Tata Steel merger is just the beginning! N Chandrasekaran’s game is to consolidate further

Tata Steel’s decision to merge seven of its subsidiaries with itself, including four public and three unlisted companies, has led to expectations that there will be another within the $128 billion salt-to-software conglomerate consolidation will come. In the past, Tata Sons chairman N Chandrasekaran has spoken of simplifying the group.

In total, the Tata Group has 29 publicly traded companies in sectors as diverse as capital goods, automotive, infrastructure, hospitality, chemicals, telecom, information technology, financial services, iron and steel, energy, retail, diamonds and jewellery. Just as a background, last week the Tata Steel Board of Directors approved the merger of Tata Steel Long Products Ltd (TSL), Tinplate Co. of India Ltd, Tata Metaliks Ltd, TRF Ltd, The Indian Steel & Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Co.Ltd. The view on the street was largely that the structure was being simplified, with the potential to yield synergy benefits and significant cost-saving opportunities.

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Analysts who follow the group point to various possible scenarios emerging with the aim of making each of its companies resilient in a dynamic global environment. According to Gaurav Dua, Head (Capital Market Strategy), Sharekhan by BNP Paribas, the group’s aim is to ensure very efficient capital allocation across all business areas. “This must be accompanied by a high return on equity. Any decision to consolidate group companies is driven to a large extent by it,” says Dua.

The companies were listed on the stock exchange at different times, depending on the type of business and the place of placement at the time. Vinit Bolinjkar, Head (Research), Ventura Securities, believes the merger of Tejas Networks, a company that manufactures networking products for telecom service providers, utilities and Internet service providers, with Tata Communications makes sense. Last July, Tejas, a Bengaluru-based company, was acquired by Tata Sons. Tata Communications, a company that was acquired by the government (it was the former VSNL) and is now positioned as one that enables the digital transformation of businesses. “This allows a clear synergy to be achieved,” he says. Other telecom company Tata Teleservices (Maharashtra), Bolinjkar explains, may not be a good fit as it first needs to recoup its losses. “In the long term, other companies like Voltas that have remained independent could remain so as well. There is no strategic reason to do anything there.”

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The need to be big and take advantage of scale is obviously a desired goal. “Tomorrow’s world is all about size, and the group wants to become more robust in order to become more globally competitive. More importantly, the larger company reduces the likelihood of business failure,” said Deven Choksey, MD, KR Choksey Securities. Regarding the Tata Steel case, he says it went on expected lines after the acquisition of Bhushan Steel and the later restructuring of the company. “It was a clear indication that they were thinking of a larger entity. Any opportunity for synergy that exists and the ability to then efficiently scale to size and scale makes the logic for consolidation right.”

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