Going Down, Down, Down

EVERY time Ratan Tata gets a breather from one set of troubles, another bunch of problems seem to nail him right down. Just when the Tata Tea-ULFA controversy had settled at the bottom of public memory, come the disastrous results announced by his two flagship companies, Tisco and Telco.

Tisco and Telco ended fiscal 1997-98 with very disappointing results. But the first quarter of the current fiscal has been even worse. Tisco's net profits during 1997-98 declined by a whopping 31 per cent from the previous year's high of Rs 469 crore plus. In the three months between April and June 1998, the steel major's bottomline has further crashed by 59 per cent (Rs 27.09 crore) compared to the first quarter of the previous year. As if this wasn't enough, automobile giant Telco has an even sorrier tale to tell. Net profits for the fiscal year plunged by 61 per cent to touch Rs 294.66 crore from a high of Rs 762.36 crore the previous year. Now, for the first quarter of 1988-99, Telco has posted a loss of Rs 35.63 crore against a profit of Rs 90.50 crore for the same period previous year.

The Tatas blame it on the continuing general slowdown in the industrial activity accompanied by political uncertainty, which has impacted several sectors of the economy. Said Ratan Tata, while announcing Tisco's results: "The results reflect the state of the economy and the business, but it is not representative of the full year. The first quarter is usually poor. For the current year, there is no appreciable change in the horizon."

 But steel industry analyst Abhay Laijawalla feels that a primary reason for the debacle is Tisco's deteriorating product mix. "Tisco is tripling its hot rolled mills capacity from 1 million tonnes per annum (TPA) to 3 million tpa." he says. "To build this incremental capacity, the plants have to be shut down for technical reasons. As a result, the steel that Tisco has made throughout the year falls under the semi-finished category which brings in less real-isation. Declining demand and less value-added steel are the main contributing factors for decline." The extensive capital expenditure programme to modernise, upgrade and expand the almost-100-year-old steel company has taken its toll on interest costs.

Tisco's outstanding dues from its loss-making associate companies have also increased to a staggering Rs 130.2 crore from Rs 75.09 crore in 1996-97. Of this amount, Rs 119.70 crore is due from Tinplate Company while equal amounts of around Rs 5 crore are due from Tata Material Handling Systems and Tata Construction & Projects, a BIFR-referred company. But Tisco has not made any provisions for these dues in view of its long-term commitment to these companies.

Telco is yet another sob story. But here Tata refused to take the easy way out of blaming economic conditions. Said he: "It would be unfair to blame Telco's decline in sales and profits entirely on the prevailing market situation. Telco clearly underperformed. In the domestic market, it lost market share in several of its product segments to its competitors. Telco also grossly underperformed in export markets against its own plans, and fell short of its projections in construction equipment. The team at Telco, with their combined strengths, could have achieved higher levels of performance.... Perhaps the most disappointing fact is that despite the call over the years that 'Telco must redefine the way it conducts its business', the Telco team has failed to do so. This message which should have been in the minds and souls of everyone in the company, clearly did not seem to have registered, and the practices of the past continued to prevail."

Tata's critique—or self-flagellation, as some shareholders appear to think—has come at a time when Mahindra & Mahin-dra, another automobile manufacturer, has not only posted good profits, but even increased the number of vehicles sold. This, while, for the first time in six years, Telco has shown a dip in actual sales. According to Telco officials, for the past three years, transporters have been adding up a lot of capacity in trucks. During the past year, not only were freight rates low, even railways have outperformed road transport in carrying freight. Naturally, demand for trucks has been abysmal.

UNFORTUNATELY, Telco failed to listen to the warning signals from the marketplace about the softening of demand as far back as the end of 1996. The company continued to operate at high levels of production in the belief that the slowdown was a temporary phenomenon and that demand would revive. This view continued through the first quarter of 1997-98. It was only in the second quarter that the company reacted to the realities in the market through drastic production cuts. Telco, therefore, had to bear the burden of carrying high inventory costs and high receivables throughout the better part of 1997-98.

The demand slump hasn't lifted in the current fiscal year. The three new launches by Telco—a 40-tonner HCV, a 9-tonner ICV, Tata Safari—are unlikely to lift Telco from the throes of gloom. At the Telco AGM last week, a shareholder went so far as to say: "Unless they (the board of directors) are put on Viagra, the Tata house will crumble under its own weight."

Could the upcoming small car be that blue elixir? Speaking to Outlook in February, when the small car was first shown to the public, Tata had said that one of the key reasons for getting into the high-volume small car market was to free Telco's fortunes significantly from the vagaries of the Indian economy. As a truck-maker, Telco would always be hostage to GDP and industrial production trends. But the small car will definitely not have a cakewalk in the market, with a resurgent Maruti, and Hyundai all ready to launch its Santro.

While the Tata chairman concentrates on cutting costs, and making Tisco and Telco leaner and meaner through business process re-engineering and other tools, the group faces yet another threat. Says a Tata analyst from UTI-Nomura Securities: "Now that the stockmarket has hammered the Tisco scrip down to Rs 100 levels, what is to prevent a predator from starting a raid on the company?"

Indeed, analysts also point to Tata Ryerson, a joint venture between Inland Steel of the US and Tisco, set up last year to offer processed steel at desired sizes to automobile and white goods makers. Inland Steel has been taken over by UK-based NRI Laxmi Mittal who is said to be wondering where to invest some US $800 million he has to spare. Mittal's global steel empire ranks third in the world. Tisco meanwhile has upgraded its plants. "By the end of this year, the age of all Tisco plants will be less than 15 years," claims managing director J.J. Irani. That means over 3.3 million TPA of steel from a world-class plant. With Tisco shares totalling around 368 million, one needs 100 million shares to own over 26 per cent. The Tatas own only about 15 per cent. It would cost Mittal $250 million (at the current scrip price of $2.50 a share) to have a very strong stake in Tisco. Analysts in Mumbai financial markets are, however, sceptical of this ever coming to pass, with a swadeshi government in New Delhi, which means financial institutions who own over 40 per cent of Tisco will never be allowed to sell to an NRI raider.

In the 92nd year of Tisco and 54th year of Telco, when the Tata group itself is planning a total restructuring, and a new corporate logo and identity, there are indeed some existential problems hanging over Ratan Tata's empire. The bright side, of course, is that once the slump is over, both companies could be fighting fit to bounce back. Hopefully, without the Viagra.