Rebuilding the House of Tata

By Richard Orange

When Vehran Irani, a senior staff member, stepped for the first time into the central stairway of the Taj Palace hotel on Saturday, what he saw broke his heart.

The walls were shot to pieces, mirrors shattered, carpets charred. But as he walked up to the first floor, he noticed something unexpected. Behind the bust of Jamsetji Nusserwanji Tata, the great 19th century industrialist who founded the group 150 years ago, the walls were riddled. But the founder himself, with his Parsi turban and flowing robes, had somehow escaped completely untouched.

For Mr Irani, this was some kind of miracle. But that is not unusual – for its staff, being part of the Tata Group is a religion.

During the horrific three-day attack on the hotel, Taj staff were extraordinary, remaining calm and attentive to guests’ welfare. The hotel’s general manager, Karambir Kang, lost his wife and two sons on the first day of the attacks, but continued to work tirelessly to rescue guests.

 

Later, when Ratan Tata said how sorry he was, Mr Kang replied: “Sir, you know, we’re going to beat this. We’re going to build this Taj back into what it was. We’re standing with you. We will build this thing back. We will not let this event take us down.”
It is not only Taj Hotels that needs this kind of spirit. The coming few years will be as testing as any in the Tata Group’s history.

The series of daring billion-dollar acquisitions, snapping up Corus – the former British Steel – the luxury car makers Jaguar and Land Rover, and the US soda ash producer General Chemical Industrial Products have left the Indian industrial group overly exposed to the coming world recession.

And the need to rebuild comes at a time when Ratan Tata, who has transformed the company since he took the reins in 1991, may step down.

“In an ideal world, after the small car has been launched and is successful, that would be a nice time for me to exit,” he told the Financial Times last year.

If he does exit early next year, his successor – and there are few names that stand out – will not only be faced with rebuilding the Taj Hotel, he will have to rebuild the financial strength of the two key companies, Tata Steel and Tata Motors.

Even pessimists do not see India’s economy growing at less than 5 per cent in the coming years. But around 60 per cent of Tata Group’s consolidated revenues now come from economies such as the UK, which are likely to see negative growth.

Corus generated 85 per cent of Tata Steel’s revenues in the first half of this year, and 62 per cent of the profits. Jaguar and Land Rover are expected to generate some 60 per cent of Tata Motors’s revenues.

If you look at both companies’ performances in the last downturn, that is a serious cause for concern.

In the last sustained steel industry slump in 2002, Corus was losing more than £1 million (Dh5.4m) a day. In the first half of this year, well before the present slump kicked in, Tata Steel was only making about £1.3m a day.

Similarly, in 2006, Jaguar lost Ford about £350m. In its latest quarterly results, Tata Motors made £46.5m. And the two deals, done at the peak of the market, have loaded debt onto the companies at a time when refinancing is hard to come by. Moody’s ratings agency last week dropped Tata Motors’s debt two levels to “B2”, and said it would lower it a further step if it failed to refinance the bridge loan it took on to do the US$2.3 billion (Dh8.44bn) deal within three months.

In October, Moody’s changed the outlook on Tata Steel’s ratings to negative, citing “the likely deterioration in demand in Europe and the UK in the next 18 months”.

This is not the first time Tata has faced dark days. “They’ve had terrible times,” says Aman Nath, who co-wrote Horizon: the Tata-India Century, a company history. “At first the steel plant looked like it was not going to work and everyone thought the company would collapse.”

Tata Steel began production in 1907, two years after Jamsetji’s death, but by 1924, at the nadir of the post-First World War steel slump, it was on the edge of bankruptcy.
Jamsetji’s son, Dorab, only kept the company from being nationalised by pledging his entire family fortune – including the 245-carat Jubilee Diamond – to secure an emergency loan from Imperial Bank of India.

He also managed to win tariff protection from the government, a first for an Indian company. None other than Mohammed Ali Jinnah, the future founder of Pakistan, spoke out for Tata in the legislative assembly.

Ratan Tata, too, has been no stranger to tough times during his 17-year tenure. In 2001, after the launch of Tata Motors’s first passenger car, the Indica, it looked as if he had blundered badly.

The Indica, which Business Week dubbed “Ratan’s folly”, fell far short of world standards, and Tata Engineering and Lorry Company (TELCO), lost an unprecedented 5bn rupees, (Dh367m) that year. But the Tatas persevered, and the Indica eventually did surprisingly well, becoming a major money-spinner for the group.
The Tatas’ biggest asset for braving such bad times is the loyalty of its staff. It is not only Taj Hotel workers who demonstrate almost uncanny loyalty, it is the graduates of its management training centre, the Tata Administrative Services, and also ordinary steel and car workers.

A senior Tata Steel manager says: “In Tata Steel, if somebody wanted to touch a part of the plant, the workers will give their lives for it, for them the plant is like a temple.”
Tata Steel built a model company town around its steel plant in Jamshedpur and many great grandchildren of the engineers who came to work there in 1907 are still employed by the group. Tata Motors and Tata Consulting Services, both started by JRD Tata and expanded under Ratan, generate a little less loyalty.

Rebuilding the Taj will be a monumental task. From the sea-facing promenade beneath, you can now see straight through the windows on the sixth floor to the sky behind – the tile roofing and wooden beams that supported it have collapsed completely.

But of the three challenges facing Ratan Tata or his successor, this may be the most straightforward. The Sea Rock Hotel in Bandra, once one of Mumbai’s finest, remains derelict a full 15 years after a 1993 bombing attack destroyed it.

But the Taj is so core to the Tata Group that rebuilding will be a priority. And if any company can rebuild it, it is Tata. “They’re one group which have been very concerned about heritage,” says Vikas Dilawariv one of Mumbai’s leading heritage architects. “They restored the Army and Navy Building, and I’ve helped them restore parts of [Tata headquarters] Bombay House. When they have old buildings they know how to look after them.”

Even so, reconstruction could be very costly, and there are still uncertainties over how much the $200m set up by India’s general insurance companies will cover. A survey of the hotel began last week and is expected to take 10 to 15 days to come to a conclusion.

Pavethra Ponniah, who rates Indian Hotels for the ratings agency ICRA, says it is too early to determine whether the damage will lead to a downgrade of the company’s credit rating.

“A 565-room hotel closing down will definitely have an effect on their revenues,” she says. “We’ll still have to see the impact over the next few months, what we need to know is how much money is needed to bring the hotel back, how much will come from insurers, and how long it will take.”

Pandurang Potnis, the vice president of the Indian Institute of Architecture, estimates that reconstructing the hotel will take 12 months and cost about $100m.

But perhaps worse for the Tatas will be the loss of revenues. The group’s hotels in Delhi and Mumbai provide 35 per cent of their revenue, and the Taj provides the most, with its six restaurants constantly packed with a procession of the city’s prominent citizens.

Mr Dilawari says that Mumbai does still have craftsmen to replicate carvings that were damaged. “If you constantly monitor and supervise, then you can get the work to that standard,” he says. “They’re hard to find, but it’s not impossible.”

Some Tata officials argue that the place of the Taj in Mumbai’s society and business life mean that, even if Indian Hotels’s own internal funds and insurance do not cover a rebuild, donations from outside may be available to top up the funding.

“I think there would be citizens of Bombay pitching in, there will be employees coming forward,” says one Tata Steel employee. “I’m sure a lot of people would come forward to help fund it.”

Withstanding the future financial strain in the steel and motor industries may be more difficult.

Just as Dorab turned to government aid and unusual financing techniques during the steel slump of the 1920s, Tata Motors and Tata Steel are looking at all possible options this time around.

Tata Motors was forced in October to shelve plans to raise funds on international equity markets to pay off the $3bn bridge loan it took on to buy Jaguar and Land Rover, and needs to find the money to repay the loan by June next year. But the division is struggling to raise money from banks as the international debt market remains frozen.
At the start of last month, Ratan Tata wrote a letter to the Indian prime minister, Manmohan Singh, suggesting that a special fund be set up in select state-controlled banks to help companies that have made major acquisitions overseas to deal with outstanding loans.

Tata is also talking to the UK government for a £1bn cash injection to help Jaguar through the downturn. Tata Steel, meanwhile, is asking the Dutch government to pay up to 70 per cent of the salaries of 4,600 workers – about half of Corus’s staff there – for six weeks under a government economic stimulus package. Corus reported last month that it would cut production by 30 per cent.

But there seems little Tata can do to ensure profitability through the world recession. Corus and Jaguar Land Rover were sold after their managements had successfully turned them around. By and large, the company has left the old managements to continue with their plans. Jaguar has launched the acclaimed XF executive saloon. Tata Steel has signed mining joint ventures in Mozambique, the Ivory Coast and Canada aimed at making Corus self-sufficient in coal and iron ore.

Neither of those moves, though, will help in a recession. The XF has propped up sales, but that will not be enough to offset the slump in the luxury car market. And none of Tata Steel’s new mines will come into production in time to nurse Corus through the present slump.

During the last major crisis in the 1920s, Dorab had the Jubilee Diamond. Sadly, his heirs sold it to a French industrialist in 1937. So Tata Group’s main surety is its stakes in other groups. Tata last month sold a stake in its telephone company, Tata Teleservices, for $2.7bn. But the real jewel in the crown is Tata Consulting Services (TCS). Tata Sons already propped up the Tata Motors rights issue by selling a 1 per cent stake of TCS, reducing its share to 73.65 per cent.

But every time it taps into this cash asset, Tata Group generates only a third of the value per share it would have received at the peak of the market, when TCS was worth $30bn. It is now worth a third of that.

If the group is forced to sell more to keep Tata Steel and Tata Motors afloat, they could easily eat up TCS before the economic cycle turns.

That would be a giant sacrifice to keep the “founder companies” such as Tata Steel and the Taj afloat. But it is one that the old man on the stairs would doubtless appreciate.