Tata’s New Leader Will Steer Through Muddy Waters

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After transforming Tata Group into India’s largest industrial conglomerate with its footprint across the globe, its chairman Ratan Tata has stepped down. Cyrus Mistry, the new chairman will now be in charge of this global $100 billion company with operations in more than eighty countries spread across six continents. Under Ratan Tata, Tata Steel, the biggest Indian steel company, bought its Anglo-Dutch rival Corus for $12.1 billion while Tata Motors got hold of the luxury car brand Jaguar Land Rover for $2.3 billion.  He takes over during a difficult period in India economically. 

Prior to Ratan Tata’s appointment as the group chairman in 1991, Tata was led by the French born Indian J.R.D. Tata. With Cyrus Mistry, the helm of affairs of Tata Group has fallen outside of the surname Tata for the second time after Sir Nowroji Saklatwala who was the chairman of the group in 1930s. However, both Mistry and Saklatwala are distant relatives of the Tata family.

After assuming his new role, Mistry sent out a letter to its employees on January 2 in which he said that the group would spend a total of $8.3 billion in the next two years for domestic and international expansion. This time, the focus of its international expansion will be the emerging economies of Asia, Africa and Latin America while it will continue investing in its existing ventures in Europe and North America. No specific details were provided.

Tata Group now boasts 24 listed companies that account for 7.1% of Bombay Stock Exchange’s (BSE) total market capitalization. Among them, the biggest, is the India’s outsourcing giant Tata Consultancy Services with a market cap of $45.9 billion and is the main competitor of Infosys whose market cap is nearly half the size of TCS. More than half of Tata’s employees (55.1%) are classified in the sector of “Communications and information systems” which is the core business area of Tata Group.

In its last financial year ending March-2012, Tata Group posted revenues of $100.09 billion, an increase of 20.1% from the previous year.

Mistry’s expansion plans come a few months after the Manmohan Singh government announced new economic reforms aimed at increasing investment in the country. India’s GDP growth has slowed down to 5.3% for the second quarter of FY-2013 which is considerably lower than 6.7% in Q2 FY-2012. Both manufacturing and the agricultural sector are reporting slowdowns. From Q1 to Q2 FY-2013 the current account deficit increased by $3.4 billion to $22.3 billion which is pointing towards the increasing levels of import bills and another round of Rupee depreciation, hence the controls on gold importation as Indians traditionally will protect themselves from further wealth destruction by accumulating gold.  Investment demand for Gold in India rose 12% in Q3 according to the World Gold Council’s latest release

In the last calendar year, the ADRs of two Tata companies; Tata Motors and Tata Communications (NYSE: TCL), rose by 69.9% and 8.0% respectively. Tata Motors is India’s leading car manufacturer by sales and is the owner of Jaguar Land Rover. In its last quarterly results, the company posted an 11% increase in profits to $381.8 million. It sold 223,665 vehicles in the previous quarter ending Sep-30 2012 which includes 6.5% cars exported to other countries. This shows a 6% increase in car sales from the previous quarter. Meanwhile, the shares of TCS rose by 8.37% in the same period.

The competition in India’s auto industry is increasing which is going to put a downward pressure on the margins. In 2013, commercial vehicles sales are expected to increase by 10%-11%. This rise will come on the back of a 13%-15% increase in light commercial vehicles. Overall, the outlook remains stable, but the diesel price hike is going to slow down growth. On the other hand, India’s IT sector is expecting to improve its performance in 2013 due to positive business outlook from their western clients who are expected to increase their spending this year. However, like the auto industry, the margins in IT are also expected to fall this year and the next. This is because significant revenue growth is going to come from low-margin Infrastructure Management Services, increasing competition between TCS, Wipro and Infosys and increasing investment requirements as the companies will continue to compete for new clients in the emerging markets.

Unfortunately, lower growth in India is likely to continue unless the Singh government revises its diesel subsidy rules which are destroying the long-term stability of the country’s finances.  Even after a 13.4% increase in diesel prices back in September, prices need to rise another 20% minimum to make refining diesel a break-even venture.  This is fueling an unsustainable diesel auto bubble in India and bankrupting the treasury. 

India’s equity markets are best represented by iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) which tracks the performance of the 50 biggest Indian companies by market capitalization. The fund is dominated by Financials (21.20%) and Computers Software (11.41%), two of India’s strengths. INDY is weighted heavily towards the multi-business conglomerates ITC limited (8.80%) and Reliance Industries (7.38%).

Investors looking for greater exposure to TCS should look towards Technology GEMS ETF (NYSEMKT: QGEM) and MSCI India Index Fund (NYSEMKT: INDA) that are weighted 6.4% and 4.2% towards TCS. Both ETFs focus on large cap companies but while INDA is India specific, QGEM has invested 45.94% in China.

<table> <tbody> <tr> <td> </td> <td> <p><strong>QGEM</strong></p> </td> <td> <p><strong>INDA</strong></p> </td> <td> <p><strong>INDY</strong></p> </td> </tr> <tr> <td> <p>Stock 6m</p> </td> <td> <p>0.82%</p> </td> <td> <p>14.18%</p> </td> <td> <p>12.91%</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>15</p> </td> <td> <p>15</p> </td> <td> <p>16</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> <td> <p>0.48</p> </td> </tr> <tr> <td> <p>Expense Ratio</p> </td> <td> <p>0.85%</p> </td> <td> <p>0.65%</p> </td> <td> <p>0.89%</p> </td> </tr> <tr> <td> <p>Asset Class</p> </td> <td> <p>Equity</p> </td> <td> <p>Equity</p> </td> <td> <p>Equity</p> </td> </tr> <tr> <td> <p>Size</p> </td> <td> <p>Large Cap</p> </td> <td> <p>Large Cap</p> </td> <td> <p>Mega Cap</p> </td> </tr> <tr> <td> <p>Top Holding</p> </td> <td> <p>Baidu Inc (9%)</p> </td> <td> <p>HDFC (8.6%)</p> </td> <td> <p>ITC Ltd (8.4%)</p> </td> </tr> <tr> <td> <p>Top Sector</p> </td> <td> <p>Tech (86.3%)</p> </td> <td> <p>Financial Services (30.3%)</p> </td> <td> <p>Financial Services (29.3%)</p> </td> </tr> <tr> <td> <p>Top Country</p> </td> <td> <p>China (45.9%)</p> </td> <td> <p>India (99.9%)</p> </td> <td> <p>India (99.9%)</p> </td> </tr> </tbody> </table>


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