The message from Tata group stocks

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Cyrus Mistry’s resignation from Tata group firms may provide some relief to the stocks of these firms. After all, shares of Tata Consultancy Services Ltd had risen after the firm’s shareholders voted out Cyrus Mistry as a director on its board.

But Mistry hasn’t given up, and the ugly boardroom battle is likely to shift to the courts. Investors still need to brace for a long-drawn fight, it appears. In any case, even if Mistry disappears from the scene, his statements have already done enough damage. The Tata-Mistry saga has dented valuations of all group firms, even in companies such as TCS where he was already shunted out.

As the chart shows, each large Tata group firm has underperformed peers, irrespective of market conditions in their respective sectors. TCS shares have fallen at a higher rate vis-a-vis the Nifty IT index. Investors are applying a discount on account of corporate governance-related concerns. In some cases, they don’t seem to be overly concerned. TCS continues to lead in the information technology sector in terms of the price-earnings multiple.

But in some other cases, valuations have fallen much more. Shares of Tata Chemicals Ltd and Indian Hotels have fallen as much as 17-24%. According to analysts, this is because of a concern that the recovery in these firms, which Mistry initiated, is likely to be derailed. Tata Motors Ltd’s shares, too, have underperformed peers by a wide margin. Overall, the performance of Tata group stocks in the past two months sends a signal that investor confidence has been shaken. Alongside all the other battles it fights, the Tata group also needs to work hard on rebuilding investor confidence.

From an investors’ perspective, it’s clear that for a reversal of the underperformance of the past two months, market conditions need to improve in the industries in which group firms operate. Take the case of Tata Steel Ltd, which is surprisingly the best performing Tata group stock since the Mistry saga began. It has fallen by less than 3%, far lower than the fall in other Tata group stocks.

ALSO READ | What if other Tata group shareholders vote the same way as those at TCS?

Tata Steel shares have, of course, been helped by the rally in the stocks of metal firms since end-November. This underscores the fact that external factors such as market conditions can help investors overcome some of the losses due to the ugly boardroom battle at Tata group firms. But, of course, not all investors may have the patience to wait for market conditions to improve and undo the damage done by leadership. Many have already voted with their feet, and others may follow suit.

As such, the Tata group clearly has its work cut out for restoring credibility.