This month when Tata Steel announced non-cash write-down of Rs 1577 crore for its investment in Benga project, it took the total write-offs by Tata Group chairman Cyrus Mistry to Rs 13,201 crore ($ 2.2 billion), since he took the reins of group leadership from Ratan Tata in December 2012. This is primarily the non cash write down of goodwill in balance sheet of four companies.
In May soda-ash maker Tata Chemicals announced Rs 924 crore write down for its African operation Tata Chemicals Magadi. For both Tata Steel and Tata Chemicals this has been second write down in two consecutive financial years.
In over two decades of leadership Ratan Tata invested about $ 16 billion in global acquisitions to bolster Tata Group companies at a time when India was seeing an onslaught of multinational companies. This includes marquee acquisitions such as Tetley ($ 450 million), JLR ($ 2.3 billion) and Corus ($ 12.8 billion). He did so to acquire the strength of global scale and technology that could take the group forward. But now a 14% of his investments have turned awry.
“There was a time when everybody wanted to acquire resources; some of these acquisitions turned out to be good and some of it not,” says Dhananjay Sinha, head of research & strategist, at domestic brokerage Emkay Global Financial Services. “The fact is that the success of JLR has virtually saved Tata Motors from its weak domestic business,” he says.
But the real pain has come from Tata Steel’s $ 12.8 billion acquisition of Corus in 2007. The largest write-down by Mistry came in May 2013 when Tata Steel took a Rs 8,356 crore ($ 1.6 billion) impairment on Corus. This raised questions if the company actually went overboard in its pursuit to be one of the top steel makers in the world. More importantly the write down came six year after the acquisition and only after the new chairman took the charge. It was clear at least for four years that deal had turned a bad.
“Not too many Indian management are comfortable to admit this much amount of write-downs,” says Ajay Garg, managing director at Mumbai based investment bank Equirus Capital. “Cyrus Mistry is trying to set a trend with being up-front with this,” he says.
Tata Chemicals previous write down came for its European operations. It acquired the UK based soda ash maker Brunner Mond for Rs 508 crore in December 2005. Last year in May the company announced write down worth Rs 483.83 crore including goodwill and assets.
Other significant impairment in the group came last financial year in Indian Hotels (IHCL). The company that runs Taj brand of luxury hotels, picked up costly assets in key markets including the United States to increase footprint in source markets. But what hit the company the most was its attempt to acquire Bermuda-based Orient Express Hotels.
IHCL through its wholly-owned subsidiary Samsara Properties acquired a 10.01% stake in Orient-Express for $ 211.28 million in September 2007. Following this, Indian Hotels made multiple attempts to pursue strategic discussion with Orient-Express which was rebuffed by the NYSE-listed company. Last year it finally dropped its formal bid. In three attempts the company wrote-down Rs 1160 crore in last financial, citing net worth erosion caused by global recessionary conditions.
Other company which has acknowledged loss in overseas acquisition is Tata Motors. It acquired a 21% stake in Spanish bus maker Hispano Motors in 2005 and took it to 100% control by 2009. Due to the worst decline in Europe’s bus market, Tata Motors sunk Rs 700 crore that are now recognised unrecoverable leading to write-down.
“When a company takes inorganic growth route its natural for some assets to succeed and some to fail,” says Jacob Mathew, managing director at domestic investment bank Mape Advisory. “But it is tough to find mangers being up-front about it as it acknowledges their mistakes,” he says.