Tata's Succession: For Cyrus Mistry, the challenges ahead

Mr Cyrus Mistry takes over from a man who over the last two decades transformed the Tata Group into a global enterprise.

Mr Ratan Tata was barely 54 when he assumed control of the Group in 1991. His successor is pushing 44 and this is keeping in line with a whole lot of other Tata company managing directors who are in their 40s.

Tata Steel's acquisition of Corus, Tata Motors buying Jaguar Land Rover and TCS going public were some of the significant milestones after Mr Ratan Tata took over from JRD as Chairman of the group.

“Mr Tata has taken the group to great heights and we hope Mr Mistry will take it to greater heights,” said an official closely associated with the selection committee. The five-member committee held 18 meetings over the last on-and-a-half years and interviewed a large number of candidates, both Indian and expatriates. That the Mistry family was the single largest shareholder in Tata Sons was not a factor in the selection, the official said.

“Mr Tata had a tougher clean-up exercise where there were many powerful individuals who were running their own fiefdoms. He managed to do this while carving out a new global agenda for the Group. Mr Mistry will have a relatively easier job on his hands,” an industry veteran said.

Yet, there are many challenges ahead for the young Chairman-to-be. Business Line takes a look at some of these critical business segments.

Steel

Weak demand and decline in global steel prices are the key challenges faced by Tata Steel's European operations. This is even as the prices of raw materials such as coking coal and iron ore rule high as compared to a year ago. Tata Steel has reduced its capacity utilisation marginally in line with weakening demand and may have to resort to production cuts if demand does not improve in Europe. Even in India, the company is up against weaker demand from sectors such as construction and automotive, but expects volumes to grow by eight per cent for the year.

Automotive

The big disappointment has been the Nano which is clocking modest numbers. The car business needs to rev up though commercial vehicles have been doing well. The Tatas are the market leader in trucks and buses but a lot will depend on the state of the economy over the next few months.

Telecom

In the telecom sector, the Tatas have their hands full with major challenges for both Tata Teleservices and Tata Communications. Tata Tele is now the fifth largest telecom player in a crowded market with as many as 14 in the arena. But the overall telecom sector is witnessing disturbing trends over the past year. All the operators' revenues, including Tata Teleservices, are stagnating, profitability is declining, and investments are slowing and costs rising.

Tata Teleservices recently undertook a major restructuring exercise in bid to cut costs and rationalise operations. Mr Mistry will have to ensure that this pays off in the long term.

Apart from the tough market conditions, there are a whole host of regulatory issues especially those related to spectrum. Tata Teleservices still does not have GSM spectrum in key markets like Delhi. The company's 3G roll out is also under a cloud with the Government raising questions over roaming agreements.

On the Tata Communications front, the worry would be to bring the company back into profitability. The company, which once had a monopoly over the international long distance segment, has had to reposition its strategy with more focus on foreign markets. While this has paid off to some extent, the ongoing dispute with the Government over funding and land sale has put the company's expansion plans on hold.

Another immediate challenge for the new Chairman would be to steer the company away from all that happened with Ms Niira Radia and the 2G scam. Although there was no business implication, the Tatas took a major hit on its image, which now Mr Mistry has to build.

IT services

Mr Mistry's appointment comes at a time when offshore IT/BPO players are grappling with macro uncertainties in key overseas markets such as the US and Europe, and, at the same time, coping with currency volatility back home.

For TCS, the largest Indian IT services company, the challenge will be also to sustain its pole position in a market that has already started seeing a reshuffle in the pecking order of Tier-1 vendors, says Mr Sanjeev Hota, Associate Vice-President - Institutional Equities at Sharekhan.

Also given its over two lakh employee base, TCS will have to chase, perhaps even more aggressively, the non-linear growth strategy (beyond adding employees). “Deals such as the recent $2.2-billion contract from Friends Life (a British financial services firm) will be critical in this regard…If TCS wants to scale up further, it will be important that the revenue growth outstrips the employee growth,” notes Mr Harit Shah, Senior Research Analyst at Nirmal Bang Institutional Equities.

Though the company has been growing at a scorching pace in the last few quarters, the euro zone crisis and the rupee volatility are key challenges. Mr Tata's acumen when it comes to the business of technology is well known. Will the new Chairman's lack of expertise in the technology space be a deterrent going forward? “I do not think so…at the top level people settle into their roles pretty quickly. Sometimes a complete outsider can bring a completely new perspective to the business of technology,” TCS sources said.