Spreading his wings
Institutional Investor - October 2005

The Indian conglomerate, after buying British icon TetleyTea and taking over the management of New York's sumptuous Pierre Hotel, is keen to expand further into the developed world

On August 15, Ratan Tata rang the opening bell at the New York Stock Exchange. He was a fitting choice to do so. The date is India's Independence Day. As head of Tata Group, Tata oversees the country's biggest conglomerate. In the past 14 years, he has transformed the company from a crumbling, inward-looking dynasty into a global powerhouse with revenues of $15.3 billion. Its 32 publicly traded subsidiaries are collectively valued at nearly $36 billion.

Tata, 67, is no stranger to the exchange floor. Just last year he beamed from the balcony for the debut of trading in the American depository receipts of the group's Tata Motors subsidiary. And he's likely to be back again. Several of the 91 companies under the Tata umbrella are viewed as candidates for listing outside India. Among these is Tata Consultancy Services, which offers information technology consulting and outsourcing to clients around the world. Tata Group offered shares of TCS on the national Stock Exchange of India in August 2004. The company currently boasts a $14 billion market capitalisation.

The sprawling conglomerate has come a long way since Tata, a soft spoken architecture graduate of Cornell University, ascended to the Group's top executive post in 1991, succeeding JRD Tata, his uncle, who had reigned for more than half a century. Economic crisis gripped India at the time, and numerous Tata companies were struggling. The first task for the younger Tata, who had made his mark running think tank Tata Industries and an electronics company, was to eject many of the ageing managers running failing divisions. Facing bitter opposition from those executives, he shut down plants, sold assets and used the cash flow from TCS to increase Tata group's stake in each company from less than 10% to an average of 26%.

By 2000, with the $432 million purchase of UK's Tetley Tea, Tata had begun an ambitious global strategy. This year VSNL International, a Tata telecommunications subsidiary, bought Teleglobe International Holdings, a Bermuda telecommunications company, for 239 million. Tata also purchased the management contract of New York's ritzy Pierre Hotel.

"We have made many major acquisitions in the past few years and expect to make more," says Tata, who wants to increase the group's revenues generated outside India. Today it gets 20 per cent of total sales from other countries; Tata wants to boost that number to 30 per cent within the next few years.

The global push is not just targeted at developing nations. The group is looking to invest up to $2 billion in Bangladesh; this would make it the biggest single investor in that impoverished country. Tata has also set his sights on South Africa, which he believes has been overlooked by US and European businesses. In February, VSNL took a stake in a South African fixed-line operator and became the No 2 phone carrier there.

To maintain its extraordinary growth rate - revenues are up 60 per cent since 2002 - the Tata group plans to invest heavily in the hotel and automotive sectors. One notable project: The group's efforts to create what Tata says would be the world's cheapest car, called the Rs 1-lakh car. Tata himself is spearheading the initiative.
Indeed, despite being at an age when most US executives consider retirement, Tata shows no signs of slowing down. In June he raised the retirement age for himself and non-executive directors from 70 to 75, to prevent what he says would be a wave of forced departures. The group, however, lacks a clear successor, a risk investors must weigh.

Shortly after ringing the NYSE opening bell in August, Tata sat down with Institutional Investor staff writer Pierre Paulden

What is driving you to expand beyond India?
Tata has traditionally been focussed on internal markets, and our local market share across a wide range of industries has been high. In the years I have been chairman, however, we have gone through downturns in the Indian economy. When there is a domestic recession, the impact on the group is considerable. Demand may cease, but we cannot shut down our factories or let our people go. As a result, we really needed to look beyond the shores of India. That way we are not so aligned with one economic cycle.

To what extent are Tata's investments in South Africa and Bangladesh driven by philanthropic concerns?
In both Bangladesh and South Africa, we have another rationale beyond the essential requirement of adequate return on invested capital. In Bangladesh we look on a neighbouring country that has been buffeted by natural disasters and famine. We believe that our investment, after satisfying our institutional investors - it goes nearly without saying- will have additional humanitarian benefits. In South Africa we also look at a difficult situation, though human hands have played a larger role. Four fifths of the populace exist in dire poverty, nearly neglected by the economy and society as a whole.

How do you answer critics of outsourcing - especially those in developed countries who argue that it is costing them jobs?
Outsourcing has been a traditional business strategy dating back to the advent of complex manufacturing and has been widely adopted in industries such as automotive and electronics. In the case of outsourced services, the fear of job loss to such places as India has been exaggerated in comparison to the reality and prospects. Very few software jobs have flocked to India. Indeed, jobs are being created there, not simply taken away. Those jobs are a net gain to the world, and indeed to both the US and Indian economics.

Has the political storm over outsourcing damaged Tata Consultancy Services?
With the passing of the US elections, the issue has quieted. We were excluded from a number of state contracts, so there was some impact from the issue, though minimal. There has been much more rhetoric than actual events.

How significant is the threat to TCS from US companies building a presence in India?
Western IT companies have increased their presence in India. Many of them now employ thousands of staff, approaching the 10,000 range in some cases. They are much larger competitors than Tata but have not crimped our growth rate, which has been over 35 per cent a year. We face them constantly in competing for new assignments, and we seem to bring a certain skill set to the table that prospective clients appreciate. We have demonstrated success in moving up the value chain, not merely serving as low-cost vendors.

Will you be listing TCS outside of India?
We always visualised TCS as needing an international listing and expect to have an international listing. The underlying reason is that if TCS wanted to make acquisitions, it would need currency.

To what extent will the requirements of the Sarbanes-Oxley Act affect whether you list TCS or other Tata companies in the US?
We have listed the shares of some subsidiaries in the US and intend to list others in the future. Sarbanes-Oxley has been a challenge insofar as it is costly, though its principles seem largely sensible. Our internal controls already reflect the thrust of these principles, which are good ones.

Why are you so involved in the development of the Rs 1-lakh car, and how risky is this?
I was involved in our first passenger car, the Indica. This was developed to appeal to domestic buyers with reasonable buying power. We faced much scepticism in its development, converting a design and production process for trucks into one for passenger cars. There is a large segment for the Indian population for whom the Indica is not affordable, who still require personal transportation. Visitors to India cannot help but notice the profusion of motorbikes. We see a market between motorbikes and a modest sedan that this car will fulfil. Launching an automobile is a risky endeavour, as you point out. But we have been satisfied with the success of the Tata Indica and are undertaking the 1-lakh car with an even stronger base of competence. We are confident that the investment will prove a wise one.