Mistrys eye huge windfall, set Rs 1.8-trillion price tag for exit

The Shapoorji Pallonji (SP) group has valued its stake in Tata Sons at close to Rs 1.78 trillion.

The valuation is based on the current value of Tata Sons' shares in group listed companies such as Tata Consultancy Services (TCS), Titan Company, Tata Motors, and unlisted subsidiaries including Tata Capital and Tata AIA Life Insurance.

SP group has also assigned a brand value of Rs 1.46 trillion to Tata Sons and wants a proportionate share of the same.

Shapoorji Pallonji & Co (SP & Co) is the single largest non-promoter shareholder, with 18.37 per cent stake. This puts the valuation of Tata Sons at s 9.7 trillion or Rs 2.4 crore per share.

Tata Sons’ stake in TCS alone accounts for 70 per cent of its entire group valuation. A further 15 per cent is accounted for by the Tata brand value, which itself comes from the superior financial performance of group firms such as TCS, Titan, and Tata Consumer Products.

Tata Sons’ big-ticket investments in key group entities such as Tata Motors, Tata Steel, Tata Power, Indian Hotels, and the group’s retail and aviation ventures contribute little to its valuation, according to SP Group.

If the Tatas agree to the offer, it would be a huge windfall for the SP group, which is currently struggling with high leverage, poor profitability, and negative cash flows at its flagship company SP & Co.

The group had total long-term and short-term borrowings of close to Rs 31,000 crore at the end of March 2019. The group’s total outside liabilities stood at Rs 63,700 crore at the end of March 2019, on consolidated basis.

Therefore, in one shot, the proceeds will make SP & Co debt-free on a net basis and provide the firm with surplus capital to make further inroads into the infrastructure segment, or enter new industries.

For Tata Sons, however, the stake buy-out would be an additional financial burden and could potentially divert resources from its cash-hungry ventures in automotive, retail, financial services, aviation, and infrastructure.

Only last year, Tata Sons cleared nearly Rs 60,000 crore in liabilities of its ailing telecom business that the group sold for a token sum of Re 1 to Bharti Airtel.

Tata Sons had total cash and cash equivalent worth Rs 4,000 crore at the end of March 2020, and as such will have to raise fresh capital to buy out the SP group stake.

Analysts expect the Tatas to lean on their evergreen cash cow TCS to come to their rescue. Tata Sons’ 72 per cent stake in TCS is valued at close to Rs 6.82 trillion. The group is expected to raise the funds required by either diluting its stake in TCS, or by pledging its holding and servicing the resulting debt through future dividend income from the company.

This, say analysts, could weigh on TCS’ share price if markets believe that the purchase would lead to dilution in promoter stake and expansion in free float shares.

However, fundraising plans will also depend on the structure used by the Tatas to buy out the SP group. Promoter stake in Tata Sons is owned by various trusts and listed group entities such as Tata Steel, Tata Motors, Tata Chemicals, Tata Power, and Indian Hotels.

All these five companies are struggling with high debt and low profitability, and any attempt by them to fund stake purchase will further stretch their balance sheets.