Was Cyrus Mistry a victim of back-seat driving?

Mistry's intention of selling ailing steel maker Corus, Tata's so-called feather in the cap, was one reason for his ouster

Everything from management style, egos and strategic decision seems to be behind the ouster of Cyrus Mistry as chairman of Tata group.

While the real reason behind the sudden move in the most admired business house in the country has not been given, speculation and reports quoting ‘sources’ suggest that the decision to replace Mistry has been brewing for some time.

The Economist, in an article on the Tata group titled ‘Mistry’s Elephant’ puts it succinctly that the problem lies in the structure of the group.

The Economist says that Tata Sons, the parent company, is not listed, but holds direct and indirect stakes in other listed Tata companies. Broad strategic decisions have to be routed through the parent company. The structure adds another layer of bureaucracy to a group that rarely needs it, says the article.

Ratan Tata, Mistry’s predecessor, was still calling the shots and it would be difficult for Mistry to be his own man, the article suggests. Tata had publicly given a target of $500 billion in revenue by 2021 to his successor. When he handed over charge to Mistry, the group had a revenue of $100 billion.

Mistry’s style of operation was in direct contrast to Tata's. While Ratan Tata has been busy acquiring companies across the globe, Mistry has, since the start of his tenure, busy in divesting many of them.

But Tata’s acquisition has not really worked for the group. Apart from a few successes such as the acquisition of JLR, the group has been struggling with others, the worst being Corus.

Reports say that Mistry’s intention of selling the ailing UK based steel producer, which had been Tata’s proud acquisition, was one reason for his ouster.

The Corus acquisition has been widely blamed by analysts as being the main reason for the fall of Tata Steel, once the crown jewel of the group. The asset was acquired after a bitter battle with ArcelorMittal at a high valuation and at the wrong end of the business cycle.

The global financial meltdown, a slowdown in Europe and now Britain’s exit from the European Union has made the high-cost steel producer an unviable player as compared to Chinese manufacturers. Though selling the unit is a logical step, the economy in the European steel market is so bad, that repeated attempts to sell Corus have been unsuccessful.

The high cost of acquisition and funding of losses is an obstacle in the company's growth and much higher profits in its home country.

JSW Steel, a much younger player, has overtaken the more than 100-year-old Tata Steel. Sales or other assets, which were reported as close to Ratan Tata’s heart did not go well with the parent company.

Mistry, the first chairman not connected to the Tata family, has been unconventional by Tata group standards from the start. Taking decisions on sale and purchase without keeping the parent company informed seemed to be the last straw for the parent company.

To his credit, Mistry was doing all the right things that a shareholder would look for in a company. His focus was on return on capital, rather than meaningless expansion. He focussed on moving out of businesses such as fertilisers, where returns were lower.

Data crunched from the top-20 listed Tata group companies (from Capitaline) shows that ever since Mistry took over the reigns of the group (FY13 to FY16) its sales have increased by a CAGR of 12.5 per cent, and debt has increased at a slower pace of 9.98 per cent from Rs 1.89 lakh crore to Rs 2.29 lakh crore.

But during this period, net profit zoomed at a CAGR of 42.3 per cent, indicating much more efficient operations under his tenure.

Under the conditions of a series of company acquisitions and global slowdown, four years is too short a period to judge a chairman’s performance of a $100 billion group.

However, for the Tata group, back-seat driving has prevailed. Growth plans would be put on hold till the new chairman is in place.

Further, given the current actions of the parent company, the new chairman would not be an independent one but would be controlled from behind the scenes.

Ratan Tata has just renewed his back-seat driving licence.

External link: Mistry’s elephant