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| Ratan
Tata: Six reasons
to smile |
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Ratan Tata is cheerful
this year. The turnaround stories of Tata
Motors and Tata Steel are known. But there
is more strength in the group's muscle. A
Tata official confirms that the return on
capital employed (ROCE) of six of the Top
12 companies in the group now exceeds their
weighted average cost of capital (WACC). In
other words, these companies clock in positive
on the EVA (economic value added) metric,
the bellwether indicator of whether companies
are creating value for shareholders. EVA is
defined as the return on invested capital
(ROIC) minus an appropriate charge for the
cost of capital invested in a company.
The six companies are VSNL, Tata Steel, Tata
Chemicals, Tata Consultancy Services, Voltas
and Tata Motors. However, Tata Steel is the
only company that has released the EVA figure,
Rs 238 crore, for 2003. Tata Chemicals comes
with a caveat - it was EVA-positive
on an operational basis. The companies that
did not make the mark this year are Indian
Hotels, Tata Tea, Rallis, Tata Power, Titan
Industries and Tata Infotech.
The top 12 companies of the Tata group contribute
over 80% of the its turnover and profits.
In fiscal 2001, only three firms made the
mark - VSNL, TCS and Tata Infotech. However,
this year, Tata Infotech did not make the
cut.
What makes the achievement commendable is
the number of manufacturing companies on the
list. It is much easier for a TCS or a VSNL
to meet this benchmark. VSNL is, in fact,
a zero-debt company, which helps. But manufacturing
companies have a tough time covering the cost
of capital in times of recession, let alone
exceeding it. For instance, the manufacturing
businesses of Mahindra & Mahindra are
not meeting this standard.
For the Tata companies, a part of this turnaround
is due to industry upturns. But a lot is because
of cost control measures and focus on shareholder
value. The profit-making Tata Chemicals got
a new managing director, Prasad Menon, two
years ago, who drove operational efficiencies.
Its profit from operations jumped 22% to Rs
414.55 crore over the last two years. Tata
Motors has been on a cost-cutting drive in
the last three years, shaving off Rs 1,000
crore. Volumes jumped 30% to touch 107,438
units as the industry picked up. And Tata
Steel became the cheapest producer of steel
in the world. Helped by a surge in global
steel prices, it declared a record profit
of Rs 1,012 crore in 2002-03.
Will this performance be repeated next year?
Anurag Dwivedi, vice-president, Stern Stewart
(global EVA consultants), which was hired
by the Tata companies, says: "What is
more important now is sustaining the performance
in volatile conditions and in cyclical industries."
So, Tata Steel needs to generate these returns
even if steel prices dip.
Four years ago, the Tatas put in place a corporate
centre to monitor and drive performance. Diversified
groups like General Electric and Mitsubishi
were studied. The Group Corporate Council
(formerly the Group Executive Office) was
set up. It then created Business Review Committees
(BRCs), staffed with members of the corporate
centre, to assist with strategy. The centre's
message was clear: be leaders and create value.
The group classified its portfolio into four
categories: pillars, start-ups, stars and
value destroyers. A Tata Strategic Management
Group paper defines them as follows. Pillars
must out-perform industry norms and generate
surplus resources, start-ups must demonstrate
a viable business model and would need funding
to grow. Stars should pursue aggressive growth
and attain resource self-sufficiency. And
value destroyers need to be restructured or
divested.
Many looked at this template with scepticism,
wondering if the corporate centre staffed
by group outsiders, like R. Gopalakrishnan,
could drive change in a diverse confederation
of companies. But it seems to be settling
down - barring the group's 17-circle play
in telecom. That is, by far, the Tata group's
biggest gamble. |
