, and the future of firms including Tata Steel Ltd. (TATA), India’s biggest producer of the alloy, and Tata Motors (TTMT) Ltd., the nation’s No. 1 automaker by revenue.

Biggest Shareholder

Mistry’s performance could also weigh on his family’s fortune: along with his billionaire father, Pallonji Shapoorji Mistry, and his brother, the chairman’s family owns about 18 percent of Tata Sons. Little is known about the London Business School management postgraduate’s leadership style or strategic vision, and the man chosen by a select search panel in November 2011 has so far shied away from the media and investors.
“I haven’t heard from him on company plans, so I don’t know” how Mistry will lead, Koen Vanderauwera, a Luxembourg- based bond-fund manager at KBC Asset Management SA that holds the debt of Tata Steel and Tata Power Ltd., said in a phone interview. “I’ll wait and see what kind of announcements he makes, how he comments.”
The $500 billion revenue vision for Tata in 2021 was outlined by Ratan while addressing his top executives in April, and confirmed by Tata Sons director R. Gopalakrishnan. Group spokesman Debasis Ray declined to comment on the vision or Mistry’s plans for Tata. “Such matters are internal to the company,” Ray said in an e-mailed reply to a query.

Textile Trading

Mistry and the Tatas follow the Zoroastrian religion and belong to the small Parsi community, which originated in Persia and found sanctuary centuries ago in India. The Tata group was founded by Ratan’s great grandfather Jamsetji Nusserwanji Tata, who started a textile-trading business in 1868 and then built the country’s first steel mill and hydroelectric plant. He also built the Taj Mahal Palace & Tower hotel in Mumbai, which was damaged in the November 2008 terrorist attacks.
Mistry will also need all the project-handling skills honed at running the construction business at his family’s Shapoorji Pallonji & Co. to sustain profitability even as many of Tata’s key companies battle adverse market conditions or regulatory changes.
“Revenue without sustained profits and a high return on invested capital is of no use,” Neeraj Monga, head of research at Toronto-based Veritas Investment Research Corp., said by e- mail. The group’s biggest businesses, steel and automobiles, are both cyclical industries and maintaining profitability is a challenge, said Monga.

Steel, Autos

For a group that includes Tata Consultancy Services Ltd. (TCS), India’s largest software company, Tata Motors, owner of the Jaguar and Land Rover luxury marques, and Tata Global Beverages Ltd., the local partner of Starbucks Corp., sales and profit growth is slowing at its biggest businesses.
Profit growth at Tata Motors decelerated to the slowest pace in four quarters in the three months ended Sept. 30 and sales growth slowed to the least in three years amid waning demand for luxury vehicles in Europe. Tata Steel posted an unexpected loss even as sales growth stayed below 5 percent for the third straight quarter.
“It’s not easy to grow fivefold organically, so Mistry at some point will have to pull a multibillion dollar surprise acquisition,” said Jagannadham Thunuguntla, head of research at New Delhi-based SMC Global Securities Ltd. “He has to be careful because the group’s experience on this front has been mixed.”

Overseas Acquisitions

Tata Steel, which acquired Corus for $12.9 billion in 2007, making it the group’s biggest overseas purchase, reported a loss of 3.64 billion rupees ($66 million) in the three months ended Sept. 30 as weak demand in Europe and China cut prices of the alloy. The steelmaker plans to restructure its U.K. business, cutting 900 jobs and closing 12 sites, it said in a Nov. 23 statement, to shore up margins in a market dogged by overcapacity.
In contrast, Tata Motors’ 2008 acquisition of Jaguar Land Rover from Ford Motor Co. for $2.3 billion helped boost the Indian automaker’s sales almost fivefold over four years. That pace of growth may be hard to sustain as Europe struggles to recover from a debt crisis.
Tata Steel shares have climbed 28 percent in Mumbai trading this year, outperforming the BSE India Sensitive Index’s 26 percent advance. The steelmaker’s shares fell 0.5 percent to close at 428.55 rupees in Mumbai trading. Tata Motors has surged 74 percent, making it the best performer on the 30-company benchmark index. The automaker’s shares gained 0.3 percent to close at 310.05 rupees.

‘Minds Open’

“We should always keep our minds open to acquisitions,” Mistry told recruits in comments that were viewable in a video on one of the group’s websites. “We would, in each company as part of its own strategy, look at M&A for growth but not as a must have.”
Purchases overseas have also proved harder in the past year with Tata’s recent attempts failing to clinch a deal.
Orient-Express Hotels Ltd. (OEH), owner of New York’s 21 Club restaurant and Hotel Cipriani in Venice, last month rejected a takeover offer by Tata’s Indian Hotels Co., saying the bid undervalues the company. In April, Tata Communications Ltd. (TCOM) decided against making an offer for Cable & Wireless Worldwide Plc after failing to agree on a price.
Mistry can look to fund acquisitions by tapping the cash pile at Tata Consultancy Services, the group’s most valuable company by market value, in which Tata Sons holds 74 percent. The Mumbai-based software exporter had 79.2 billion rupees in cash and short-term investments on Sept. 30, according to data compiled by Bloomberg.
Still, Tata’s new head may opt to look within and consolidate holdings to bolster profitability instead of continuing to pursue acquisitions, according to Tarun Kataria, chief executive officer at Religare Capital Markets Ltd.
“Cyrus takes over the reigns of a highly regarded but sprawling conglomerate at a time of great global uncertainty and muted economic growth,” Mumbai-based Kataria said in an e-mail. “His very deliberate focus will likely be on consolidation, deleveraging, exiting certain businesses and bringing related businesses under a unified whole.”
To contact the reporters on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net; Siddharth Philip in Mumbai at sphilip3@bloomberg.net
To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net

Tata, Birla May Lead $9 Billion Urea Spending: Corporate India

By Abhishek Shanker - Dec 25, 2012

Aditya Birla Nuvo Ltd. (ABNL) and Tata Chemicals Ltd. (TTCH) may lead $9 billion of spending to increase India’s urea capacity by almost 50 percent, spurred by a government policy guaranteeing returns on investments.
Producers of the nitrogen-based soil nutrient including state-run companies and co-operatives may add 10 million metric tons of capacity over the next five years, said S.C. Sharma, an officer at the Planning Commission, which assesses and allocates the nation’s resources. The government will assure new urea units a profit margin 12 percent to 20 percent, Food Minister K.V. Thomas said in New Delhi on Dec. 13.
“As much as 500 billion rupees ($9 billion) of investments could come,” Sharma said in an interview in Mumbai. “They’ll start flowing in after this policy change.”
Government control on the price of urea and ambiguity over natural gas feedstock costs have deterred new investments in the sector for more than 10 years, leading to an increase in imports and state subsidies. An increase in urea capacity will also boost agricultural productivity, helping feed two-thirds of India’s 1.2 billion people that live on less than $2 a day and contain inflation that averaged 7.5 percent in 2012.
“India has to support a large population base on a small land area, so the use of fertilizers like urea is critical and will only rise,” said Apurva Shah, an analyst at Dalal & Broacha Stock Broking Pvt. Ltd. in Mumbai. “Other fertilizer makers not present in urea may plan setting up a unit to expand their product base. In three to four years, there’s bound to be large-scale investments in this sector.”

Double Capacity

Billionaire Kumar Mangalam Birla may spend as much as $1 billion to double Aditya Birla Nuvo’s urea capacity after the government approves the new policy, Managing Director Rakesh Jain said in an interview on Nov. 8.
Tata Chemicals planned to double urea capacity at its unit in the northern state of Uttar Pradesh at an estimated cost of 35 billion rupees, it said in October 2010. The company was waiting for government assurances on supplies of natural gas, the main fuel used to produce urea, it had said.
Other planned urea projects include Rashtriya Chemicals & Fertilizers Ltd. (RCF)’s 1.15 million ton unit, for which it secured environment approval in 2006, in western Maharashtra state. Chambal Fertilisers & Chemicals Ltd. plans to build a similar- sized factory in the northern state of Rajasthan.
State-owned GAIL India Ltd. (GAIL), Coal India Ltd. (COAL) and Rashtriya Chemicals have planned a venture to build a coal gasification and fertilizer project in eastern Odisha state at an estimated cost of 80 billion rupees, while Oil & Natural Gas Corp. is seeking a partner to build a urea factory in the eastern part of the country.

Rising Imports

India imports about 33 percent of the 28 million metric tons of urea it needs and the quantity is increasing by about 1 million tons each year, according to a Planning Commission report last year. Supply shortages may widen to 12 million tons by March 2017 should new capacities fail to be added, the commission said.
The government’s subsidy burden increased as urea prices surged to a 3 1/2-year high of $515 in April. Urea imports are estimated to have risen to about 7 million tons in the year ended March 31, inflating the subsidy by 21 percent to 294 billion rupees from a year earlier, according to the report.
The new policy will save 47.6 billion rupees of subsidies and reimburse producers the cost of natural gas, which comprises about 80 percent of the input cost, Dalal & Broacha’s Shah said.

Pending Plans

Plans to expand the nation’s urea capacity by 50 percent to 34 million metric tons have been held back by companies, pending a well-defined state policy. The reopening of a unit in the eastern state of Assam was the only major urea project to come on stream since 1999, according to the fertilizer ministry’s annual report.
At a conservative estimate, urea units will need at least 72 million metric standard cubic meters of gas fuel daily by March 2017, compared with the current availability and demand of 41 mmscmd and 43 mmscmd, respectively, according to the commission report. Should all plans to start new plants, expand existing facilities and resume closed units be implemented, the required quantity may exceed 100 mmscmd.
“India needs a robust pipeline network to carry natural gas for urea and other industries,” said Ashok Kumar Balyan, managing director at Petronet LNG Ltd. (PLNG), the state-owned owner of LNG terminals in the western and southern coast of India. “While our Kochi terminal is ready, the lack of a pipeline network is a constraint.”

Gas Terminal

Petronet is planning to set up a 5 million metric ton LNG terminal by 2016 at a cost of 45 billion rupees in the east coast to meet demand in the eastern part of the country.
“We’re prepared to supply LNG to urea makers as and when capacities come up,” Balyan said on Dec. 19 on the sidelines of an energy conference in Mumbai. “The new policy will boost investments in urea capacity expansion and boost demand for natural gas.
Aditya Birla Nuvo, the $4 billion company present in businesses like financial services, fashion and information technology, plans to sell the increased output in the eastern states of Bihar, Jharkhand, West Bengal, the eastern region of Uttar Pradesh and in the central state of Chhattisgarh, Jain said last month. The company declined to comment after the new policy was approved.
The government will provide financial support to private entrepreneurs for making capital investments in the fertilizer sector, the then Finance Minister Pranab Mukherjee had said in his budget speech in March. On Oct. 11, the cabinet increased urea prices by 50 rupees a ton and approved direct transfer of the fertilizer subsidy to the farmers.
“At current prices, it is better to import liquefied natural gas and produce urea locally,” Planning Commission’s Sharma said. “There should be higher activity in this industry that has not seen much interest.”
To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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