Why is Tata Sons selling stake in the goose that lays golden eggs?

So far this fiscal year, Tata Sons Ltd has received dividends worth Rs6,853 crore from Tata Consultancy Services Ltd (TCS). Besides, it tendered shares worth Rs10,278 crore in the IT services company’s buyback last June. But evidently, even these massive inflows of $2.6 billion aren’t enough to fill the holes created by the group’s non-performing assets such as telecom.

So, for the first time in nearly a decade, Tata Sons has sold a stake in TCS to raise another $1.4 billion. Also, for the first time in more than a decade, it plans to raise $1.5 billion through an offshore syndicated loan, Bloomberg reported last week.

A large part of these funds is likely to be used to clean up the mess created by Tata Teleservices Ltd. Tata Sons is honouring the implicit loan guarantees for loans taken by the telecom subsidiary, besides which it had to foot the tab for buying back NTT DoCoMo Inc.’s stake. The damage is expected to be around $5 billion, without including the write-down in the value of the group’s equity investments in the venture.

One concern for TCS investors is if such requirements will keep coming up, necessitating future stake sales by its promoter.

Now that the telecom misadventure has ended and with the troubled Corus acquisition in the process of being housed in a joint venture with Thyssenkrupp AG, the group has been showing a penchant for taking over other stressed assets. Tata Steel Ltd was reportedly the most aggressive bidder for assets of Bhushan Steel Ltd, and as some analysts see it, it is threatening a repeat of Corus.

Besides, the group has said it will consider buying Air India with a view to gaining scale in the aviation industry.

Investors worry that if these or some other projects backfire, the Tata group will fall back again on a TCS stake sale to get by.

But if all goes well, and some of the proposed acquisitions create value, like Jaguar Land Rover did for Tata Motors Ltd, the decision to sell a small portion of the family silver would prove to be a masterstroke. After all, while TCS may be the proverbial goose that lays golden eggs, the flipside is that the Tata group’s exposure to this one company is at unhealthy levels. In FY17, dividend from TCS accounted for 92% of Tata Sons’ total dividend income and 86% of total revenue from operations.

In that backdrop, selling down its stake in TCS and reinvesting the proceeds elsewhere is not a terrible idea. It’s also important to note here that TCS has been enjoying rich valuations lately, and the stake sale has been timed well.

As pointed out earlier in this column, the TCS stock has been pricing in growth estimates that seem nearly impossible to achieve.

Prima facie, the stake sale by the company’s promoter appears to support the view that returns may not be great from current levels. But as pointed out above, the Tata Sons management may have been guided by other factors— such as the need to raise funds to plug some holes and create new opportunities, as well as to de-risk the group from a disproportionately high exposure to TCS. Besides, the gains from the stake sale will help offset the write-off necessitated by the shutdown of the wireless business. It will spruce up Tata Sons’ profit and loss statement for FY18 and enable it to continue paying dividends. As such, TCS investors needn’t read too much into the timing of the sale.

But the concern that this may not be the last of such sales may well be a valid one. TCS shareholders need to live with the risk of a sell down by its promoter to support the group’s other adventures and misadventures.livemint

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