What Natarajan Chandrasekaran must do next at Tata

FACED with complexity humans often resort to a heuristic, a rough mental template that gets the job done. That could come in handy at Tata Group, India’s largest business, whose dizzying mix of scale, palace politics and sense of moral purpose defy any categorisation. Tata’s boss, Natarajan Chandrasekaran, known as Chandra, has been in the job for a year. He spent 2017 pepping up morale and extinguishing fires. Now he must squeeze Tata into a new strategic framework that clarifies its structure and purpose.

Is it a 150-year-old national monument, a philanthropic vehicle or a conglomerate? In Schumpeter’s view Tata should instead be positioned as a holding company—like Berkshire Hathaway but minus the personality cult and with Indian characteristics.

Tata is a handful. It has 695,000 staff and is active in 17 industries. Its family of firms has a market value of $155bn. It mixes virtue with profits; Tata’s leaders are expected to exude decency and probity. The group was an early supporter of Mahatma Gandhi, led India’s industrialisation drive in the 1940s and played a big part in the IT-outsourcing revolution in the 1990s.

A structure with three layers, largely an accident of history, magnifies the complexity. At the bottom are 289 operating companies, a dozen of which are big and listed. In the middle is Tata Sons, a holding firm that owns stakes of varying size in the operating businesses (Chandra is chairman of Tata Sons). It is in turn majority-owned by the Tata family trusts, charities led by Ratan Tata, the group’s 80-year-old-patriarch, who has no direct heirs.

The resulting ambiguity has led Tata to be too tolerant of weak businesses and to a complicated succession. Mr Tata, who was chairman between 1991 and 2012, led a bold globalisation drive, which included the acquisitions of Jaguar Land Rover (JLR) and Corus, a British steel firm. But he neglected profits and roamed over all three layers. His successor, Cyrus Mistry, tried to cull bad businesses but suffered from paralysis-by-analysis and fell out with Mr Tata (he was ousted in 2016 and is now suing Tata Group).

Chandra created $60bn of value when he was boss of TCS, Tata’s IT services arm, in 2009-17, and is known for metronomic consistency. His superb record gives him a licence to ask hard questions and makes it hard for Mr Tata to object.

A few romantics want the group to be a vehicle for building up the nation, a goal with which the trusts may sympathise. But Tata is not a state-owned firm or a charity, and outside shareholders have $85bn tied up in Tata firms. They expect profit, not glory. Alternatively, Tata could be run as a conglomerate, like General Electric in its prime. But it has legal control of only 62% of its empire, based on the value of firms in which it has a majority stake. Its gems—TCS, JLR and Titan, a jeweller—are largely autonomous.

The best path is to be a holding company that makes strategic investments but does not normally exercise operational control, like Berkshire or Investor AB in Sweden. After all, Tata Sons does not have an equal interest in all Tata-branded firms. Chandra is a director of some operating firms but derives his authority from being chairman of Tata Sons. Once Ratan Tata retires, the trusts will probably be run by arm’s length boards focused on their fiduciary duty to hold Tata Sons accountable for its performance.

Viewed as a holding company, Tata Sons has a net asset value (the market or book value of its stakes, less its debts) of $84bn. Its NAV has risen by 547% since 2007, beating India’s stockmarket, which made a total return of 151%–a strong performance but one mostly due to its 74% stake in TCS, which comprises 84% of NAV. Of Tata Sons’ 289 affiliated businesses, 126 are lossmaking. Valued at book, 66% of Tata Sons’ investments over the years sit in underperforming units with a return on capital of less than 10%.

Tata Sons should set clear targets. It should aim to continue to grow its NAV faster than India’s stockmarket and its profits faster than nominal GDP. By 2030 that would allow the trusts to have a budget to match the present budget of the Gates Foundation.

It may sound easy, but there probably will not be another triumph like TCS to prop up performance. So Tata Sons must be ruthless. It must ensure that the stars, TCS, JLR and Titan, continue to thrive, which means leaving them alone. And it needs new growth businesses. Buried within it are promising operations, including its retail, defence and financial-services arms. To grow big these will require piles of capital. For example, Tata’s financial business, which should be a big beneficiary of its trusted brand, has a book value of $2bn and ranks only 27th in India’s industry.

Dealing with the underperformers is critical. Surprisingly, Chandra has given a second chance to two serial offenders. He has approved a capacity expansion at Tata’s domestic steel operation. And he has supported a new strategy at Tata’s domestic trucks and cars unit, which has lost market share. Over 25 years these two have generated acceptable returns on equity only about half the time. It is unlikely that they will do much better.

Time for Sons to grow up

Elsewhere, though, Chandra has shown backbone. He has sold Tata’s toxic mobile-telecoms arm and is folding Corus into a joint venture with Germany’s ThyssenKrupp. Although these deals eliminate the risk of giant losses, they have not released much capital. To do that Chandra should grit his teeth and sell off all the peripheral stakes and businesses. That could raise $8bn, making Tata simpler to run and fortifying its balance-sheet. To succeed, holding companies need to be a source of brains and money rather than dependents of firms they invest in. Tata Sons’ debt has risen to $10bn, shrinking its kitty. It may need to buy out Mr Mistry’s family, which has an 18% stake in Tata Sons, worth $15bn.

Under Chandra, Tata Sons should aim to be a muscular holding firm that invests in competitive businesses and produces strong returns for its owners. That description cannot possibly capture the epic scale of human endeavour within Tata. But as a way to position the group for the next 150 years, it does the job.