The Tata and Reliance groups present an interesting study in contrasts – being the two largest groups of India Inc in terms of revenues and market valuations.
The Tatas are ahead in terms of both revenues and valuations, but the big difference comes in the latter metric. According to a Business Standard report, while group revenues totalled nearly Rs 4,97,650 crore for the globalised Tata group, for the largely India-based Reliance it was Rs 4,09,972 crore – with the Tatas ahead of Reliance by 21 percent in 2014.
The big difference is in terms of market valuations where the Tata group is two-and-a-half times the size of Reliance at Rs 6,89,257 crore (versus Reliance’s Rs 2,78,978 crore).
What accounts for this huge gap in market perception and valuation for two groups separated by a mere 21 percent in terms of revenues?
Several things really.
First, while the Tatas are a conglomerate and a diverse business group spread over scores of companies, Reliance is one company with a diverse footprint. This can make a huge difference to valuations, as we shall see later.
Second, the Tatas are more global than Reliance; all their gains and losses relate to how they globalised. Reliance, despite some purchases of shale gas interests in the US and an occasional European buy (Trevira, a speciality polyester manufacturer), is largely an Indian company.
Third, the Tatas have grown global largely through debt. Reliance is a net debt-free company and is sitting on oodles of cash – nearly Rs 90,000 crore of it at last count.
Fourth, the Tatas, despite being called a group, are really a loose federation of independently-run businesses, each with its own growth trajectory. Reliance is centrally controlled by its promoter Mukesh Ambani, even though there are professionals running the actual operations in major strategic business units.
So what explains the hugely different valuations of the two groups?
The first point explains most of it. As a diverse group with different companies in different businesses, Tata companies are easier to analyse and value. Of the Rs 6,89,257 crore market capitalisation reported by Business Standard, just one company, Tata Consultancy Services (TCS), accounts for 60 percent of the value.
The flagship company of the Tata group – Tata Steel – accounts for just 5 percent of the valuation, thanks to its expensive and debt-laded acquisition of Corus. Tata Motors, the other big company, accounts for a goodish 17 percent, but this is less to do with its domestic operations as its enormously successful Jaguar Land Rover (JLR) acquisition. Tata Steel and Tata Motors have thus had opposite fortunes with their global acquisitions – while TaMo lucked out with JLR, Tata Steel acquired an albatross.
The second point of difference is, of course, the business the core profit generator is involved in. TCS is into tech, which has been booming in north America – and especially in the context of the rupee depreciation. Reliance is into tightly regulated businesses – where it is forced to sell the bulk of its gas at fixed rates – and its refined products abroad. Thanks to the regulation of domestic fuel prices, India’s biggest private refiner sells the bulk of its products in world markets rather than in India - possibly at slimmer margins than if it could sell back home.
Attitudes to cash also constitute a difference. TCS is the prime cash generator for holding company Tata Sons; it thus tends to have a high dividend payout ratio – which improves its net worth and valuations. TCS’s return on net worth (RONW) is nearly 40, while its peer Infosys – which also likes to hold on to cash – it is around 25. For Reliance, which is sitting on lots of cash, the RONW is just 11.66.
The differing attitudes to cash payout explain a lot of the valuation differences between the Reliance and Tata groups. TCS’s payout ratio as a percentage of net profits is 36, against Reliance’s 12.5 percent. QED. To improve valuations, Reliance must pay out more of its profits.
The most important difference between the Tata and Reliance groups is structural. The Tatas are a horizontal conglomerate with vertical businesses run as separate companies, while Reliance is both vertical and horizontal: in the textiles to polyester to petrochemicals to oil refining and oil exploring chain, it is vertically integrated. But Reliance is also a horizontal business with retail, infrastructure, telecom, life sciences and other kinds of businesses embedded in it.
As this writer has noted before, the Tata group is too big and diverse to remain as big forever. Sooner or later it has to divest businesses (telecom is ripe for it), and bring focus back to the core businesses that it can capitalise without too much debt. In the emerging world, where banks are getting chary of taking too big risks, conglomerates have to rely on their own internally generated cash and less of debt.
Reliance, for its part, is too diverse and too vertically integrated to deliver value to shareholders (read the detailed reasoning here). It has to disaggregate its businesses – both vertically and horizontally - to unlock value. This is historically the opposite of what it has been doing in the past under Dhirubhai Ambani – which is to create separate companies and merging them into Reliance one by one.
In short, the difference between the Tata and Reliance groups is the visibility of one group’s profits and performance in separate companies, and the complexity of the latter.
Both have to divest and/or disaggregate to deliver higher value to shareholders.
In the Tata case, the valuation of TCS shows which part is delivering value to the group. In the case of Reliance, one suspects that the value of the sum of the parts is greater than the whole. This explains why the Tatas are currently two-and-a-half times Reliance in terms of market valuation despite being only 21 percent larger in terms of revenues.
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