Two years of Cyrus Mistry

Standing in Mumbai’s Birla Matoshree Sabhagar on a rainy July afternoon, Cyrus Mistry is conducting Tata Motors’ 69th annual general meeting. The company’s turnover has grown 22.8% to Rs 236,503 crore and profits 43% over the previous year, much of that on the back of Jaguar Land Rover. The domestic business has not done as well. What’s more, Karl Slym, the British managing director newly roped in from General Motors to run trucks, buses, and cars in India, has died a few months earlier, leaving a vacuum yet to be filled.

One shareholder gets up and asks Mistry how Mahindra & Mahindra can turn in profits in the same domestic market. “It’s time for Tata Motors to do some soul-searching,” he says, adding that accountants and former bankers are running the company, and there aren’t enough people with an automobile background. (That’s not entirely true; however, as if on cue, Tata Motors poaches Maruti Suzuki’s star Mayank Pareek to head the passenger cars business a few months later.) Mistry listens patiently and admits that India has not done well in passenger cars, adding, “We can’t hide anywhere. Next year will also be challenging.” He points out that the domestic passenger car business, where market share has declined to 6%, is in the process of revamping its portfolio. “Several interventions are being implemented,” he says, particularly mentioning that the company has spent Rs 3,000 crore on two new cars, the Zest and the Bolt.

A few days later, on August 14, he is at Tata Steel’s annual general meeting at the same venue. It’s much the same. The previous two years have been terrible for steel due to global economic woes, causing Tata Steel’s losses to balloon. Its debt of Rs 81,609 crore, outstanding as of March 2014, due largely to the acquisition of British steel-maker Corus in 2007, isn’t helping either. In May last year, Mistry wrote down $1.6 billion (Rs 9,892.8 crore), an admission that the European acquisition hadn’t paid off. There is every sign that more of Corus’s assets may be put on the block.

“While we face a challenging environment, the management is focussed towards improving the competitiveness of our operations,” Mistry tells shareholders. He offers greater detail on the company’s new plant being built in Odisha: “The Kalinganagar project is key. Stage-wise commissioning is expected at the end of FY15, and this facility is expected to significantly strengthen the company’s portfolio.”

The Tata group’s annual general meetings (it conducts 32 for listed companies every year; I attended six, of some of its biggest companies) provide a useful peek into Cyrus Mistry, chairman of Tata Sons. When predecessor Ratan Tata chaired those meetings, shareholders rarely asked probing questions, preferring instead to seek his autograph and even lauding him as a corporate noble. The deference is understandable: By the time he demitted office, Ratan Tata had become a larger-than-life figure, feted around the world, the senior statesman of India Inc, an embodiment of what India was capable of. Though Mistry occupies the same chair, he is much younger (almost a generation), new to the job (two years), and still to build a legacy.

But he is no newbie. He comes from a storied business family (father Pallonji Mistry is chairman of the Mumbai-based construction major Shapoorji Pallonji Group), which owns the largest block of shares in Tata Sons, the holding company, which in turn controls the $100 billion Tata empire. Pertinently, he ran the family firm for six years as joint managing director. So when he doesn’t get ruffled at pointed questions from ordinary shareholders and is willing to express his company’s shortcomings, it sits well. He’s a comforting presence, the person you can take home to mum.

Beyond that honest, boy-next-door appeal, perhaps accentuated by the fact that he wears open-collar shirts inside the starchy, pin-striped environs of Bombay House, the group’s Mumbai headquarters, he has begun revealing himself in other ways. While it may seem just the other day, it’s nearly two years (seven quarters to be precise) since he began running the Tata group as chairman, and three since he apprenticed under Ratan Tata during the handover. In many mammoth public sector companies, that’s often the entire term of a chairman.

So, what does Mistry’s tenure so far say about the direction of India’s largest business house? Some would argue that at his position, he needs to be dreamer-in-chief, piecing together a picture of the Tata group in the 21st century, which his executives can deliver on. Ratan Tata did something like that, evangelising the idea of globalisation—nearly 70% of the Tata group’s revenues come from overseas now. Mistry’s two New Year letters addressed to all employees at the beginning of 2013 and 2014 speak of many things—innovation, nation building, ethics, the Tata way, etc. At the annual leadership conference in Mumbai earlier this year, he spoke of big investments ($35 billion over the next three years), and that the Tata group should count among the world’s 25 most valuable companies, and reach 25% of the world’s population, both by 2025.

If these are the outcomes, what will be the journey? A Mumbai-based banker, who asked not to be named because of the privileged nature of his relationship, says Mistry shouldn’t hurry in trying to articulate a larger vision because of the number of years he has ahead of him. If he plans stepping down at 75 as per norms, that’s 29 years beginning 2015. In other words, it’s premature for him to announce a big idea. You can also say that in a group this big, it’s not about one silver bullet, but about multiple initiatives. The only counterpoint: Are his investors willing to wait?

One Singapore-based investor who declined to be named said all company promoters meet investors and discuss their “journeys”, so why not Mistry? Equally, Saurabh Mukherjea, who heads the institutional equities business at Ambit Holdings, thinks two years is an inconsequential timeline. “The single biggest defining feature of Tata Sons is that they think in terms of decades; they do that more than any other group in the country.”

It’s not immediately clear if Mistry came to Tata Sons with a plan, like his predecessor. Much before he took over, Ratan Tata had put together some broad ideas of what he would do if he bagged the top job. What is, however, amply clear is that Mistry has spent his first couple of years meeting people all over the world, seeking ideas. As a Bombay House colleague says, “Mistry has been pumping flesh at -45 degree Celsius [Labrador and Quebec provinces, Canada], and 45 degree Celsius [Kalinganagar]. He has been travelling more than I have seen Mr. Tata travel ... Everything we do, he wants to know the strategy behind it.”

What’s also evident is a series of actions which, seen in totality, indicates how Mistry is thinking. Notoriously press-shy, Mistry wasn’t available for comment. Since he took over, he hasn’t sat for a single media interview. But Tata group officials were available for background briefings.

Financial community who have previous dealings with Mistry say he has an eye for numbers. They see him as an astute businessman who gets to the core of an issue very quickly. At Afcons Infrastructure, an engineering, procurement and construction outfit that Mistry oversaw for nearly a decade after his family bought it in 2000, the operating credo was, “Construction companies make money not by bagging good contracts, but by avoiding the bad ones.”

As the business scaled up—turnover grew 10 times on Mistry’s watch—Afcons emphasised “focussed tendering and selecting the right jobs”, says a former Afcons officer who saw Mistry from close. He even appointed a team of former Arthur Andersen officials, who were tasked with developing a risk-management framework for tendering and execution.

So what he must be seeing across spreadsheets can’t all be making him smile.

As the table (‘Being Cyrus’) shows, the top 10 Tata companies, which account for over 90% of the group’s turnover, are in varying degrees of stress, save Tata Consultancy Services, Voltas, and Titan. If Ratan Tata’s early years were spent asserting the rights of the centre in what was then a loose federation of companies, you can be sure Mistry’s focus will be on improving the group’s financial health. None of the stress is of Mistry’s doing, and in most instances the causes are environmental—economic downturn, policy ambiguity, and so on.

Mistry is trying a combination of things, such as asset sales, closure, recapitalisation, new launches, and perhaps even management change. He is treading carefully because such moves are an admission of assumptions that haven’t worked out. Mistry’s is, after all, a complex inheritance: In the past few decades, while the Tata group has been transformed into a supremely ambitious and go-getting outfit, like all other hungry organisations around the world, it’s made bets that haven’t paid off. Mistry’s challenge is to reorder parts of his empire without making it look like an indictment of past decisions, and equally retain what is now the ethos of the Tatas: a group that dares to make big bets, backed by the confidence that comes from some taste of success.

The business where he has been the boldest is Indian Hotels, better known for its brand of Taj hotels. He has brought in a new head, Rakesh Sarna from the Hyatt, after the previous incumbent Raymond Bickson exited. Sydney Blue, the Australian hotel that Indian Hotels acquired in 2006 for $27 million, was sold at the end of 2013 for $30 million after years of failing to make a profit. “Indian Hotels [was] looking for this divestment to focus on its core markets,” the company said on the deal in a stock exchange announcement. What that means is that the focus is back on India.

Then in September, just two years after it had bagged a management contract to run the Taj Palace Marrakech in Morocco, the company issued a statement pulling out of the deal with no specific reason. Earlier, at the company’s annual general meeting, with reference to the hotel chain’s overseas properties and the investments in Orient Express ($262 million for 7% in 2007), Mistry blamed the company’s decline in value to the global recession, but said that it will “continue to monitor the performance of these assets on a periodic basis”. He also added that the company would take a call on the Orient Express Hotel chain investment. That was significant given that despite all the criticism heaped on the Orient Express deal, Indian Hotels kept resolutely defending the transaction.

Sale of assets is equally evident in Tata Steel. The company is in talks to sell the long products business to the Klesch Group, run by Gary Klesch. Klesch buys distressed commodity assets and then runs those. The deal is expected to close next year. Long products are a low-margin business, which doesn’t fit in as Tata Steel Europe shifts to a higher-margin model. It includes Scunthorpe Steelworks in north Lincolnshire, England, as well as some units in Germany and France. Scunthorpe produces about 2.8 million tonnes, or around 20% of Tata Steel Europe’s production. It employs about 6,500 people, or roughly a third of the group’s British workforce and a fifth of Europe’s.

Commodity businesses are marked by expansion and contraction: aggregating capacity during bull runs and then shedding it, often piecemeal, when the markets turn sour. So Mistry is following a time-honoured practice. Equally, there’s nothing in Tata’s history that shows it doesn’t sell: In the 1990s, it sold Tata Oil Mills and Lakmé, and exited joint ventures with Mercedes-Benz, IBM, and Honeywell.

Seemingly intractable problem seems to be telecom. Tata Teleservices (Maharashtra) is a Rs 2,818.7 crore company, and also the entity on the back of which the group got telecom licences. It offers fixed line and mobile telephony services in Maharashtra (including Mumbai) and Goa.

Then there is Tata Teleservices, essentially a joint venture with Japan’s NTT Docomo. Tata Teleservices began with CDMA operations under the brand name Tata Indicom, mobile broadband under Tata Photon, and 2G GSM services under Tata Docomo. It also runs a telecom tower business in partnership with Srei Infrastructure, where the latter has majority management control. It is now the group’s most troubled telecom business, with debt of Rs 28,000 crore.

Earlier this year, NTT Docomo announced it wanted to exit the JV by triggering an option built into the partnership. That is under a cloud. Then there’s the third company called Tata Communications (formerly VSNL). This company makes revenues of around Rs 20,000 crore and is, by far, the most successful among Tata’s telecom plays. It runs a submarine cable business that offers generator and server support, fixed data services, and broadband. It’s basically more in line with the group’s general profile of nation-building ventures. Given Mistry’s emphasis on profitability, the question is, which part of telecom does he want to remain invested in?

He could potentially look at retaining just Tata Communications. His other option would be to stay in the mobile business, and keep investing in the hope of some success. But it appears unlikely. The challenge is that the Tatas got into mobile based on a sound business idea. It had a strong information technology company, Tata Consultancy Services, and telecom is critical in the new information age. “We entered believing there would be an ultimate convergence of IT and telecom, and that if we were strong on one side, we could become strong on the other,” says an insider. Those propositions haven’t gone away, but the business is messed up. The billion dollar question: How soon can Mistry cut his losses and walk away?

Much of this is about reordering the legacy. But what of the future? That’s where Mistry is untrammelled by the past and can demonstrate his business genius. Another way of posing the same question: Which are the new Tata Consultancy Services or Titans that he can or will create, which will generate immense shareholder value?

Two years is too short to evaluate that, but there are early signs. At various internal meetings, Mistry has spoken of clusters—defence, smart cities, innovation, consumer-facing businesses. But piecing together what Bombay House insiders say and some of the moves that Mistry has made, it’s evident that more than the specific ideas, it’s the approach which he has firmed up. One revolves around the idea of more collaboration among Tata group companies. As a senior Tata executive points out, the belief is that the “collective can get more business than the individual”.

Tata executives stress that this isn’t merely about best practice sharing, which has been prevalent for at least two decades now, but the coming together to build new businesses. One of the exercises under way is to evaluate if a common e-commerce platform can be built within the group, across companies. The idea, Tata executives say, is not to derail the existing e-commerce initiatives of individual companies, but evaluate if a coming together will fetch more market share in a new demographic, say, millennials.

Something like this has many moving parts which often seem disparate. A Tata insider speaks of Mistry cranking up the consumer insights function across the group. Not only is a mammoth customer research exercise under way, but individual companies such as Tata Industries, Tata Chemicals, and Tata Global Beverages have all appointed consumer insight heads. A Tata executive says that Mistry’s style is to ask questions constantly. “He’ll step into Selfridges in London, see some new beverages, take pictures, send them to the head of Tata Global Beverages, and ask what’s possible.”

Or, for that matter, take how the group is looking at the opportunity thrown up by Prime Minister Narendra Modi’s announcement to build smart cities. Says an executive: “If I am Tata Projects and do EPC [engineering, procurement & construction] contracts, then I could play one role in this scheme; if I’m Tata Projects plus Tata Housing plus Tata Power plus Tata Communications, then I can go in with a much bigger project outlook.”

Mistry’s collaborative framework has other implications. When J.R.D. Tata ran the group, he allowed it to function in the federation model. Ratan Tata consolidated the group through a series of moves, such as increasing Tata Sons’ shareholding in individual companies, and creating common platforms where senior management participated. Mistry doesn’t need to drive home the preeminence of Bombay House any longer. But as the companies become larger and larger (Tata Motors and Tata Steel are part of the global Fortune 500) and chart their own destinies, he needs to remind them that they are a part of the same group beyond the blue-and-white logo, the common shareholder, and shared values. Collaboration achieves that.

The other approach visible is using technology. Exhibit A: Gopichand Katragadda. This former managing director of GE’s India Technology Centre joined the Tatas in July as the group’s first-ever chief technology officer, reporting directly to Mistry. Katragadda led a team of over 5,000 engineers and scientists at GE and built its largest integrated, multidisciplinary centre in the world, in Bangalore. His job description now: making sure that the idea of using technology seeps into every bit of the Tata empire. It could mean creating a new grade of steel at Tata Steel to building a more energy-efficient compressor for Voltas air conditioners to understanding preferences of Indian Hotels customers way better. What’s significant is that there are no boundaries drawn for Katragadda. It’s for him to define the possibilities for Mistry.

Katragadda is one of Mistry’s key hires. He has also been staffing the Group Executive Council (GEC) which works as his brains trust. He’s brought in Madhusudan Kannan, former head of the Bombay Stock Exchange, as head of business development; Mukund Rajan, formerly head of private equity advisory at Tata Capital, as custodian of brands and chief ethics officer; London Business School professor Nirmalya Kumar to run strategy; N.S. Rajan, formerly partner at Ernst & Young, to head human resources; and Harish Bhat who was running Tata Global Beverages as CEO. There is talk that he will very soon appoint someone with a banking and finance background as group CFO.

Mistry, who has also been vocal about getting more women to join the group, has inducted Vishakha Mulye, managing director of ICICI Venture on the board of Tata Power, Falguni Nayar (former MD of Kotak Mahindra Capital) to Tata Motors’ board, and Ireena Vittal, a former McKinsey partner, on boards of Indian Hotels and Tata Global Beverages. (Some of that could also be a response to the Sebi mandate to hire at least one woman director.) It’s evident that he is staffing the group with younger talent, in a sense his contemporaries, who will last the journey with him.

Those who have seen him at Afcons say that its growth was largely due to Mistry’s ability to pick the right team. Within two to three years of Pallonji Mistry buying Afcons, Mistry brought on board managing director K. Subrahmanian, executive director (finance) S. Paramasivan, and executive director (business development) Anil Jangle. He then hired human resources head, Bhakti Prasad, to focus on communication between the top management and employees. A comprehensive performance management system was built, and Mistry pushed for a performance-oriented culture, which included weeding out non-performers. All of this was unheard of in the construction industry in those days.

Cyrus Mistry was born exactly a hundred years after J.N. Tata founded what would one day become India’s largest conglomerate: By the time he demits office, it’ll be a few decades shy of 200 years. While there are enough outfits which are way older (typically Japanese), there are no modern corporations the way we understand the term that are as old today. It’s perhaps appropriate that the venerable GE, to which the Tatas have often been compared, comes close: It was founded in 1876.

What accounts for GE’s longevity? The obvious answer would be its corporate culture. Sometimes culture is also the enemy of change. But in GE’s case, what has mitigated that is adaptability, or the ability to assess the environment for what it’s worth, without any dogma. The Tatas have also exhibited that often in the past. And now it’ll be up to Mistry to demonstrate that doesn’t change.

- Additional reporting by Rajiv Bhuva