Wednesday, April 4, 2012

Ratan Tata's Vision 2020: Expect big bang acquisitions.

Cyrus P. Mistry, deputy chairman, of Tata Sons, and who takes over as chairman from Ratan Tata at the end of this year, has his task cut out. His mandate over the next 10 years is to take the Tata Group to $ 500bn from the present $83bn turnover.

Achieving that task is impossible unless key companies make strategic acquisitions. While India is a significant market for all Tata Group companies, the majority of the group’s revenue now comes from outside India. Be it TCS, Tata Motors or Tata Steel or even Tata Global Beverages, the group is known as an Indian group with significant global operations.

Here is a list of Tata companies that will continue to hunt for acquisitions to meet the 2021 target set:

Tata Consultancy Services: The software services giant, with a market cap of Rs 2,32,000 crore, has faced a slowdown in revenue and profit growth. Over the next two to three years, analysts expect revenue and profit growth to decline to under 20 per cent. An acquisition for scale over the next 10 years cannot be ruled out for TCS. The company could leverage its market cap to make a sizeable global acquisition. At current market prices, TCS ($ 46bn) is more valuable than Accenture ($44 bn), one of the world’s biggest IT services vendor.

Tata Steel: Tata Steel, India’s largest steelmaker, could see an improvement in profitability over the next two years. This is largely due to the restructuring exercise in Europe and close to 3 million tonne (MT) capacity addition. Tata Steel acquired British steelmaker Corus in an over $ 12 billion transaction in 2007. The company currently has negative free cash flow. This means its capital expenditure is higher than operating profits. Over the next two years, Tata Steel is expected to generate positive free cash flow. Over the next 9 years, when opportunities arise, Tata Steel could participate in a consolidation of global steel giants.

Tata Motors: Tata Motors recently denied any plan to bid for bankrupt Swedish luxury car maker SAAB. In 2009, Tata Motors acquired Jaguar Land Rover from Ford Motors for $ 2.5 bn. The acquisition provided the Tata Group access to the lucrative luxury car market in Europe, US and China, and now accounts for more revenue than its domestic passenger vehicle sales. Each time a car company is put up for sale, bankers bring it to the notice of the Tata Group. The luxury car market is expected to grow at 5 per cent per annum till 2021, according to Goldman Sachs, a global bank. Tata Motors could look at snapping up more brands to add to the portfolio. Aston Martin, earlier part of Ford, is currently owned by private owners.

Tata Communications: Tata Communications late in March received government approval to bid for UK’s Cable & Wireless Worldwide. The company is already a top contender to acquire the company besides Vodafone. It has engaged bankers and is believed to have raised a $ 2 bn war chest. Even if the company does not succeed in making an acquisition, the move underscores its hunger for growth. It will continue to pursue more such targets around the world.

Tata Global Beverages: Tata Global Beverages (formerly Tata Tea) acquired UK’s Tetley in 2000 to let everyone know that the Tata Group was looking for growth outside India. The company changed its name to reflect the global nature of the business. It is impossible to imagine that the Tata Group would focus on an organic growth for boosting consumption of tea and coffee. To that effect, the company has entered into a joint venture with Starbucks to set up the Seattle-based chain’s coffee shops in India. It would not surprise the street if over the next decade, the company looks to acquire beverage brands to gain market access in diverse geographies.