A massive restructuring is on the cards for Tata Group; reason: its holding company Tata Sons recently decided to create a more agile and powerful platform by its operations under 10 different verticals.
The Economic Times reported Tata Sons representatives will head the verticals and ensure smooth integration, coordination and functioning. Creation of the verticals will take place under the leadership of Tata Sons chairman N Chandrasekaran; it is expected to be a difficult decision to execute.
Business Today had first hinted about the move last November; it reported that Tata Group may prune its extensive portfolio by eliminating cross holdings and consolidating similar businesses.
The publication had quoted Chandrasekaran saying, “I will be the first to admit that we are very complex. We need to be simplified. I would like to see ourselves as 5, 6, 7 groups as opposed to 110 companies. The more we see ourselves as (many companies), nothing will get done.”
What to expect from the Tata Group rejig
A top executive, requesting anonymity, told ET each vertical head will coordinate and facilitate for the companies under its purview; it is not mandatory for them to be a Tata Sons board member. S/he will, however, need to have deep sector knowledge and the capability to ensure benefits of scale.
The company seems on board with the plan to operations of 100 Tata Group companies for the rapid growth of Tata’s $104-billion conglomerate through the 3S model postulated by Chandrasekaran. It not only aims to simplify, synergise, and scale operations, but it will also help to cut costs and boost efficiency.
Out of the 100 operating companies, 30 are listed, while over 1,000 are subsidiaries.
Details of verticalisation: What we know so far
Under Chandrasekarans tutelage, Tata Group has carved out new sectorsdefence, infrastructure, consumer and retail, financial services, and hotels and airlineswhile supporting the growth of the three largest companies, namely Tata Consultancy, Tata Steel and Tata Motors.
It has incorporated its hotels and aviation subsidiariesIndian Hotels and Vistara and AirAsiaunder the newly-minted travel and tourism vertical. Speaking about Air India, Chandrasekaran had told CNBC-TV18 last year that Tata Group will wait for the government to execute its disinvestment, in progress currently.
Infrastructure has Tata Power, Tata Housing, Tata Consulting Engineers, and Tata Realty and Infrastructure, while Tata Communications, Tata Sky, and Tata Teleservices are under telecommunication and media. Speaking of the latter, Chandrasekaran had said in November, “Reviving it would need Rs 50,000-60,000 crore and that is not a choice.”
Steel and Aerospace & Defence have their separate verticals with Tata Steel and Tata Advanced Systems, respectively. Tata International, Tata Industries, and Tata Investment Corporation are under trading and investments.
A few challenges ahead
However, one of the challenges, according to sources close to the development, will be putting together sometimes overlapping but mostly disparate ventures under verticals like consumer and retail. The Tata Group currently owns Tata Chemicals, Tata Global Beverages, Titan, Voltas, Croma, Trent, and Westside.
On the flipside, verticalisation will certainly help to recover impairment costs, like the $3.1-billion Tata Motors announced on account of its Jaguar Land Rover unit. Impairment of assets is the diminishing in quality, strength amount or value of assets. An impairment cost must be included under expenses when the value of an asset exceeds the recoverable amount.
A work in progress
It is clear that Chandrasekaran wants to scale the business aggressively to compete with the global marketplace. It is a move that can eventually bring a unified working culture and introduce a common goal in a firm that performs diverse services, has a diverse consumer base, and is extremely heterogeneous in nature.
The Group hopes that verticalisation will further leverage the scale of its supply chain and logistics to improve productivity, efficiency, and profitability in the long run. During Ratan Tata’s tenure from 1991 to 2012, Tata Sons reduced group firms from 250 to 100, through mergers.
Chandrasekaran himself began disentangling the cross-holdings among Tata companies last year, starting with Tata Steel’s stake in Tata Motors. He has reportedly roped in fresh talent to oversee the consolidation and equip the group better to tackle ensuing challenges.
An overhaul in the basic business structure will certainly bring a few issues in its train; those, however, can be solved with time and without compromising the solutions that have worked in the past.
Why it matters
To analyse the onerous verticalisation of products and services, it is also crucial to realise the basis for each division; while some clusters have been aimed at simplifying operations, others are building on scale.
Tata Sons had spent over Rs 70,000 crore ($10 billion) in 2018 to deleverage and restructure Tata companies, consolidate cross-holdings, acquire strategic assets and infuse much needed capital, a Tata Group executive recently told ET. The new structure will help it to better manage core businesses and exit non-core smaller companies.
While the move heralds a new direction for Tata Group, it is essential that the ongoing consolidation and focus on scale disrupt the landscape without affecting the operational freedom of individual companies.
For a complex brand of services, this rejig decision has been long overdue, according to some market pundits; they, however, warn that it’s also one that needs to be navigated with caution.
With the leadership of the company in stable hands after a brief period of turbulence, it will be interesting to chart the next course of growth for Indias largest salt-to-steel conglomerate.
Prarthana Mitra is a staff writer at Qrius