By Anuja Mardikar
Many a time, hiving off a particular business division helps in achieving many goals for a large-scale company. The company selling off the segment can then dedicate its resources for the operations of its core business. Also, the management can entirely focus on the mainstream divisions of the company. At the same time, the hived-off division, with its new management, can make a fresh attempt to perform better. As it seems then, hiving off can prove to be a win-win situation for a company as well as its division to be sold.
On 29th March 2018, Tata Power announced the sale of its defence business to a group company, Tata Advanced Systems. Tata Advanced Systems is a wholly-owned subsidiary of Tata Sons Ltd. and is a solutions provider for aerospace, defence, and homeland security. The sale of the business shall be done at a price of Rs 2,230 crores. Tata Power shall receive Rs 1,040 crores at the time of deal closing and the remaining amount of Rs 1,190 crores shall be received only on achieving certain milestones.
The business being sold off is the Strategic Engineering Division (SED). The division designs, develops, produces and supplies lifecycle support for mission-critical defence systems. The key products of this division include manufacturing and assembling missile launchers, electronic warfare, night vision systems and artillery systems.
Reasons to sell the SED
According to CEO and Managing Director of Tata Power, Mr Anil Sardana, the SED is a non-core business of Tata Power and the company has been aiming for its next phase of growth for which monetisation of the non-core business segments is a critical step. The sale is also expected to reduce the leverage of the company. Last week, Tata Power had also announced plans of selling its stake in Tata Communications and Panatone Finvest Ltd.
According to a Motilal Oswal report, the sale of the SED and Tata Communications shall help Tata Power reduce around 10 percent of its total debt. A reduction in the debt shall certainly help Tata Power in improving its balance sheet. Clearly, Tata Power is examining various debt reduction options including the sale of non-core assets. The company currently has a gross debt of Rs 48,816 crores.
Other concerns
Another cause of concern is the Coastal Gujarat Power Ltd. (CGPL), the Tata Power unit that runs a 4,000 megawatt (MW) power project at Mundra in Gujarat. The plant became unviable after Indonesia sharply increased coal rates in 2010, from where the plant imports coal for its operations. The CGPL project since then has accumulated losses of around Rs 6457 crores. Tata Power is still under the recovery process in case of the Mundra plant. Tata Power has more than 90 subsidiaries and associate firms and the company is working on a plan to simplify the corporate structure, wherever feasible.
The merger of housing and infra business
Tata Sons Ltd. also announced this month a reorganisation of its real estate and infrastructure businesses to leverage synergies and rapidly scale operations. Given that world-class infrastructure would be critical to Indias economic growth, the merger of the housing and infrastructure business shall provide a fairly good scope for growth.
Another reason behind the merger of these businesses is the consolidation of firms doing similar kind of work. With over 100 companies under the rubric of the Tata Group, some of these companies are underperforming, not contributing to profits or doing the same kind of business. Therefore, building an economy of scales is the main motive behind the merger of companies under the Tata brand.