Tata Group Companies: Holding The Flag High

If ever Tata Group is in the news, it’s always for a positive reason, except for the time when the depar-ture of Cyrus Mistry created a big shake-up. In fact, betting on any of the Tata Group companies always makes good investing sense. Armaan Madhani explains what makes the group retain its leading edge in such a globally competitive business scenario. The article also presents recommendations for a couple of individual Tata Group companies whose stocks will add some shine to your portfolio

Jamsetji Nusserwanji Tata In 1868, Jamsetji Nusserwanji Tata aka the father of Indian industry bought a bankrupt oil mill and converted it into a cotton mill, kicking off Tata Group’s journey. Today, there are 28 publicly listed Tata companies with a combined market capitalisation Rs22.2 lakh crore as on September 8, 2021, making it India’s largest business conglom-erate with products and services in over 150 countries along with operations in 100 countries across six continents. Each Tata company or enterprise operates independently under the guidance and supervision of its own board of directors. Tata Group is the country’s third-largest employer after the Indian Railways and defence forces. The group leads the nation in 10 diverse business verticals.

Consider this: HDFC Group is the second-largest Indian business group with a market capitalisation of Rs16 lakh crore followed by Reliance Group at Rs15.7 lakh crore. You would be amazed to know that the market capitalisation of Tata Consul-tancy Services (TCS) alone is worth more than the combined market capitalisation of HCL, Mahindra and Mahindra, Jindal and Vedanta Group. Guided by the motto of ‘Leadership with Trust’, Tata Group’s companies believe in the long-term development of value for all its stakeholders worldwide. A high degree of emphasis on ethos, quality, innovation, sustainable activities as well as business evolution – these are just a couple of the tags which the Tata brand has been pegged for.

A True Leader
In the 30 years after India’s economic liberalisation, the Tata companies have created more wealth for shareholders than other large conglomerates in India like Reliance, Aditya Birla as well as similar conglomerates in other countries including General Electric, Mitsubishi, Siemens and even Berkshire Hathaway. The Tata Group companies have efficiently managed to survive the pandemic, emerging unscathed, resilient and stronger. Robust economic recovery in global markets, grand commodity up-cycle, mass vaccination drives, reviving domestic consumption, strong sectoral tailwinds, consistent earnings’ growth, cost rationalisation measures, improved oper-ating leverage, deleveraging trends, smooth integration of acquired companies, ameliorating profitability and strengthen- ing of the balance-sheet has led to re-rating of several Tata Group companies, thereby furnishing a fillip to investor confidence.

Shares of 27 of the 28 Tata Group listed companies have soared during the year. The multinational conglomerate has added a market value of USD 84.75 billion since the beginning of the year on the back of share price gains ranging from 15 per cent to 375 per cent. Tata Consultancy Services was the top con-tributor to the gains, with its share of the group market capitalisation at a whopping 52 per cent followed by Tata Steel (16.22 per cent), Tata Motors (6.75 per cent), Titan Company (5.07 per cent) and Tata Consumer (4.1 per cent). Six of the group companies have climbed over 100 per cent during the year while nine have jumped by 50 to 90 per cent. As many as 12 entities witnessed their share price rise 15-45 per cent. Rallis India is the only Tata Group stock that has failed to deliver returns during the year.

Change of Leadership
In 2016, the Tata Group found itself in a pickle with the sudden announcement of the then Chairman Cyrus Mistry’s exit and a public fallout. Natarajan Chandrasekaran, Chief Operating Officer (COO) of TCS was handed the reins of the salt-to-soft-ware conglomerate, who became the first non-family profes-sional to head the venerable Tata Group. Recently, on February 21 2021, Chandrasekaran completed four years at the helm of India’s biggest conglomerate and has successfully pivoted the group in the right direction, making it more organised and structurally sound. The fact that market capitalisation of Tata Group companies has more than doubled since Chandrasek-aran took charge is testament of his 3S strategy i.e. simplifica-tion, synergy and scale working wonders.

To quote an excerpt from an interview of N Chandrasekaran with Business Today, “When I started in 2017, I had said that brand, trust, standard and heritage are the biggest strengths of the group. And whenever you have a group which has such a large presence and strong history of more than 150 years, you should expect that there will be complexity. So, I had proposed a strategy of simplification, synergy and scale. We evaluated the number of entities and their businesses. Besides, we focused on balance-sheet fitness and financial returns.”

Growing Market Share

To quote artist Leonardo Da Vinci, “Simplicity is the ultimate sophistication.” Chandrasekaran’s strategy is playing an effective role in charting a turnaround for the traditional business of the group. In recent years, Tata Steel has been reorganised into four distinct businesses – long products, downstream, mining, and utilities and infrastructure. Its capacity has been increased to over 20 metric tonnes (MT) by acquiring the steel business of Usha Martin and Bhushan Steel as well as building a unit in Kalinga Nagar. The company’s focus has been aligned towards the Indian market and the number of subsidiaries reduced. A decade ago, two-third of the production was coming from Europe. Currently, two-third production comes from India. Tata Steel’s domestic business has the highest profitability in the world because of captive iron ore mines and has delivered a robust 20 per cent EBITDA margin even during the worst of times.

In FY21, Tata Steel pared its debt to the tune of Rs28,000 crore. As a result, the year-end net debt was Rs75,389 crore, which is 28 per cent lower than FY20. Similarly, Tata Motors underwent consolidation and a bold call was taken to put the lid on Nano along with other small businesses. They have been focusing on three businesses – passenger cars in India, commercial vehicles and Jaguar Land Rover. They have launched a diverse range of new products in recent years which have been well-received in the markets, encouraging them to double their market share in passenger cars. They have also launched a Tata EV (electric vehicle) ecosystem with full range of capabilities from charging stations to batteries. Further, they are combining expertise and developing sustainable synergies with other group companies such as Tata Power and Tata Chemicals.

A target has been set to reduce Tata Motor’s net debt to zero by 2025. After taking over, Chandrasekaran reorganised group companies working in silos into ten clusters in order to optimise synergy among them. For instance, the consumer business of Tata Chemicals was combined with Tata Global Beverages and was renamed Tata Consumer Products. Over the last three years, the Tata Group has slowly increased its stake in companies such as Tata Motors, Tata Power, Tata Chemicals and Tata Metaliks which were going through a rough patch. This goes to show their commitment and conviction towards fighting tooth and nail with the adversity facing a group entity. Their unwillingness to throw in the towel and exit is distinct evidence of their ethos of long-term development of value for all stakeholders.

Tata is a name which is known to Indians for generations – a name that is synonymous with the Indian industry and a brand known for salt, software, cars, coffee, gold, pesticides, tea, trucks, telecom, housing, hospitality and steel. In fact, Tata is the most valuable Indian brand with a value of USD 21.3 billion. The brand is deeply ingrained in the fabric of India and happens to be the most global Indian brand. Tata Group with its phenomenal growth and rapid expansion over the decades has certainly laid a solid foundation for inspiring many aspiring new entrepreneurs who wish to create a prominent place for their businesses in the future. The group continues to be the pride of the nation and a glowing precedent of potential success for fresh businessmen and entrepreneurs.

STOCK RECOMMENDATIONS 

Tata Consultancy Services Ltd. (TCS)......... BUY ..... CMP Rs3,830.45

BSE Code : 532540
Face Value(Rs) : 1
52 Wk High/Low : 3,981.55 / 2,302.50
Mcap Full ( Rs Cr.) : 14,16,903.13

 HERE IS WHY
✓High Free Cashflow Generation
✓Healthy Dividend Payout
✓Sustained Quarterly Performance

Tata Consultancy Services is an IT services, consulting and business solutions organisation that has been partnering with many of the world’s largest businesses in their transfor-mation journeys for over 50 years. The company was founded in 1968 and is headquartered in Mumbai. TCS offers a consulting-led, cognitive-powered, integrated portfolio of business, technology and engineering services and solutions. This is delivered through its unique Location Independent Agile™ delivery model, recognised as a benchmark of excellence in software development. TCS has over 488,000 of the world’s best-trained consultants in 46 countries. The company serves to some of the biggest conglom-erates in the world like Google, Amazon, Azure, Open Stack, Adobe, Intel, Bosch, IBM, Apple, Oracle, Symantec, etc.

The company has generated consoli-dated revenues of USD 22.2 billion in the fiscal year ended March 31, 2021. It is one of the world’s largest IT services firm by market capitalisation. Based on industry classification, the company operates in five key verticals i.e. banking, finance services and insurance (BFSI) which accounts for 40 per cent of revenues, followed by communication, media and technology (16.5 per cent), retail and consumer business (15.6 per cent), manufacturing (9.7 per cent) and others which accounts for the rest 18.2 per cent of revenues. TCS generates around 51.3 per cent of total revenues from the Americas followed by Europe (31.9 per cent), India (5.1 per cent) and the rest of world accounts for the residual 11.7 per cent of revenues.

Financial Overview
TCS experienced a rise in revenues for the fourth straight quarter on deal wins as clients continued to spend on digital services during the pandemic. Q1FY22 revenue from opera-tions grew by 18.5 per cent to Rs45,411 crore from Rs38,322 crore in the corresponding quarter of the previous fiscal. Operating profit stood at Rs13,384 crore, up by 26 per cent on YoY basis. The company reported a 28.5 per cent rise in net profit of Rs9,008 crore as compared to Rs7,008 crore in the year-ago quarter. The Q1FY22 dollar revenue rose by 21.6 per cent on an annual basis to USD 6,154 million and constant currency revenue growth was 16.4 per cent YoY.

Its order book stood at USD 8.1 billion, witnessing a robust growth of 17.3 per cent YoY. The cherry on the cake was that their attrition rate was lowest in the industry at 8.6 per cent. The company’s board also declared an interim dividend of Rs7 per share. On an annual basis, net sales jumped by 4.6 per cent from Rs156,949 crore in FY20 to Rs164,177 crore in FY21. Operating profit for FY21 stood at Rs49,680 crore, up by 6.38 per cent from Rs46,701 crore in the previous fiscal year. Net profit for FY21 was flat at Rs32,562 crore relative to Rs32,447 crore in FY20.

Rationale
TCS is the market leader in the IT sector having greater revenue and efficient margins than its peers and hence enjoys the higher margins magnitude due to its massive scalability in revenues. It has a global presence, deep domain expertise in multiple industry verticals and a complete portfolio of offerings – grouped under consulting and service integration, digital transformation services, cloud services, cognitive business operations, and products and platforms – targets every C-suite stakeholder. The company leverages all these and its deep contextual knowledge of its customers’ businesses to craft unique, high-quality, high-impact solutions designed to deliver differentiated business outcomes.

More importantly, as consumers shifted to digital channels for most of their needs during the first wave of the pandemic, enterprises realised the need to invest in enhancing customer experience. This significantly accelerated investments in digital transformation and cloud adoption. The global market for IT services continues to be a highly fragmented one with even the largest provider having a mid-single-digit market share. TCS is among the largest IT services providers globally, with a market share of 1.6 per cent and has significantly outperformed the market, growing at twice the rate of market growth over the last decade. Hence, we recommend BUY for this stock.

Titan Company Ltd............... BUY ...........CMP Rs 2,094.95

BSE Code : 500114
Face Value(Rs) : 1
52 Wk High/Low : 2,150.00 /1,076.00
Mcap Full ( Rs Cr.) : 1,85,986.76

 HERE IS WHY
✓Strong Fundamentals
✓Diversified Portfolio
✓Asset Light & Extensive Distribution Model

Titan Company is among India’s most respected lifestyle companies. It was founded in 1984 as a joint venture between Tata Group and Tamil Nadu Industrial Development Corporation (TIDCO). Titan Company has trans-formed itself from being one of the world’s largest integrated watch manufacturers with an enviable distribution footprint to a premier lifestyle company with a presence in jewellery, watches, fragrances and eyewear and Indian dress wear segments. The company has 11 manufacturing and assembly facilities and 1,909 exclusive stores having 2.5 million sq. feet of total retail space. It also has more than 11,000 multi-brand outlets which reach all the major towns and cities in India.

Titan Company is the largest jewellery retailer in the country. It sells jewellery through its brands Tanishq, Zoya, Mia and Caratlane. The jewellery division accounts for approximately 80 per cent of the company’s revenue and has a strong retail presence of close to 500 retail stores. The company is the world’s fifth-largest and one of the largest watch players in the domestic market. It owns several brands such as Xylis, Nebula, Titan, Fastrack, Sonata and Favre Leuba. It also has a joint venture with Monto Blanc as well as possesses licens-es of several international brands such as Tommy Hilfiger, Police, Anne Klein, Kenneth Cole and Coach. The company also operates India’s largest optical retail chain. 

Financial Overview
On a consolidated basis, for Q1FY22 the company reported total income of Rs3,519 crore, a 74.21 per cent jump from Rs2,020 crore recorded in Q1FY21 due to low base effect. The pandemic-induced lockdowns disrupted the company’s performance in the first half of the quarter. However, green shoots were visible with strong pent-up demand as restrictions eased. The underlying gross margin in Q1FY22 was at its best level in the recent five quarters. Operating profit for the quarter stood at Rs183 crore as compared to an operating loss of Rs212 crore Q1FY21.

The company posted net profit of Rs18 crore for the period ended June 30, 2021 as against net loss of Rs297 crore for the cor-responding quarter of the previous fiscal. Operating expenses were controlled during the quarter. Marketing spends were curtailed during the quarter in the wake of shutting of stores and the sombre mood of the population. On an annual basis, net sales for FY21 declined by 3.27 per cent from Rs20,768 crore in FY20 to Rs20,088 in FY21. Operating profit also contracted by 27.1 per cent from Rs2,620 crore in FY20 to Rs1,910 crore in FY21. Net profit for FY21 stood at Rs979 crore, down by 34.6 per cent from Rs1,497 crore in the previous fiscal year.

Rationale
Titan Company has consistently displayed its ability to gain market share in the midst of a competitive industry scenario owing to its brawny brand patronage, healthy cash flows and robust balance-sheet. Their asset-light and extensive distribu-tion model has enabled it to overtake their peers in terms of store addition as well. The company’s quality and design proposition along with personalised service orientation has been a key differentiator, enabling them to build a deep customer connect.

They continue to invest in the latest technology for facilitating seamless and immersive shopping experiences. The company is also looking forward to a complete omni-channel presence in jewellery with its 72.3 per cent owned subsidiary Caratlane.

Titan Company’s strategy of focusing on the under-penetrated and unorganised markets has helped them to establish market dominance in diverse retail business through scale, branding, innovation and distribution which furnishes them a wide economic moat. The company is optimally placed to ride the current wave of formalisation of retail and distribution channels in India. Hence, we recommend BUY for this stock.

(Closing price as of Sept 17, 2021)