theme back to business - credit suisse

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13 July 2017 Asia Pacific/India Equity Research

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THEME

Back to business

Figure 1: The five likely key focus areas for the new team

Source: Credit Suisse research, Credit Suisse HOLT Lens for Titan, Tata Chemicals and Tata Global Beverages

■ Largest Indian conglomerate but areas to improve. The Tata Group

with over 100 companies is India's largest conglomerate with US$100 bn+

of revenue and 660k employees in FY16 and current market capitalisation

of US$125 bn+. The companies present a mixed bag—only four of the top

ten have a 15%+ ROE, and about 60% of companies for which we have

data have an ROE less than 10%. We estimate TCS to contribute 85-90%

of the parent's dividend receipts. There is a long tail with 94% of revenue

from the top-ten companies and domestic being only one-third of revenue,

with domestic consumption (ex-financial services) being less than 10%.

■ New energy at the top. With the new CEO, N Chandrasekaran (ex-CEO of

TCS), and his team we expect renewed energy at the top with five key

elements of strategy—improvement of return ratios (especially for Tata

Motors, Tata Power, Tata Steel & Tata Teleservices), focus on domestic

consumption and leveraging brands better, simplicity in structure and

holding, ensuring relevance in all sectors it is present in and digital initiatives.

■ Shift in focus will raise return. Execution is where the new team can

differentiate itself. Tata Motors can benefit from better India execution; Tata

Steel from improving returns in Europe and growth in India; Voltas from a

greater focus on its consumer business; and Titan from the domestic

consumption theme. Among others, media reports (Business Today, Live

Mint) have talked of how domestic focus and brand leverage could impact

Tata Global while new consumer offerings and non-core divestiture may

impact Tata Chemicals. We estimate that if some of the changes succeed,

there could be incremental value creation of US$10 bn-plus in the above

covered names and 20-40% gain for such stocks. Additionally, any debt

reduction in other companies could help the enterprise value of the Group.

Themes Companies that could be impacted Incremental value (% of current

market cap)

Return ratios Tata Motors: Domestic focus

Tata Steel: domestic focus, international

restructuring

Voltas: Expansion of consumer business

Titan: Focus on domestic consumption

Tata Chemicals: Consumption, cross-

holdings

Tata Global Beverages: Domestic, cross-

holdings

US$5 bn (22%)

US$2 bn (18%)

US$0.5 bn (21%)

US$3 bn (37%)

US$0.5 bn (19%)

US$0.6 bn (34%)

Domestic consumption

Simplicity, in structure

and holdings

Relevance, in segments

where the Group has

presence

Digital initiatives across

segments

http://www.businesstoday.in/magazine/corporate/tata-global-beverages-india-business-focus-after-acquisitions/story/214453.html

http://www.livemint.com/Companies/1A0NKIut3igfeJkQyd2azN/Tata-Chemicals-to-focus-on-high-margin-value-added-consumer.html

13 July 2017

Tata Group 2

Focus charts

Figure 2: The largest Indian conglomerate with a

significant international presence

Figure 3: Top few companies account for a major

chunk of revenue, PAT and market cap

Source: Company data, Thomson Reuters, Credit Suisse research Source: Company data, Capitaline, Thomson Reuters, Credit Suisse research

Figure 4: A significant proportion of companies

have less than 10% ROE profile

Figure 5: Domestic business accounts for only a

third of Tata Group's overall revenue

Source: Company data, Credit Suisse estimates Source: Company data

Figure 6: Tata Group's India B2C exposure is low,

this should be a key focus area going forward

Figure 7: Tata Motor's domestic business

turnaround can be a significant stock price driver

Source: Company data, Credit Suisse estimates. Note: The above proportions exclude financial services

Source: Credit Suisse estimates

Figure 8: Voltas—there is a manifold opportunity

outside ACs

Figure 9: Tata Steel: Resolution of Europe can be a

trigger; more focus on domestic operations likely

Source: Euromonitor, Credit Suisse estimates Source: Company data

20%

40%

60%

80%

0

50

100

150

Tata Group RelianceGroup (RIL)

Aditya BirlaGroup

Bharti Group MahindraGroup

Revenue (US$ bn)

Combined Mcap of listed companies (US$ bn)

Share of domestic revenue [RHS]

79%

93%

77%

94%

99%

98%

0% 20% 40% 60% 80% 100% 120%

Total top-3

Total top-10

PAT share (FY16) Revenue share (FY16) Market cap share

0

5

10

15

20

>20% 10-20% 0-10% Negative

ROE profile of companies

Number of companies

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Tata Group: Revenue break-up

International India

17%

10%

8%

13%

7%6%

0%2%4%6%8%

10%12%14%16%18%

FY06 FY11 FY16

Tata Group's India B2C revenue share

India B2C revenue India B2C revenue (excl. Telco)

Current value

per share

Blue sky value

in 2 years

Incremental value

(per share)

What needs to happen?

Domestic business 80 130 50 Revival in CV business where company

recoups some market share; will lead to re-

rating of India business to 9x EV/EBITDA.

Tata Motors Finance 10 30 20 Needs to be run like a proper NBFC; other

Auto OEMs owned NBFCs getting much

better value today as run well and

diversified beyond Autos

China JV 70 100 30 A separate HK listing (like Brilliance) of the

China JV can set a benchmark valuation for

the JV

Total value of businesses 160 260 100

ProductMkt size

(US$mn)

Five year

CAGR (%)Key players

Washing machines 1,369 10.4%LG (26%), Samsung (20%), Videocon (16%),

Whirlpool (11%), Godrej (7%), IFB (6%)

Microw av es 285 10.2%LG (29%), Samsung (26%), IFB (15%), Whirlpool

6%), Godrej (6%), Panasonic (6%)

Refrigerators 3,217 17.3%LG (25%), Samsung (22%), Whirlpool (13%),

Godrej (12%), Videocon (9%), Haier

ACs 2,015 11.3%

Voltas (+21%), LG (~19%), Samsung (~10%),

(3%), Bluestar (~10%), Daikin (9%), Videocon

(7%)

44%28%

0%

20%

40%

60%

80%

100%

Revenue EBITDA

Tata Steel: Revenue and EBITDA share

India Europe Others

13 July 2017

Tata Group 3

Back to business

Largest Indian conglomerate but areas to improve Started in 1868, the Tata Group is India's largest conglomerate—FY16 revenue was over

US$100 bn, headcount over 660k and current market capitalisation is over US$125 bn. It

has about 100 operating companies.

As is to be expected in such a large conglomerate, there are many areas for improvement.

Only four companies in the top ten—TCS, Tata Motors, Voltas and Titan—have an ROE in

excess of 15%. ROE is less than 10% for about 60%+ of the companies for which we have

data. TCS is the single largest source of cash for the Group—it contributed 65% of Group

PAT and we estimate that its dividends accounted for 85-90% of the total inflow to the

parent. There is a long tail of companies as well—the top-ten companies (including

subsidiaries) account for 92% of the Group's revenue and 98% of PAT. Domestic B2C, a

strong growth area, contributes less than 10% of revenue (ex-financials).

The Group market capitalisation has been nearly flat over the last year, up 11% over three

years, underperforming the Indian market. Large companies—TCS, Tata Motors and Tata

Steel—have underperformed for over three years as have some smaller ones.

New energy at the top N Chandrasekaran (Chandra) took over as Chairman in January 2017 after a few months

of turmoil following his predecessor's dismissal. He is the first Chairman from outside the

shareholding families and has a stellar track record of leading TCS for seven years. He,

with his new team, can provide renewed energy at the top, in our view.

Based on our understanding of the Group, individual companies, and comments made in the

press (Business Standard, etc), we believe new management's strategy will hinge on five

key objectives: (1) Improvement of return ratios, especially for larger companies; (2) Focus

on domestic consumption. This would likely be for consumer businesses (Global, Chemicals,

Voltas) and financial services (Capital, insurance); (3) Simplification of the structure and

holding, including consolidating similar businesses in different entities and simplification of

intra-group holdings; (4) Relevance—the Group has sub-optimal presence in some large

segments such as financial services, retail/consumer and aviation. It would either want to

scale up or exit some of these. It also has presence in small segments through companies

whose sizes are not significant; and (5) Given the Group's presence in technology and

Chandra's background, it may step up its digital initiatives across its various businesses.

Shift in focus will raise returns Given the above broad themes, we believe companies such as Tata Motors, Tata Steel,

Voltas and Titan could benefit. Tata Chemicals and Tata Global Beverages could also be

impacted by the above strategy. Tata Motors could gain from better execution in the

domestic business, Tata Steel from better returns in the European operations. Voltas can

leverage its consumer brand for new consumer products (outside AC and air coolers), and

demerger of its projects business can also make it a pure consumer play. Titan may

benefit from the Group's focus on domestic consumption. Among others, media reports

(Business Today, Live Mint) have talked of how domestic focus and brand leverage may

impact Tata Global while new consumer offerings and non-core divestiture may impact

Tata Chemicals. Tata Power and Tata Teleservices had combined debt of US$14 bn.

We estimate that if some of the changes succeed, there could be incremental value

creation of US$10 bn-plus in the above covered names and between 20% and 40% for

individual covered stocks. Additionally, any debt reduction in other companies could help

the enterprise value of the Group.

We rate Tata Motors, Tata Steel, Titan, Voltas OUTPERFORM; we are NEUTRAL on TCS.

US$100 bn revenue in FY16, 660k employees, about 100 companies, US$125 bn market cap

Only four of the top ten have a 15%+ ROE,

~60% of companies for which we have data

have ROE <10%

New management at the top can bring renewed energy

We believe management will have

five key objectives

Tata Motors, Tata Steel, Voltas and Titan are likely gainers in our

coverage universe

13 July 2017

Tata Group 4

Table of contents

Focus charts 2

Back to business 3

Largest Indian conglomerate but areas to improve .................................................. 3

New energy at the top .............................................................................................. 3

Shift in focus will raise returns .................................................................................. 3

Largest Indian conglomerate but areas to improve 6

The largest Indian conglomerate with a high global exposure ................................. 6

Delving deeper into the Group's financials ............................................................. 10

Tata Group underperformed the market in the last one and three years, led by TCS

and Tata Motors ..................................................................................................... 17

Renewed energy at the top 19

Five key mantras .................................................................................................... 19

#1 Focus on the big guns ....................................................................................... 20

TCS: Little to be done ............................................................................................. 20

Tata Steel: Focus on India, addressing the pension issue .................................... 23

Tata Motors: India needs to be fixed ...................................................................... 26

Tata Power: Mundra power plant has weighed on profitability .............................. 30

Tata Teleservices: Challenges in the telecom industry .......................................... 32

#2 Domestic business and B2C may garner higher investment share .................. 34

#3 Some strong consumer brands can be leveraged better .................................. 35

#4 Some important segments need to scale up ..................................................... 37

#5 Restructuring of Group companies and their divisions can add value .............. 42

#6 Simplification of the cross-holding structure ...................................................... 44

#7 Sub-scale operations: Are they really needed? ................................................ 45

#8 Divestments may be value accretive for few companies .................................. 46

#9 Selective M&A approach in some businesses .................................................. 47

#10 Culture ............................................................................................................. 48

Shift in focus will raise returns 49

Tata Motors: Domestic business turnaround can offer upside ............................... 49

Tata Steel: The European business turnaround can improve returns significantly 50

Voltas: Consumer business expansion, demerger of projects can make Voltas a

good consumer play ............................................................................................... 51

Scenario analysis based on HOLT ......................................................................... 52

Overall Group financials likely to improve over the next two years ........................ 53

Tata Motors Ltd. (TAMO.BO) 54

13 July 2017

Tata Group 5

Tata Steel Ltd (TISC.BO / TATA IN) 56

Titan Company Ltd (TITN.BO) 58

Voltas (VOLT.BO / VOLT IN) 60

Tata Consultancy Services (TCS.BO / TCS IN) 62

Tata Power (NOT COVERED) 64

Tata Communications (NOT COVERED) 65

Tata Chemicals (NOT COVERED) 66

Indian Hotels (NOT COVERED) 67

Tata Global Beverages (NOT COVERED) 68

Trent Ltd (NOT COVERED) 69

Tata AIA Life Insurance (Not Listed) 70

Appendix: HOLT Analysis 71

13 July 2017

Tata Group 6

Largest Indian conglomerate but areas to improve Started in 1868, the Tata Group had a total revenue of over US$100 bn in FY16 and an

employee base of over 660,000, with presence in several sectors of the Indian economy.

While the Group has close to 100 operating companies (including subsidiaries), the top-

ten and top-20 companies (by revenue, including subsidiaries) of the Group account for

94% and 99% of Group revenue, 98% and 99% of Group PAT and 94% and 99% of the

Group's gross fixed assets (excluding goodwill and intangibles), respectively.

The largest Indian conglomerate with a high global exposure

Figure 10: The Tata Group is the largest Indian conglomerate with a high global exposure

Source: Company data, Credit Suisse estimates

The largest Indian conglomerate…

Started in 1868 by Jamsetji Tata as a trading company, the Tata Group has grown to

become among the largest industrial groups in India with a presence in multiple segments.

The Group's operations cover most of the key industries including technology, automotive,

telecom, infrastructure, power, defence and retail. Tata Group companies such as TCS (IT

services), Tata Motors (commercial vehicles), Tata Steel (steel), Voltas (air conditioners),

Titan (jewellery) and Tata Global Beverages (tea) are amongst the market leaders in their

respective categories. The Group had a total revenue of over US$100 bn in FY16 and an

employee base of over 660,000.

The Tata Group has a presence in these diverse segments through a large number of

group companies (about 100 including subsidiaries), of which over 20 are publicly listed in

India. These (listed) companies have a combined market capitalisation of over US$125 bn,

and it has increased by 11% over the last three years versus the 27% rise in the Sensex.

The Group's ownership in companies is mainly through Tata Sons. Several Tata Trusts

hold 66% stake in Tata Sons, the holding company. Tata Sons has holdings in each of the

Tata Group companies directly as well as through its subsidiaries.

…with a global business…

While the group expanded its operations by entering into new segments domestically,

international expansion began under the leadership of Mr Ratan Tata (he was the

Chairman of Tata Sons between 1991 and 2012). Tata made several global acquisitions

during his tenure, including Tetley (acquired by Tata Tea in 2000 for over US$400 mn);

20%

30%

40%

50%

60%

70%

80%

0

20

40

60

80

100

120

140

Tata Group Reliance Group (RIL) Aditya Birla Group Bharti Group Mahindra Group

Revenue (US$ bn) Combined Mcap of listed companies (US$ bn) Share of domestic revenue [RHS]

US$100 bn revenue and 660k employees in

FY16, US$125 bn market cap

67% of FY16 revenue was from international

businesses

13 July 2017

Tata Group 7

Glaceau (30% stake acquired by Tata Tea in 2006 for over US$670 mn, though sold later);

Corus (acquired by Tata Steel in 2006 for over US$8 bn); and Jaguar Land Rover

(acquired in 2008 for about US$2.3 bn). Besides these, the IT services business, TCS,

was growing at a brisk pace, further expanding the Tata Group's global revenue base.

About 67% of the Group's revenue came from international businesses in FY16.

…and significant focus on corporate social responsibility

The Group has had a significant focus on ethics and corporate social responsibility (CSR)

since the very beginning. For example, Tata Steel introduced eight-hour working days well

before it became a statutory requirement in most of the Western world, and it also started

the provident fund scheme in 1920, much before the government regulations came (in

1952). Many of the companies in the group continue to be perceived as better places to

work by employees.

A professional leader for the first time at the helm

Historically, the Tata Group has been led by family members of the owners of Tata Sons

(66% owned by Tata Trusts and 18% owned by Shapoorji Pallonji). The first five Chairmen

were from the Tata family (Mr. Jamsetji Tata, followed by Mr. Dorab Tata, Mr. Saklatwala,

Mr. JRD Tata and Mr. Ratan Tata), and the last Chairman (Mr. Cyrus Mistry) was from the

Shapoorji Pallonji family. Mr. N Chandrasekaran (appointed as the Chairman effective

January 2017) is the first professional Chairman of the Group and has a distinguished

track record of leading the most valuable (by market capitalisation) company of the group

(TCS) for seven years.

Figure 11: Tata Group—overview of companies in the manufacturing domain

Source: Company data, MCA, Capitaline,Thomson Reuters, Credit Suisse

Auto

Others

Steel

Auto

Didn't include

Others

Others

Steel

Steel

Didn't include

Didn't include

Steel

Didn't include

Steel

Steel

Steel

Manufacturing

Auto and auto components Steel and Steel products Others

Tata Pigments(100% subsidiary of Tata Steel)

Pigments, paintsRev (FY16): Rs 1.1 bnPAT (FY16): Rs 0.1 bn

Net debt (FY16): Rs -0.1 bnROE (FY16): 15%

Tata MotorsPassenger & commercial vehicles

Mcap : US$ 20,183 mnRev (FY17): Rs 2,745 bnPAT (FY17): Rs 102 bn

Net debt (FY17): Rs 425 bnROE (FY17): 15%

Jaguar Land Rover(100% subsidiary of Tata Motors)

Passanger vehiclesRev (FY17): Rs 2.1 tn

PAT (FY17): Rs 105 bn

Net debt (FY17): Rs -170 bnROE (FY17): NA

Tata Daewoo Comm Vehicle(100% subsidiary of Tata Motors)

M&HCV, S KoreaRev: Rs 48 bnPAT: Rs 3 bn

Net debt: NAROE: 15%

Tata Autocomps Limited(26%, Tata Motors)Auto components

Rev (FY16): Rs 8.3 bnPAT (FY16): Rs 0.1 bn


Tata Cummins(50% JV, Tata Motors)

Auto componentsRev (FY15): Rs 25 bnPAT (FY15): Rs 0.5 bn

Net debt (FY15): Rs 3.5 bnROE (FY15): 7%

Tata Metaliks (50% subs of Tata

Steel)Pig and ductile iron pipes

Mcap: US$ 285 mnRev (FY17): Rs 14 bn

PAT (FY17): Rs 1.2 bnNet debt (FY17): Rs 3.1 bn

ROE (FY17): 58% *

Tata SteelDiversified steel producer

Mcap: US$ 7,680 mnRev (FY17): Rs 1,174 bn

PAT (FY17): Rs 38 bn


Indian Steel and Wire Products

(95% subsidiary of Tata Steel)Wire and steel roll

Rev: Rs 2.3 bn

PAT: Rs 0.1 bnNet debt: Rs 0.2 bn

ROE: 10%

Tata Sponge Iron (55% subsidiary of Tata Steel)

Sponge ironMcap: US$ 197 mn

Rev (FY17): Rs 6.2 bn

PAT (FY17): Rs 0.6 bnNet debt (FY17): Rs -5.7 bn

ROE (FY17): 7%

TRL Krosaki Refractories(27%, Tata Steel)

RefractoriesRev (FY16): Rs 9.9 bnPAT (FY16): Rs 0.0 bn


Tinplate Company of India(75% subsidiary of Tata Steel)

TinplateRev (FY16): Rs 8.3 bnPAT (FY16): Rs 0.7 bn


JAMIPOL(40%, Tata Steel)

De-sulphurising compounds for steel


PAT (FY16): Rs 0.2 bnNet debt (FY16): Rs -0.5 bn

ROE (FY16): 19%

Tata BlueScope Steel(50% JV, Tata Steel)

Coated steelRev (FY16): Rs 15.1 bnPAT (FY16): Rs 0.3 bn


Jamshedpur Continuous Annealing and Processing

(JV, Tata Steel)Annealed products


PAT (FY16): Rs -2.2 bnNet debt (FY16): Rs 15.6 bn

ROE (FY16): NA

Rallis IndiaAgro chemical

Mcap (FY17): US$ 748 mnRev (FY17): Rs 17.8 bn

PAT (FY17): Rs 3 bn


Tata ChemicalsChemicals, pulses, saltMcap: US$ 2,442 mn

Rev (FY17): Rs 133 bnPAT (FY17): Rs 9.9 bn


Tata Hitachi Construction(40%, Tata Motors)Heavy equipments

Rev (FY16): Rs 22.5 bnPAT (FY16): Rs -3.4 bn

Net debt (FY16): Rs 8 bnROE (FY16): NA

Tata Petrodyne(100%, Tata Sons)

Upstream oil and gasRev (FY15): Rs 1.1 bnPAT (FY15): Rs 0.5 bn


Advinus Therapeutic(Tata Group)

Contract research - pharmaRev (FY16): Rs 1.6 bnPAT (FY15): Rs 0.1 bn

Net debt (FY15): Rs 3.2 bnROE: NA

Tata Ceramics(57%, Tata Power)

TablewareRev (FY15): Rs 0.5 bnPAT (FY15): Rs 0 bn

Net debt (FY15): Rs 0.1 bnROE: NA

Tayo Rolls (55% subs of Tata

Steel)Cast anf forged steel rolls

Mcap: US$ 10 mnRev (FY16): Rs 1.3 bn


ROE : NA

N Chandrasekaran is the first "professional" Chairman of the Group

13 July 2017

Tata Group 8

Figure 12: Tata Group—overview of companies in IT, telecom and services domains

Note: ^ Taken from FY17 BSE filing * Business Standard. Source: Company data, MCA, Capitaline,Thomson Reuters, Credit Suisse research

Figure 13: Tata Group—overview of companies in power, engineering and defence domains

Source: Company data, MCA, Capitaline,Thomson Reuters, Credit Suisse research

Not included

Revenue

PBT

IT, telecom and services

Other servicesIT/Engg services/BPO/consulting Telecom and allied

Tata International(Tata Sons and Industries)

TradingRev (FY16): Rs 130.5 bnPAT (FY16): Rs -0.5 bn

Net debt (FY16): Rs 18.4 bnROE (FY16): NA

Tata Elxsi Engineering services, VFX

Mcap: US$ 744 mnRev (FY17): Rs 12.3 bnPAT (FY17): Rs 1.7 bn


Tata Consultancy ServicesDiversified IT servicesMcap: US$ 73,018 mn

Rev (FY17): Rs 1,180 bnPAT (FY17): Rs 263 bn

Net debt (FY17): Rs -495 bnROE (FY17): 33%

Tata Business SupportServices

(100% subsidiary of Tata Sons)BPO

Rev (FY15): Rs 6 bn


ROE (FY15): 15%

Tata Strategic Management(Tata Industries)

Management consultingRev: NAPAT: NA

Net debt: NAROE: NA

Tata Technologies(72% subsidiary of Tata Motors)

Engineering servicesRev (FY16): Rs 10.8 bnPAT (FY16): Rs 2.2 bn


Indian HotelsHotels

Mcap (FY17): US$ 1,959 mnRev (FY17): Rs 40 bn

PAT (FY17): Rs -0.6 bn


Taj Air(Associate, Tata Sons)

Aircraft charterRev (FY15): Rs 0.7 bnPAT (FY15): Rs -0.2 bn

Net debt (FY15): Rs -0.7 bnROE (FY15): NA

TKM Global Logistics(100% subsidiary, Tata Steel)

Logistics and supply chainRev (FY15): Rs 0.6 bnPAT (FY15): Rs 0.0 bn


Tata Interactive Learning(Division of Tata Industries)

Interactive learningRev: NAPAT: NA

Net debt: NAROE: NA

Tata Class Edge(Division of Tata Industries)

Smart classRev: NAPAT: NA

Net debt: NAROE: NA

Tata Teleservices Maharashtra(63%, collectively held by several

Tata Group companies)Mcap: US$ 195 mn

Rev (FY17): Rs 27 bn

PAT (FY17): Rs -24 bnNet debt (FY17): Rs 136 bn ^

ROE (FY17): NA

Tata Teleservices(59%, collectively held by several

Tata Group companies)Telecom


PAT (FY16): Rs -30 bnNet debt (FY16): Rs 336 bn

ROE (FY16): NA

Tata CommunicationsTelecom solutions and network

servicesMcap: US$ 3,330 mn


PAT (FY17): Rs -7.7 bnNet debt (FY17): Rs 66 bn

ROE (FY17): NA

NelcoVSAT, security, managed services

Mcap: US$ 29 mnRev (FY17): Rs 1.4 bnPAT (FY17): Rs 0.1 bn


Tata SIA Airlines (Vistara)(51% JV, Tata Industries)

AirlineRev (FY16): Rs.7.1 bn*PAT (FY16): Rs.-4 bn*

Net debt: NAROE: NA

mjunction services50% subsidiary of Tata Steel

B2B ecommerce for steelRev : Rs.1.3 bnPAT : Rs.0.3 bn

Net debt : Rs.-1.6 bnROE: 19%

Air Asia(40% JV, Tata Industries)

AirlineRev (CY16): Rs.8.3 bn

PBT (CY16): Rs.-1.4 bn

Net debt: NAROE: NA

Tata SkyJV, Tata Sons

D2H television servicesRev (FY16): Rs 44.7 bnPAT (FY16): Rs 0.8 bn


Housing/others

Power, engineering, defense, others

Power Engineering/infra Defence

Tata Advanced Materials(100% subsidiary of Tata Sons)

Advanced composites and armoured products



ROE (FY16): NA

Tata PowerIntegrated power company

Mcap: US$ 3,261 mnRev (FY17): Rs 279 bnPAT (FY17): Rs 14 bn


Tata Advanced Systems(100% subsidiary of Tata Sons)

National security and defenceRev (FY16): Rs 5.7 bnPAT (FY16): Rs 0.2 bn


Tata Power Trading100% subsidiary of Tata Power

Power tradingRev (FY16): Rs 59.4 bnPAT (FY16): Rs 0.2 bn

Net debt (FY16): NAROE (FY16): NA

TAL Manufacturing Solutions100% subsidiary of Tata Motors

DefenceRev (FY16): Rs 2.1 bnPAT (FY16): Rs -0.1 bn


Powerlinks TransmissionJV, Tata Power

Power transmissionRev: Rs 2.3

PAT: 1.1

Net debt: 1.6ROE (FY16): 20%

Tata Realty and Infrastructure100% subsidiary of Tata SonsReal estate and infrastructure



Tata Industrial Services100% subsidiary of Tata Industries

Programme management for defence and aerospace

Rev: NA

PAT: NANet debt: NA

ROE: NA

Tata Power Solar100% subsidiary of Tata Power

Solar energyRev (FY16): Rs 14.9 bnPAT (FY16): Rs -0.3 bn

Net debt (FY16): NAROE (FY16): NA

Tata ProjectsTata Sons

InfrastructureRev (FY16): Rs 42.3 bnPAT (FY16): Rs 0.7 bn


Tata Consulting Engineers100% subsidiary of Tata Sons

Project engineeringRev (FY16): Rs 5.0 bnPAT (FY16): Rs 0.1 bn


TRFMaterial handling equipments

Mcap: US$ 40 mnRev (FY17): Rs 10.1 bnPAT (FY17): Rs -0.2 bn


JUSCO(100% Subsidiary of Tata Sons)

Urban infrastructureRev: Rs NA

PAT: NA

Net debt: NAROE: NA

Tata Housing Development100% subsidiary of Tata Sons

HousingRev (FY15): Rs 5.8 bnPAT (FY15): Rs 0.2 bn


VoltasAC, engineering solutions

Mcap: US$ 2,532 mnRev (FY17): Rs 60.4 bnPAT (FY17): Rs 5.0 bn


13 July 2017

Tata Group 9

Figure 14: Tata Group—overview of companies in retail and financial services domains

Source: Company data, MCA, Capitaline,Thomson Reuters, Credit Suisse research

Figure 15: Tata Group—holding structure of the key companies

* Investing vehicle for the four Tata Group Companies as its principals viz. Tata Sons, Tata Power, Tata Iron & Steel Company and Tata Industries. Tata Power has 30% stake in Panatone Finvest. Source: BSE, Company data, Credit Suisse research

Retail, consumer, financial services

Financial servicesRetail/consumer

Tata Capital(Subsidiary of Tata Sons)

Diversified financial servicesRev (FY16): Rs 21.8 bnPAT (FY16): Rs 4.1 bn


Trent Fashion retail chainMcap: US$ 744 mn

Rev (FY17): Rs 18.3 bnPAT (FY17): Rs 0.8 bn


Titan CompanyWatches, jewellery

Mcap: US$ 7,185 mnRev (FY17): Rs 131 bnPAT (FY17): Rs 7 bn


Tata Coffee (57% sub of Tata

Global Beverages)Coffee producer and exporter

Mcap: US$ 376 mnRev (FY17): Rs 16 bn


ROE (FY17): 15%

Tata Investment Corporation (TICL)

Investment companyMcap (FY17): US$ 605 mn



ROE (FY17): 8%

Tata AIG General Insurance(JV, Tata Sons)

General insurance ventureRev (FY16): Rs 2.7 bnPAT (FY16): Rs 0.2 bn


Infiniti retail100% subsidiary of Tata Sons

Electronics retailRev (FY16): Rs 29.2 bnPAT (FY16): Rs -2 bn


Tata Asset Management(68% Tata Sons, 32% TICL)

Asset managementRev (FY16) : Rs 1.4 bnPAT (FY16): Rs 0.1 bn


Tata AIA Life Insurance(JV, Tata Sons)

Life insuarance ventureRev (FY16): Rs 2.7 bnPAT (FY16): Rs 0.6 bn


Tata Global BeveragesNon alchoholic beverages

Mcap: US$ 1,532 mnRev (FY17): Rs 68 bnPAT (FY17): Rs 3.9 bn


Tata Unistore (Tata CliQ)Unit of Tata IndustriesE-commerce platform

Rev: Rs NAPAT: NA

Net debt: NAROE: NA

Casa DécorJV, Tata Group

Luxury furnishingRev (FY16): Rs 0.1 bnPAT (FY16): Rs -0.1 bn


Tata Motor Finance(100% Subsidiary of Tata Motors)

Vehicle financingRev (FY16): Rs 12.9 bnPAT (FY16): Rs 1.0 bn


31.6

Tata Sons Tata Industries

Promoter entities

Tata Trusts66%

Shapoorji Pallonji: ~18%

Tata Steel

Tata Motors

Tata

Communication

Tata Elxsi

Tata Tele

Tata Tele

(Maharashtra)

Tata Global

Beverages

Tata Coffee

Titan

Trent

Rallis

Tata Chemical

Tata Power

Voltas

Indian Hotel

TCS

Nelco

Tata Investment

Corp

73.3% 68.1%

26.6%

3% 2.4%42.2%

19.4%

4.4%

6%

50%

23.5%

4.4%7.1%

57.5%

30%

31.6%

0.4%

0.4%2.5%

0.5%

31%

1.5%

48.6%

27.7%

4.6%

20.8%

1.6%

2%

28%

1.4%

Tata Trusts: 8%

14%

4.7%Panatone

Finv est: 30% *

19.6%

7%

36.5%

36.2%5.5%

9.3%

7%

NTT Docomo: 26.5%

13 July 2017

Tata Group 10

Delving deeper into the Group's financials

The Tata Group companies are a mixed bag. While the Tata Group has close to 100

operating companies (including subsidiaries), a few of them account for a major part of the

Group's revenue, PAT and market cap. For example, the top-ten and top-20 companies

(by revenue and including subsidiaries) account for 94% and 99% of Group revenue, 98%

and 99% of Group PAT and 94% and 99% of the Group's gross fixed assets (excluding

goodwill and intangibles), respectively. Tata Steel, Tata Motors, Tata Power and Tata

Teleservices are the most significant contributors to the Group's net debt, and together,

accounted for over 90% of the Group's net debt (as per our estimates) in FY16. TCS

accounts for 85-90% of the total dividend received by the parent. About 60% of the

companies for which we have data have a ROE of less than 10%. There is a long tail of

companies within the Group which are quite small.

Financial health check of key companies

TCS has been a consistent performer for the Group—profits have been growing

consistently, cash generation has been decent and it is the most significant source of cash

for the Group (we estimate that dividends from TCS would have accounted for 85-90% of

the total dividend inflow for the Tata Group in FY16). TCS' ROE contracted over FY15-17,

but it was partly because of the cash accumulation in the balance sheet.

Tata Steel's revenue declined by Rs113 bn over FY15-17, but despite that, its profits have

increased by Rs37 bn. Net debt/EBITDA has come down from 8.8x in FY16 to 4.3x in

FY17. While it has generated positive free cash for two consecutive years, the cash

generation has been insufficient to meet the finance cost. ROE has improved, but it still

remains at single-digit levels (9% in FY17).

Tata Motors' revenue has grown over FY15-17 (incremental revenue of Rs92 bn), but

profits have declined in both FY16 and FY17 (Rs59 bn decline over FY15-17). Net

debt/EBITDA is comfortable at 1.4x. While Tata Motors' free cash generation has been

slightly volatile over the last three years (FY14-16), its free cash generation over the last

three years (on a cumulative basis) has been higher than the cumulative finance cost.

ROE has been declining—it has come down from 23% in FY15 to about 15% in FY17.

Tata Power had a Rs21 bn revenue increase over FY15-17 and its profits increased by

Rs12 bn. However, net debt/EBITDA remains high at 8x in FY17 (increased from 5x in

FY16). It has shown a consistent improvement in free cash generation, and in FY16, its

free cash flow was higher than the finance cost. ROE has been improving, but it is still at

the mid-single digit level.

Highly leveraged companies and the cash guzzlers

Companies such as Tata Tele, Tata Tele Maharashtra, Tata Housing and Tata

International have high leverage, with a very high net debt/EBITDA—11x (FY16), 21x

(FY17, 13x in FY16), 63x (FY16), and 43x (FY16), respectively. Tata Tele Maharashtra's

leverage increased significantly in FY17. Companies such as Tata Housing, Infiniti Retail

(Croma) and Trent have been consistently generating negative free cash flows based on

historical data. Tata International and Tata Projects' cash flows showed an improving trend

over FY14-16; however, they were still generating negative free cash in FY16.

A long tail

There are several companies in the Group that are very small in the context of Tata

Group's overall size. Tata Petrodyne and Tata Realty Infrastructure have high asset

intensity and low profitability based on FY16 financials. Similarly, Tata Pigments, Tata

Ceramics, Tata Décor and Tata UniStore (e-commerce) are small players in the industry

they operate in based on reported revenue in FY16.

About 60% of the companies for which we have data have an ROE of less than 10%

13 July 2017

Tata Group 11

Concentration with a few companies

While the Tata Group has close to 100 operating companies, including subsidiaries, a

handful account for a large proportion of the aggregate revenue, PAT and market

capitalisation. For example, the three largest companies of the Group—TCS, Tata Motors

and Tata Steel account for 56%, 16% and 7% of the Group market cap, 17%/43%/17% of

the Group revenue and 63%/34%/2% of the Group PAT, respectively. Together, these

three companies account for 79% of the Group market capitalisation, 77% of the Group

revenue and 100% of the Group PAT (some of the other companies are loss making). If

we go down a level further, the top-ten companies (by revenue and inclusive of

subsidiaries) account for 93% of the Group’s market capitalisation, 94% of its revenue and

98% of PAT.

Figure 16: High level of concentration

Source: Company data, MCA, Capitaline, Credit Suisse research

Improvement in profitability for Tata Steel, consistent performance for TCS, deterioration for Tata Motors

Among the top companies of the Tata Group, there has been divergence in revenue and

PAT performance over the last two years. For example, while Tata Motors has grown its

revenue over FY15-17 (incremental revenue of over Rs92 bn), the profits have declined

for both FY16 and FY17 (Rs59 bn decline over FY15-17). On the other hand, Tata Steel

1%

6%

2%

3%

3%

6%

57%

16%

1%

2%

2%

2%

2%

3%

5%

17%

17%

43%

0%

2%

0%

-8%

2%

1%

2%

2%

63%

34%

-20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

Tata Global Beverages

Titan Company

Tata International

Tata Teleservices

Tata Chemicals

Tata communications

Tata Power

Tata Steel

TCS

Tata Motors


79%

93%

77%

94%

99%

98%

0% 20% 40% 60% 80% 100% 120%

Total top-3

Total top-10


TCS, Tata Motors, Tata Steel contribute 77% of

the Group's revenue and 79% of market cap

13 July 2017

Tata Group 12

had a net revenue decline of Rs113 bn over FY15-17, but despite that, its profits have

increased by Rs37 bn. For Tata Power, revenue increased by Rs21 bn and the profits

improved by Rs13 bn over FY15-17.

TCS has been a consistent performer for the Group—its revenue has increased by over

Rs230 bn over FY15-17 and PAT has increased by Rs66 bn. Tata Communications made

losses in FY17 (Rs8 bn) from close to break-even in FY15. Tata Tele's revenue declined

by Rs9 bn and losses increased by Rs11 bn over FY15-17.

Figure 17: Change in the revenue and profits of the key companies over the last two years

Note: For FY16 change, we have considered the IGAAP numbers, while for FY17 changes, we have used Ind AS numbers. Used IFRS numbers for TCS. Source: Company data, Credit Suisse research

Net debt/EBITDA stable-to-improving for Tata Steel and Tata Motors

Tata Steel, Tata Motors, Tata Power and Tata Teleservices are the most significant

companies in terms of net debt, and the first three have accounted for over 90% of the

Group's net debt (as per reported numbers) in the past. For Tata Steel and Tata Motors,

the leverage (net debt/EBITDA) was at a comfortable level (4.3x and 1.4x, respectively, in

FY17), and indeed, it has come down from 8.8x in FY16 to 4.3x in FY17 for Tata Steel.

Tata Power, on the other hand, has witnessed an increase in leverage (it increased from

5x in FY16 to 8x in FY17). Tata Power accounts for 16-20% of the Group's net debt.

Companies such as Tata Tele, Tata Tele Maharashtra, Tata Housing and Tata

International have high leverage, with significantly higher net debt/EBITDA—11x (FY16),

21x (FY17, 13x in FY16), 63x (FY16), and 43x (FY16), respectively.

-300 -200 -100 0 100 200 300

TCS

Tata Motors

Tata Power

Titan Company

Voltas

Indian Hotels

Tata Communications

Tata Tele

Tata Chemicals

Tata Steel

Change in revenue (Rs bn)

FY15-17 FY17 FY16

-60 -40 -20 0 20 40 60 80

TCS

Tata Steel

Tata Power

Indian Hotels

Tata Chemicals

Voltas

Titan Company

Tata Tele

Tata Communications

Tata Motors

Change in PAT (Rs bn)

FY15-17 FY17 FY16

13 July 2017

Tata Group 13

Figure 18: Net debt to EBITDA stable-to-improving for Tata Steel and Tata Motors

Source: Company data, Credit Suisse research

Only four companies of the top-ten have a 15%+ ROE

Only four companies out of the top-ten companies have ROE in excess of 15%—these are

TCS (33% in FY17), Tata Motors (15%), Voltas (17%) and Titan (18%). While Tata Power

(>10%, adjusting for one-off charges) and Tata Steel (9%) have shown some improvement

in FY17, their ROE remains low. Indian Hotels and Tata Global Beverages' ROE stands at

-2% and 6%, respectively.

Among the companies that have witnessed the most significant improvement are Rallis

India and Nelco, as per reported numbers. Rallis' ROE improved from 21% in FY15 to

30% in FY17 and Nelco's from low single-digit levels to over 30% in FY17—besides

operational improvement, this was also helped by higher other income to some extent and

absence of losses from the discontinued operations, as per the reported financials.

Companies such as TCS, Tata Motors, Trent, Titan, Tata Elxsi and the insurance units

(Tata AIA and Tata AIG) witnessed a contraction in ROE. Tata Motors' ROE came down

from 23% in FY15 to 15% in FY17, and Titan's ROE contracted from 29% in FY15 to 18%

in FY17. For TCS, cash accumulation may have been one key reason.

0

10

20

30

40

50

60

70

0

100

200

300

400

500

600

700

800

Tata Steel Tata Motors Tata Power Tata Tele Tatacommunications

Tata Tele(Maharashtra)

Tata Chemicals Indian Hotels Tata Housing TataInternational

Net debt (FY16, Rs bn) Net debt (FY17, Rs bn) Net debt/EBITDA (FY16), RHS Net debt/EBITDA (FY17), RHS

13 July 2017

Tata Group 14

Figure 19: Several companies with sub-optimal ROEs


TCS remains the cash cow, cash generation improved in Tata Steel

In terms of free cash generation, TCS, being an extremely profitable company and an

asset light business, continues to be the cash cow for the Tata Group—its free cash flow

has been increasing over the last three years. Tata Power has shown a consistent

improvement in free cash generation, and in FY16, its free cash flow was higher than its

finance cost.

Tata Steel too has generated positive free cash for two consecutive years, but it has been

insufficient to meet the finance cost. Similarly, Tata Teleservices generates positive free

cash flow; however, it has not been sufficient to pay its finance costs in the past.

While Tata Motors' free cash generation has been slightly volatile over the last three years

(FY14-16), its free cash generation over the last three years (on a cumulative basis) has

been higher than the cumulative finance cost.

Companies such as Tata Housing, Infiniti Retail (Croma) and Trent have been consistently

generating negative free cash. Tata International and Tata Projects' cash flow showed an

improving trend over FY14-16; however, they were still generating negative free cash in

FY16 and also had a relatively higher leverage (and a correspondingly higher finance

cost).

18%

18%

-20% -10% 0% 10% 20% 30% 40% 50%

Tata Elxsi

TCS

Nelco

Rallis India

Titan Company

Voltas

Tata Motors

Tata Coffee

Tata Chemicals

Tata Steel

Tata Projects

Tata Capital

Tata Sponge Iron

Tata AutoComps

Tata Power

Trent

Tata AIA Life Insurance

Tata AIG General Insurance


Tata Housing

Tata International

Indian Hotels

Listed companies

Total group

FY17 FY16 FY15

13 July 2017

Tata Group 15

Figure 20: Top-five free cash generating companies in the Tata Group

Rs bn Free cash flow Finance cost

FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17

TCS 124 181 189 250 0 0 0 0

Tata Motors 92 36 65 47 49 49 42

Tata Power 21 25 58 34 37 32 31

Tata Teleservices 15 29 35 35 30 33

Tata Chemicals 16 7 10 6 5 5 4

Tata Steel -33 -16 5 25 43 48 41 52


Figure 21: Companies with weak cash generation profile

Rs bn Free cash flow Finance cost

FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17

Tata International -11.4 -2.6 -0.1 NA 1.6 1.8 2.1 NA

Tata Projects -1.7 -1.4 -0.4 NA 0.4 0.8 1.0 NA

Trent -1.8 -1.7 -0.5 0.3 0.1 0.1 0.4 0.3

Tata Global Beverages 2.2 2.4 -0.5 NA 0.9 0.8 1.2 NA

Infiniti Retail -0.3 -0.2 -0.7 NA 0.5 0.5 0.5 NA

Tata Housing -5.1 -10.7 NA 0.4 0.4 0.6 NA


■ TCS remains the single largest source of cash for the Group. TCS remains the

single largest source of dividend for the Tata Group—TCS had over 65% share in the

Group's aggregate PAT in FY16, Tata Group has the largest ownership in TCS (73%)

and the average payout historically has been above 40%. Our estimates suggest that

dividends from TCS would have accounted for 85-90% of the total dividend inflow for

Tata Group (from the Group companies, including the cross holdings of the Group

companies) in FY16.

All the other larger companies (Tata Steel, Tata Motors, Tata Power) are capital

intensive and are generating free cash that is either lower than the finance costs or not

significantly higher than it, there is little scope of any significant increase in dividend for

these companies in the near term, although this will be one focus area for new

management. Other companies are much smaller in size, and any increase in dividend

payout there would not change things meaningfully for the Group.

■ Further scope to increase the payout. The last five years' average dividend payout

for TCS has been 42% (excluding dividend tax), and including the recent buy-back of

Rs160 bn, the average payout ratio has been 58%. IT services companies have

accumulated significant cash in their balance sheet and there is an increasing

shareholder demand for a higher dividend payout. With a decent cash generation (PAT

to FCF conversion of over 80%) and over US$4.5 bn of cash in its books as on March

2017 (adjusting for the buyback), there is enough scope to increase the payout, and

this is being actively considered by the Board.

We estimate TCS accounts for 85-90% of

the total dividend inflow for the Group

13 July 2017

Tata Group 16

Figure 22: TCS' payout (dividend and buy back) history

Note: There was a special dividend paid in FY15. Source: Company data, Credit Suisse research.

A long list of tail companies lacking scale and strategic synergies

There are several companies in the Group that are very small in the context of Tata

Group's overall size and also lack scale to be a significant player in the industry they

operate in. For example, companies such as Tata Petrodyne and Tata Realty

Infrastructure have high asset intensity and low profitability based on FY16 financials (Tata

Realty made a net loss of Rs60 mn in FY16, with gross assets of close to Rs19 bn).

Similarly, Tata Pigments, Tata Ceramics (tableware), Tata Décor (luxury furnishing) and

Tata UniStore (e-commerce) are smaller players in the industry they operate based on

FY16 revenue.

31% 33%

79%

35% 35%

96%

42%

58%

0%

20%

40%

60%

80%

100%

120%

FY13 FY14 FY15 FY16 FY17 (exclbuyback)

FY17 (inclbuyback)

5 year average(excl the recent

buyback)

5 year average(incl the recent

buyback)

Payout (excluding dividend tax)

13 July 2017

Tata Group 17

Figure 23: Non top-ten companies (in terms of revenue, FY16 financials)*

Companies Segment/sector Revenue PAT Net debt Gross fixed assets ^

Voltas Air conditioners, engineering solutions 57.5 3.87 -5.8 5.2

Tata Sky D2H television 44.7 0.77 20.8 75.5

Tata Projects Infrastructure 42.4 0.67 4.3 5.7

Indian Hotels Hotels 40.2 -2.31 40.0 99.4

Tata Teleservices (Maharashtra) Telecom 29.7 -3.58 100.0 53.2

Infiniti Retail (Croma) Electronics retail 29.2 -1.97 4.4 1.3

Tata Capital Diversified financial services 21.8 4.05 331.5 1.5

Tata AutoComps Auto components 21.2 0.52 -2.2 5.3

Rallis India Agro chemicals 16.3 1.43 0.6 4.3

Trent Fashion retail chain 15.9 0.55 0.5 10.1

Tata Coffee Coffee producer and exporter 15.5 0.83 7.9 8.1

Tata Metaliks Pig and ductile iron pipes 13.0 1.23 2.1 5.7

TRF Material handling equipment 11.2 -0.36 5.1 2.2

Tata Housing Housing 10.9 -0.04 39.3 0.5

Tata Technologies Engineering services 10.8 2.23 -0.5 4.6

Tata Elxsi Engineering services 10.8 1.55 -1.8 2.1

Tata Sponge Iron Sponge iron 6.3 0.32 -5.4 4.0

Tata Business Support Services BPO 6.0^^ 0.19^^ 0.6^^ 2.1^^

Tata AIA Life Insurance Life insurance venture 2.7 0.64 -20.0 NA

Nelco VSAT, security and allied services 2.0 0.01 0.3 1.1

Tata Advanced Systems National security and defence 1.7 0.07 0.3 3.5

Advinus Therapeutics Contract research – pharma 1.6 0.07^^ 3.2^^ 1.7^^

Tata Asset Management Asset management 1.4 0.06 0.0 0.3

Roots Corporation Budget hotel (Ginger) 1.4 -0.11 0.9 4.0

mjunction services B2B E-commerce for steel 1.3 0.28 -1.6 1.2

Tata Advanced Materials Advanced composites and armoured products 1.3 -0.32 1.3 2.2

Tata Petrodyne Upstream oil and gas 1.1^^ 0.47^^ -2.9^^ 6.8^^

Tata Pigments Pigments, paints 1.1 0.06 -0.1 0.3

TKM Global Logistics Logistics and supply chain 0.6 0.03 0.0 0.1

Tata Realty and Infrastructure Real estate and infrastructure 0.6 -0.06 10.8 18.8

Tata Ceramics Tableware 0.5^^ 0.00^^ 0.1^^ 0.1^^

Tata AIG General Insurance General insurance 0.4 0.20 -39.3 2.4

Casa Décor Luxury furnishing 0.1 -0.06 0.1 0.0

Tata UniStore E-commerce platform (Tata CliQ) 0.0^^ -0.04^^ -0.5^^ NA

Top-10 as % of total 94% 98% 77% 94%

Top-20 as % of total 99% 99% 100% 99%

* Considered independent companies and subsidiaries/JVs/associates with a different business model than the parent. ^ excluding goodwill and intangibles. ^^ FY15 financials as FY16 financials were not available. Source: Company data, Capitaline, MCA, Credit Suisse research

Tata Group underperformed the market in the last

one and three years, led by TCS and Tata Motors

Overall, the aggregate market cap of the listed Tata Group companies has been flattish in

the last one year and up 11% over the last three vs 17% and 27% increase in the broader

market index, the Sensex. The top two companies of the Group—TCS (56% of the Group

market cap) and Tata Motors (16%)—have had a subdued performance over the last one

and three years. TCS' market cap is down 4% over the last one year and up just 1% over

the last three years. Tata Motors, on the other hand, is down 5% and up 9% over the last

one and three years, respectively. Tata Steel's (7% of the market cap) has done well in the

last one year (up 63%).

13 July 2017

Tata Group 18

Tata Metaliks (0.2% of the Group market cap), Tata Elxsi (0.6%), Voltas (2%), Trent (1%),

and Tata Communication (2.3%) have been the top performers over the last three years,

with their market cap up 994%, 192%, 155%, 103%, and 91%, respectively. Tata Tele

(Maharashtra) and Tata Power have seen the most market cap erosion over the last three

years (down 24% and 18%, respectively).

Figure 24: Tata Group companies—market cap movements

Market cap composition Change in market cap

Current 1 yr back 3 yrs back 1 year 3 years

TCS 56.3% 61.0% 61.7% -4% 1%

Tata Motors 16.1% 17.6% 16.3% -5% 9%

Tata Steel 6.5% 4.2% 6.5% 63% 12%

Titan Company 5.7% 4.5% 3.9% 31% 61%

Tata Power 2.7% 2.5% 3.7% 14% -18%

Tata Communications 2.3% 1.7% 1.3% 37% 91%

Voltas 1.9% 1.3% 0.8% 49% 155%

Tata Chemicals 2.0% 1.4% 1.1% 43% 100%

Indian Hotels 1.5% 1.6% 1.0% -4% 61%

Tata Global Beverages 1.3% 1.1% 1.2% 31% 18%

Trent 1.0% 0.7% 0.5% 37% 103%

Rallis India 0.6% 0.5% 0.5% 20% 20%

Tata Elxsi 0.6% 0.7% 0.2% 1% 192%

Tata Investment Corporation 0.5% 0.4% 0.4% 49% 45%

Tata Coffee 0.3% 0.3% 0.2% 27% 59%

Tata Metaliks 0.2% 0.1% 0.0% 111% 994%

Tata Tele (Maharashtra) 0.2% 0.2% 0.3% 6% -34%

Tata Sponge Iron 0.2% 0.1% 0.1% 35% 36%

Nelco 0.0% 0.0% 0.02% 6% 83%

TRF 0.0% 0.0% 0.0% -31% -12%

Tata Group aggregate 4% 11%

Sensex 17% 27%

Source: Thomson Reuters

13 July 2017

Tata Group 19

Renewed energy at the top The Tata Group constitutes one of the oldest, largest and most respected business groups

in India. While many of its group companies have done well over the years, there is

potential for some to improve. The track record of individual companies relative to peers

has also been mixed.

More recently, there was turmoil at the top level of the Group when the previous

Chairman, Cyrus Mistry, was ousted. After a search for a new Chairperson, N

Chandrasekaran (Chandra) was zeroed in on. He is an insider, having spent about 30

years at TCS and leading TCS since 2009. He took over as Chairman of Tata Sons in

January 2017 and has appointed some key personnel in various corporate functions.

Chandra has had a stellar track record at TCS and has led the company to a pole position

among its peers. We are optimistic that some of the relatively problematic areas for the

Tata Group can be solved in the next few years. Some of the recent developments (some

of these are likely to have been initiated by previous management) include:

■ Tata Steel signed a definitive agreement in February to sell its UK specialty steels

business to Liberty House Group for £100 mn.

■ TCS announced a Rs160 bn buy back (about US$2.5 bn), of which Tata Sons obtained

over Rs100 bn (about US$1.5 bn).

■ Tata Steel sold its stake in Tata Motors to Tata Sons for US$586 mn in June.

■ There have been cost cuts and organisational restructuring at Tata Motors.

■ Tata Sons has agreed to support the arbitration award to DoCoMo in relation to Tata

Teleservices.

■ There have been some management changes, such as Rakesh Sarna (CEO of Indian

Hotels), and the head of CV operations at Tata Motors, both have resigned due to

personal reasons, as indicated by the Group.

Five key mantras

Based on our understanding of the Group and the individual companies, and comments

made in the press, we believe new management's strategy will hinge on the following five

key objectives:

■ Improvement of return ratios, with focus on the "big guns". As mentioned earlier,

only four companies out of the top-ten companies have ROE in excess of 15%. The

main focus will be on the larger companies such as Tata Motors, Tata Power, Tata

Steel, and Tata Teleservices.

■ Domestic consumption. While international expansion was a big focus area until

2008, we believe that domestic consumption will be an important focus area for the

Group, going forward. Some of the important areas would include the consumer

business (Tata Global, parts of Tata Chemicals, Voltas) and financial services (Tata

Capital, insurance).

■ Simplicity in structure and holding. The Group consists of multiple companies that

operate, either fully or partially, in the same segments. There is a possibility of

consolidating some of these operations. Also, there are various intra-group holdings

and these can be simplified and consolidated at the Tata Sons level. This process may

also allow individual companies access to some funding, as long as the parent can

fund it, e.g., Tata Steel's recent sale of its stake in Tata Motors to the parent.

13 July 2017

Tata Group 20

■ Relevance. While the Group's presence in some segments is dominant, its presence in

others is not relevant. It also has sub-optimal presence in some large segments of the

economy such as financial services and retail/consumer (including e-commerce). It is

possible that the Group may either exit businesses where it is too small or consolidate,

wherever possible, to increase scale.

■ Digital initiatives across segments. Given the Group's presence in the technology

industry through TCS and others, Chandra's background and the increasing

implementation of digital initiatives by corporations, the Group may step up its digital

initiatives across its various businesses.

While quite a few of these objectives would have been in place even before the new team

took over, execution of this strategy will be key.

The following sections discuss various potential strategic imperatives within the above five

broader segments.

#1 Focus on the big guns

As discussed in the previous section, a handful of companies account for a significant

portion of the value (in terms of market capitalisation), revenue and debt. Some of the key

companies are—TCS, Tata Motors, Tata Steel, Tata Power and Tata Teleservices. Fixing

some of the key issues of these companies can essentially enhance the Group's value

significantly.

TCS: Little to be done

TCS has been the star performer for the Tata Group over the last several years. Its

absolute performance, both fundamental as well as in terms of market capitalisation has

been stellar, as has its performance relative to its peer group (despite being the largest

player among the peers by a margin). However, this performance has stagnated over the

last one year or so—the revenue growth has moderated from 15% levels, a couple of

years back to high single-digit in FY17. Margins are relatively resilient though (in the target

band of 26-28%) and remain at the industry leading levels.

Figure 25: TCS has outperformed the Sensex over

the last five years; stagnation in performance over

the last one year or so

Figure 26: Historically, TCS has grown ahead of the

industry, growth has suffered in the last few

quarters for TCS as well as the industry

Source: Thomson Reuters Source: Company data, Credit Suisse estimates

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TCS Top-5 Indian IT firms

Not all of these will be new strategies—

however, execution will be key

13 July 2017

Tata Group 21

Structural and cyclical factors behind recent slowdown in growth

The relatively slower growth over the last two years has been on account of some

structural and cyclical factors. On the structural front, commoditisation of traditional

services and cannibalisation of revenue on account of the cloud and automation have hurt.

Expectations of newer digital services making up for the shortfall have not played out fully

yet. Also, TCS' current scale will make it difficult to mirror the high growth rates of the past.

On the cyclical front, cautious spending by customers on new initiatives and the deferment

of discretionary projects have not helped. The sluggish performance of market

capitalisation over the last two years has been on account of a significant P/E derating.

Figure 27: The industry is going through several structural challenges


Things can potentially improve going forward

While the scale will inhibit high growth numbers, we expect some gradual improvement in

some of the structural issues, mainly in the ability of newer digital services in filling up the

shortfall caused by the deflation in legacy work.

Cyclical factors too can improve, and we expect some improvement in the next few

quarters, driven especially by financial services clients. With this, we believe growth can

pick up over the next two years from the level in FY17 but is unlikely to get back to the

15%+ levels. P/E could expand if growth rates pick up although it is unlikely, in our view, to

reach the high levels of the last five years.

1980 1990 2000 2010 2020

Y2K

Dotcom enabling

Consulting, testing, engg svcs

Package implementation

Infra management

Domain Knowledge

Consulting

Fixed price

Platforms

Automation

Mainframes

Client Server

Internet (Web)

ERP

Application development and maintenance

Digital, end-to-end engg services, platforms based offerings

Coding, T&M project management skills

Design, business consulting, AI, DevOps/Agile, outcome based

Cloud (as-a-service), IoT, mobilecomputing, Open Source

Capability additions

Technology additions

Services additions

13 July 2017

Tata Group 22

Figure 28: After a derating over the last couple of years (and rerating of the broader market), TCS now

trades at a discount to Sensex


What can the Group do for TCS?

In our view, there is little the Group can do for TCS at this point. TCS has been making

investments in newer digital areas over the last many years, and we believe that it will be

well positioned to capitalise on any pick-up in digital spending by clients. Given its track

record over the last many years, we have no reason to believe that TCS will not be

positioned at the forefront of digital services as well.

TCS has largely relied on organic investments and partnerships with start-ups for

emerging technologies so far. Its larger peers, like Accenture, have been aggressively

investing in developing digital capabilities through acquisitions, and have been successful

in building a leadership in digital. While the broad philosophy of TCS’ management is likely

to continue, we believe this is one area which may require a relook by management.

On the cyclical side, like its peers, it will just have to wait for an improvement. On the P/E

front, the only thing the Group can do, in our view, is to have high and consistent dividend

payouts/buy back. While TCS' payout has been reasonably high, it has been lumpy. There

is scope to enhance the average payout and to make it more consistent, given the cash

pile and free cash flow.

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TCS' premium/discount to Sensex [RHS] TCS Sensex

13 July 2017

Tata Group 23

Figure 29: Unlike Accenture and IBM, Indian IT firms

have accumulated significant cash in the balance

sheet over the years

Figure 30: TCS' average payout has been 40%+ over

the last five years (58%, including the recent buy

back); scope to increase this further

* Including buyback. Source: Company data, Credit Suisse estimates. * Including buyback. Source: Company data, Credit Suisse estimates.

Tata Steel: Focus on India, addressing the pension

issue

Tata Steel is one of the leading steel companies globally and the second largest steel

company in India in terms of volumes. The company had consolidated revenue of Rs1.2 tn

in FY17—about 45% of this was contributed by the India business, while the international

operations account for the rest (Europe operations, including Corus, have a predominant

share in the international business, Southeast Asia accounts for the rest). In terms of

EBITDA, India's share is about 70%.

Figure 31: Europe accounts for close to 45% of revenue but has a below 30% EBITDA share (FY17)

Note: Under IndAS. Source: Company data, Credit Suisse estimates.

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Europe44%

Others10%

Tata Steel: Revenue breakup

India70%

Europe28%

Others2%

Tata Steel: EBITDA breakup

International business is 55% of revenue and

30% of EBITDA

13 July 2017

Tata Group 24

Decent progress on the India business, Europe business is still under restructuring

FY17 was a decent year for Tata Steel. Its India business picked up sharply in FY17—

volume growth at 15% was the best in the last six years, and EBITDA/t also improved from

depressed levels of US$105/t to US$150/t. In the European business, volumes were down

30% in FY17 but EBITDA/t improved from -US$17/t to +US$67/t.

Several drivers behind the domestic business' recovery

Tata Steel's domestic business was helped by a higher volume growth, better pricing (the

ASP increased by over 6% during the year) and resulting improvement in profitability

(EBITDA/t was up 45% during the year). The performance of Indian subsidiaries—Tata

Metaliks, Tinplate and Tata Sponge Iron—also improved.

The commencement of production at the Kalinganagar plant (in May 2016) brought close

to US$4 bn of investment to fruition, with about 3 MT of capacity. Tata Steel's profitability

in the last 6-7 quarters had also been impacted by the high cost of purchased iron ore

(captive production was disrupted due to mine closures at Joda, Noamundi and

Khondbond). With the mines back in production and most of the expensive iron ore

already consumed, iron ore cost fell sharply.

The MIP (Minimum Import Price) also helped the domestic business. Tata Steel benefitted

due to its relatively better positioning.

Europe business is still under restructuring

Tata Steel's European business has two parts—Netherlands and the UK. While the former

has historically done well, the latter has been a drag on the company's operations. Tata

Steel sold a part of the UK business (specialty steel) for £100 mn and has also

implemented a transformation programme to improve the performance of the remainder of

the European business.

The imposition of anti-dumping duty by EU on hot-rolled and heavy plates imported from

China could have helped margins to some extent in 2H17. Falling GBP (against USD) was

also a tailwind for the UK business.

Figure 32: Tata Steel's India volume growth was the

best in FY17 in the last six years, and EBITDA/t also

improved from depressed levels

Figure 33: Although volumes were down at Tata

Steel Europe, EBITDA/t improved from the

depressed levels

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

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in international in FY17

Kalinganagar capacity, resumption of iron ore mines and MIP helped

The UK business has been a drag

13 July 2017

Tata Group 25

Figure 34: EU turnaround—progress in the last two years

Date Development

Jul-2015 SPH (NL pension scheme) re-classified as defined contribution

Jul-2015 Specialty and bar business to refocus on high-value markets (aerospace)

Aug-2015 Mothballed hot strip mill at Llanwern, Newport

Oct-2015 Mothballed plate mills at Scunthorpe, Dalzell and Clydebridge

Oct-2015 Closed two coke ovens at Scunthorpe

Dec-2015 Entered into discussions with Greybull Capital LLP for Longs business

Jan-2016 Further restructuring announcements incl. redundancies in UK

Apr-2016 Sale agreement signed with Greybull

Apr-2016 UK government announced support package for potential buyers of TSUK

Apr-2016 Sold Clydebridge and Dalzell plate mills in Scotland to Scottish government

May-2016 The UK government issued a public consultation paper outlining possible regulatory support to facilitate changes in BSPS

May-2016 Longs business sale completed (to Greybull)

Feb-2017 Definitive agreement with Liberty House Group for the sale of its UK Specialty Steel business.


Positive cash generation and improving debt coverage

After several years of consistent negative free cash flow generation, Tata Steel has

generated positive free cash flow for the last two years—FY16 free cash generation was

marginally positive and was Rs25 bn in FY17. Net debt coverage has improved too. Net

debt has been stable for the last four years, and with improved profitability, the net

debt/EBITDA has come down to the levels of ~4x. The recent sale of stake in Tata Motors

for close to US$590 mn has further reduced this ratio.

Figure 35: After several years of consistent negative

free cash flow generation, Tata Steel has generated

positive free cash flow in FY17 (marginally positive

in FY16)

Figure 36: Net debt is stable for the last four years,

and with improved profitability, net debt/EBITDA is

back to the historical levels ++++ ++++++ +++++

+++++ +++

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

What can be improved?

The domestic business has done well in the last one year and that may remain a key focus

area for the Group, in our view. The European business (the UK in particular) on the other

hand is still operating at sub-optimal levels—a speedy resolution of the UK pension issue

will be important. Also, there have been talks of a strategic JV with ThyssenKrupp.

Elimination of cross holdings can help in debt reduction.

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13 July 2017

Tata Group 26

Nothing much to be done in the India business but it will be the key segment

Tata Steel's India business is already operating at a reasonably high utilisation. Also much

of the input requirements are met in-house through captive operations. Hence, there is

little scope for further efficiency gains in the India business. Any improvement in EBITDA/t

will largely depend on an increase in realisation (steel prices).

The European business has scope for improvement

Tata Steel's strategy on turning around the European portfolio hinges upon: (1) resolution

of the UK pension issue, (2) the sale of peripheral businesses (several of them have been

already sold), and (3) a broader strategic JV with ThyssenKrupp. The UK assets have

already been largely written down, and hence, there is little risk of a big impairment in the

future.

The company has already moved its active employees in the UK from a defined benefit

pension plan to a defined contribution plan. Additionally, steps to de-link the pension fund

from the scheme sponsor are separately under way. Tata Steel has obtained "in-principle

approval" from the UK pension regulator for a Regulated Apportionment Arrangement. It

will pay £550 mn alongside a 33% stake in Tata Steel UK to close the existing pension

scheme. It will, however, sponsor a closed de-risked new pension scheme to be offered as

a voluntary option to the existing members. That may pave the way for an eventual JV with

ThyssenKrupp, and possibly help the business become self-sufficient.

Tata Motors: India needs to be fixed

Tata Motors originally started operations as a commercial vehicle company (it started as a

locomotive manufacturer in 1945 and ventured into commercial manufacturing in 1954),

and built the passenger vehicle business much later (in the 1990s). Tata Motors has been

the market leader in the commercial vehicles segment in India, and is still trying to build a

prominent positioning in the passenger vehicles segment.

It made a few large acquisitions to expand international operations. In 2004, it acquired

Daewoo's South Korea-based truck manufacturing unit (named as Tata Daewoo) for over

US$100 mn. In 2008, it made a much bigger acquisition of Jaguar Land Rover for a

consideration of US$2.3 bn. These businesses have done well for the company.

India needs to be fixed

Given the long history of the India business and the strong Tata brand in India, the

contribution of this business to the overall value of Tata Motors is very low. For example,

the India business contributes just Rs80 of the CS target price of Rs630 for Tata Motors,

or just 13%. The contribution of Tata Motors to the overall value has also been coming

down over time.

Any significant improvement in

profitability will depend on steel prices

Pension resolution should pave the way

for it to be self-sufficient

Contribution of India to analysts' target price is

very low

13 July 2017

Tata Group 27

Figure 37: The domestic business accounts for only a small chunk of Tata Motor's fair value

Source: Credit Suisse estimates

Market share loss in commercial vehicles

While Tata is the largest player in this segment (49% market share in the M&H CV

segment and 38% in the LCV segment), it has been losing market share to Ashok Leyland

and Eicher over the last few years. Furthermore, the market itself has been relatively

muted recently and this makes the situation even more challenging.

The main issue here, in our view, is that an improvement in managing this business is

required. Initiatives can be on the channel strengthening side and also on the cost side.

Figure 38: Tata Motors is the largest player in the

M&H CV market + + +++ ++++ ++++ ++++ ++++

+++

Figure 39: However, its market share is being

challenged by players such as Ashok Leyland and

Eicher

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Passenger vehicles: Brand perception needs to be changed

Historically, Tata Motors has not had much success in the passenger vehicles segment

after the launch of its flagship products, Indica and Indigo. Slower product refresh, and

relatively weaker brand perception and dealer network have been the key reasons for Tata

Motors’ weaker positioning in this segment.

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Ashok Leyland 34%

Eicher Motors12%

Mahindra Navistar

3%Swaraj Mazda

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2002 2004 2006 2008 2010 2012 2014 2016

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Recent launches have seen some traction,

however

13 July 2017

Tata Group 28

Recent launches such as Tiago and Hexa have witnessed decent traction, however, and

the company needs to build on this with new product launches consistently.

There have also been newspaper reports (Economic Times) that Tata Motors and

Volkswagen may explore a partnership. If this happens, Tata Motor's PV capacity

utilisation may improve and help margins.

Figure 40: Tata Motors is the fourth largest player in

the passenger vehicles segment

Figure 41: After declines over the last several years,

the market share stabilised in 2017

Source: Company data Source: Company data

Margins should be the management's priority

The domestic business' margins have been subdued for Tata Motors for the last several

years. Given Tata Motors' domestic business includes both commercial vehicles (CVs)

and passenger vehicles (PVs), we compare the margins with both Maruti (a leading PV

player) and Ashok Leyland (a leading CV player). For the last three years, Tata Motors'

margins have significantly lagged the margins of these two companies.

Management has already taken some initiatives in this regards. It has made the

organisation leaner and has also optimised headcount. Furthermore, the recent initiatives

on advanced modular platform (AMP) development for passenger vehicles can achieve

higher cost efficiencies (through economies of scale) and faster time-to- market.

Figure 42: Tata Motor's domestic margins have been subdued for the last

several years

Source: Company data

Maruti Suzuki47%

Hyundai17%

Mahindra & Mahindra Ltd.

8%

Tata Motors

6%

Honda SIEL5%

Toyota5%

Renault4%

Ford3%

Others5%

Passenger Vehicles: 2017 market share (by volume)

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It has lagged its peers but recent initiatives

could help

13 July 2017

Tata Group 29

JLR has done well, although it has smaller scale than its key peers

JLR has worked extremely well for the Tata Group. Bought in 2008 for an enterprise value

of US$2.3 bn, we estimate the value to be US$20 bn today, over 25% annual returns.

After navigating through the challenging macro environment immediately (the global

financial crisis) after the acquisition, JLR emerged as a stronger company and it now

accounts for a major chunk of Tata Motors’ profits.

However, there are a couple of areas that need to be worked upon. JLR has not made any

significant progress on electric or hybrid vehicles yet, and it has a larger exposure to diesel

vehicles. These are early days yet and it is likely that JLR has concrete plans for this

segment. Another area where JLR still lags is scale. For example, its sales in FY17 were

0.6 mn units vs 2.2 mn units sold by Daimler (Mercedes-Benz), over 2 mn car sales by

BMW and close to 1.9 mn car sales by Audi in 2016 (global sales). In the absence of any

appropriate acquisition opportunity available, this will have to be largely an organic

process and will likely be gradual at best.

While there have been talks on a separate listing of JLR for the last few years,

management has recently denied any such possibility near term.

Figure 43: JLR has smaller scale as compared to

the other luxury car makers

Figure 44: JLR's volumes have grown much ahead

of the industry in five out of the last six years


Fixing these issues can help valuation multiples, especially in the domestic business

Tata Motors' domestic business currently gets a lower multiple (8x FY19 target

EV/EBITDA for our SOTP valuation) than its peers, given weaker fundamentals. Any

improvement in this business (higher market share in passenger vehicles, protection of

market share in commercial vehicles and margin improvement) can lead to a rerating.

Figure 45: Domestic business currently gets a lower multiple, given weaker

fundamentals, any improvement in this business can lead to re-rating

EV/EBITDA EBITDA margin Volume growth CAGR

FY19/CY18 FY17/CY16 3 years CAGR 5 years CAGR

Domestic (PV and CV)

Tata Motors 8.0* 4% -1% NA

Maruti Suzuki India Ltd 13.5 15% 11% 7%

Ashok Leyland Ltd 10.4 12% 23% 4%

* Target multiple for our SOTP valuation. Source: Company data, Thomson Reuters, Credit Suisse estimates

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13 July 2017

Tata Group 30

Tata Power: Mundra power plant has weighed on

profitability

Tata Power is an integrated power company with presence in power generation (over

10,000 MW generation capacity), transmission (Mumbai and Bhutan-North India), and

distribution (Mumbai and Delhi). While a major proportion of the operations are in India,

the company has focused on the international market for growth in recent years (660 MW).

Also, the company has expanded its renewable portfolio through an acquisition (Welspun

Energy's renewable assets, acquired in June 2016 for about Rs100 bn). The current

renewable generation capacity is about 2 GW. Close to 60% of the revenue and 45% of

the EBITDA comes from business with regulated assured returns.

The company has set a target of making 30-40% of its generation capacity non-fossil-

based. Accordingly, over the last 5-6 years, it has not set up any new coal-based power

generation facilities.

ROE is above 10%; further increase in net debt

Over the last five years, Tata Power's revenue and EBITDA have grown at 1% and 4%

CAGR, respectively (inclusive of Welspun's renewable assets acquisition). While there has

been some improvement in the ROE over the last couple of years, it is still slightly above

10%. Post the acquisition of Welspun's renewable assets business, net debt has

increased to Rs468 bn, while PAT margin is only 5%—net debt to equity was 3.5x in

FY17. FCF generation improved in FY16, sufficient to take care of the finance cost.

Just to make a simple comparison, NTPC (another large Indian power utility company) had

ROE of over 10% in FY17 (more consistent over the years than Tata Power) and net debt

to equity of slightly above 1x (much lower than that of Tata Power).

Figure 46: Some improvement in ROE over the last

couple of years+++++ ++++++ ++++++ +++++ +++++

Figure 47: Post the Welspun acquisition, net debt

has spiked but FCF generation improved in FY16,

sufficient to take care of the finance cost

Note: PAT margin and ROE calculated on normalised PAT (after excluding the exceptional items). Source: Company data.

Source: Company data.

The Group has sought to exit the Mundra power plant

Tata Power won the 4,000 MW UMPP (ultra mega power plant) Mundra project through a

bidding process in 2006, with a price quote of Rs2.26 per kWh. To make the project viable,

it intended to feed the plant with coal procured from mines owned by the company in

Indonesia. The total investment outlay on this project was close to Rs180 bn—with over

Rs60 bn equity investment and over Rs100 bn debt funding.

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Tariff renegotiation or exit are the two options

13 July 2017

Tata Group 31

However, before the capacity was commissioned, the Indonesian government

implemented certain pricing norms for coal exports from the country—it made the export of

Indonesian coal at prices that are mandatorily linked to international prices (the difference

would have to be retained in the country).

As a consequence, the project economics deteriorated. The company has been trying to

seek a compensatory tariff for the last few years; however, no progress has been made on

this front so far.

In a recent letter, Tata Power proposed either tariff negotiation or for power procurers to

take over 51% of the paid-up equity shares of CGPL (subsidiary of Tata Power that owns

that Mundra Power plant) for a nominal value of Rs1, and grant relief to the project by

purchasing power at a rate to fully address the under recovery of fuel costs.

However, this would require intense coordination with the regulator, state DISCOMs

(distribution companies) and banks. The street currently assigns a negative value to the

Mundra Power project.

Figure 48: Mundra Power project has been weighing on the company's profitability

Source: Company data. Note: PAT numbers above are normalised (excluded the exceptional items)

Renewables will also be an important part of the strategy

Renewable energy is one segment that the company is looking to grow. However, given

the consistently declining renewable energy tariffs, a cautious approach would be

recommended. For example, the recently acquired (June 2016) Welspun renewable

portfolio (1,140 MW) for over Rs90 bn enterprise value has weighted average feed-in tariff

of close to Rs8/kWh for solar and Rs6/kWh for wind. In some of the recent auctions, the

solar tariff has come down to Rs3/kWh or below. While Tata Power has agreements

(PPAs) with DISCOMs for this renewable capacity, the current low tariffs (much below the

contracted price) pose a risk.

As per media reports (Economic Times), the above mentioned deal has also been under

scrutiny by Tata Sons due to its concerns over the valuations and unusual swiftness in

execution.

Tata Power has some non-core assets

Tata Power has a significant holding in Tata Communications—directly as well as through

Panatone Finvest (Tata Power has about 40% stake in this company), and also has a

minority stake in Tata Teleservices. The combined book value of these investments is

13550

-9,990

1,890 1,740190 160 150

1,860

9350

-8,490

2,560 2,610

50770 690 1,160

12,170

-15000

-10000

-5000

0

5000

10000

15000

Tata Power(Standalone)

SGPL (MundraUMPP)

MPL (MaithonPower)

TPDDL (DelhiDiscom)

TPTCL (Powertrading)

Tata Power Solar TPREL(Renewable

Power)

WREPL (WelspunRenewable)

Associate and JVprofit share

Rs mn

FY16 FY17

Tariffs are coming down significantly

Rs37 bn of investments at market value

13 July 2017

Tata Group 32

Rs20 bn and the market value (using the current market price for the quoted investments)

is over Rs37 bn. At market value, these investments constitute 17% of Tata Power's

market cap; FY17 net debt of Rs468 bn.

Tata Teleservices: Challenges in the telecom

industry

Tata-NTT DoCoMo issue seems behind us now

Tata Teleservices was incorporated in 1996, and was one of the pioneers in India in

CDMA technology. It acquired Hughes Tele.com in 2002 and this acquired company was

renamed as Tata Teleservices (Maharashtra). The Tata Group formed a 74:26 joint

venture with NTT DoCoMo in 2008. Tata DoCoMo launched its GSM services in 2009.

NTT DoCoMo had a put option of sorts in the event of missed performance targets—the

Tata group had to find a buyer at a fair market price or pay half the original amount,

whichever was higher. The JV had done badly relative to its peers, racked up losses and

had no buyers. The deal between the Tata group and NTT DoCoMo to buy back the

shares ran into trouble with the Central bank (new regulations prevented any form of put

options at the time of investment) and the latter took the issue to the London Court of

International Arbitration. Finally, after Chandra took over, Tata Sons resolved the dispute

and agreed to pay the price as dictated by initial agreement. The Delhi High Court

approved this settlement in April 2017.

Three dominant players gaining share—before Jio's entry; market structure changing rapidly since Jio’s entry

Historically, India has been a competitive telecom market with the No.1 player never

crossing 34%+ revenue market share due to the presence of 10-12 players at all times.

The earlier regulatory policy of a low entry cost (Rs16.5 bn/US$250 mn for nationwide

spectrum) ensured high competition. However, over the years, auction-based spectrum

allocations where bigger players bid aggressively and forced cancellation of

administratively allocated spectrum in 2012 have resulted in market shares consolidating

with the top-three operators: Bharti, Vodafone and Idea.

However, with Jio’s entry by launching free services for first seven months, incumbents

started witnessing a sharp contraction in all financial and operating parameters with ARPU

compressing 19-22%, data and voice pricing compressing by 45% and 24-27%,

respectively, from the June-2016 quarter levels for Bharti and Idea. This resulted in a

significant loss of revenue for the industry. Indeed, Bharti’s India mobile revenues declined

by 6% YoY in 2H17, while in the case of Idea it was 9%.

Tata Sons will pay as per the agreement and

the Delhi High Court has approved it

13 July 2017

Tata Group 33

Figure 49: Over the years, revenue market shares

have been consolidating with the top-three players

Figure 50: Revenues for the industry declined by 7%

YoY in 2H17

Source: TRAI Source: TRAI

Even after Jio announced the commencement of paid services from April 2017, the price

points are significantly lower than that of the incumbents, putting further pressure on them.

This intense competition has resulted in rapid consolidation in the sector, with even the

number two and three operator (Vodafone-Idea) announcing their decision to merge.

However, even after this consolidation, we see industry continuing to see high competition

in the near term, with Jio likely to prioritise market share over near-term profitability. So

now, from a previous cozy equilibrium where we had Bharti at the top, Vodafone not trying

to dislodge Bharti from the top and Idea being at number three, we have three equally

capable operators vying for the top spot (Bharti, Jio and Idea+Vodafone). Thus, scale both

in terms of revenue and spectrum market share, balance sheet strength will be critical to

be able to compete in such a market.

Tata Tele has 7% spectrum market share and FY17 leverage of about 18x.

Figure 51: With its 7% spectrum market

share…++++++++++++++++++++++++++++++++++++

Figure 52: … Rs20.5 bn EBITDA and about 18x

leverage, Tata Tele compares unfavourably to peers

Source: TRAI, DoT, Company data Note: Tata Tele numbers refers to summation TTML and TTSL Source: Company data, Credit Suisse estimates

0%

20%

40%

60%

80%

100%

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Mar

-17

Bharti Vodafone Idea RCOM

BSNL/MTNL TTSL Aircel BPL

HFCL S Tel Uninor Videocon

Etisalat Sistema Shyam Jio

-

100,000

200,000

300,000

400,000

500,000

600,000

Sep-06 Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17

Launch of free services by Jio

Bharti21%

RJio17%

BSNL/MTNL14%

Vodafone14%

Idea13%

Tata Tele7%

Aircel6%

Others4%

RCOM4%

Revenue wtd avg spectrum market share after Oct-16 auctions

-

2

4

6

8

10

12

14

16

18

20

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Bharti (consol) Idea Tata Tele

FY17 EBITDA (LHS) FY17 Net debt (LHS) FY17 Net debt/EBITDA (RHS)

13 July 2017

Tata Group 34

What next?

Tata Teleservices has an enterprise and consumer wireless business. The pressure

discussed above relates to the latter. Tata Teleservices' losses and debt have been

increasing. The way we see it, there are three ways forward:

■ Business as usual: This may not be a viable option given increasing competition in

the sector in the form of Jio.

■ Sell-off spectrum assets and wind down the business: Similar to how Telenor

exited its India operations by selling off the spectrum assets to Bharti, and then

deciding to shut down the remaining business, Tata Tele could evaluate selling off its

spectrum assets which, could yield some value based on the last auction prices.

■ Combine with larger peers: Another option for Tata Tele would be to merge with a

larger player—either the RCOM + Aircel combined entity or with Bharti/Jio/Idea +

Vodafone. However, even here we highlight that the major value for the business

would comprise of spectrum, with negligible value ascribed to its 45 mn subscribers

(this is a high churn market, some of Tata customers have CDMA handsets) and its

network. Recent newspaper reports (Economic Times) suggest the possibility of a

combination of Airtel Tata Teleservices, Tata Communications and Tata Sky. If this is

true, it would present the Tata Group with a complete or partial exit from the consumer

wireless business.

#2 Domestic business and B2C may garner higher

investment share

Historically, a major chunk of Tata Group's investments has been in the international and

B2B nature of businesses. For example, over the last five years, Tata Motors, Tata Steel,

Tata Power and Tata Communication have accounted for close to 87% of the Group's total

investments (net capex + acquisitions, net of disposals). The investments in Tata Steel

have come down significantly over the last five years, given the disposals in some of the

problematic international assets. Tata Motors, on the other hand, has witnessed a major

increase in investments during the last five years. Note that, most of the growth for Tata

Motors is in the international business, and hence, the investments are also directed

towards that part of the business (Jaguar Land Rover). Investments have also come down

in Tata Power. Historically, higher investments in the international heavy businesses also

reflect in the revenue profile of the Tata Group, which is international heavy (two-third of

Tata Group's combined revenue).

Incrementally, we believe, there should be higher investments towards the domestic and

B2C businesses, given a large addressable market, faster growth and a scope to leverage

the Tata brand. Companies that cover this area would include Tata Global, Tata Chemical,

financial services, including Tata Capital and the insurance arms, Indian Hotels and the

retail operations. There has been some increase in investments in businesses such as

Voltas (the recent JV), Titan (new launches), Tata Chemicals (more focus on the core and

value accretive businesses), and Trent (store expansion). Additionally, the Group may also

invest in relatively new ventures such as e-commerce (at the Group level), although

cautiously. TCS' dividend/buy back payouts would be the main source of funding for such

investments at the Group level for now, accompanied by possible small divestments.

Three options: continue, combine with

another player, exit

13 July 2017

Tata Group 35

Figure 53: Domestic and B2C businesses have had a very small share of the Group's total investments over

the years

Note: The above calculation is based on the investments by the 13 major companies of the Tata Group mentioned in the side box. Source: Company data, Credit Suisse research

Figure 54: International business dominated in the past


#3 Some strong consumer brands can be leveraged

better

Tata Group companies have built very strong consumer brands in some of the businesses,

besides being an overall respected and well-known brand across the country. For

example, Tata Salt is a household name across India. Similarly, Voltas is a very strong

brand in the AC market and Tata Tea also has a very prominent brand recall. In Titan,

Tanishq is the largest and most trusted jewellery brand, and Fastrack is evolving as a

decent youth brand (in the mid-segment). However, Tata Motors (passenger vehicles) is

one consumer brand where the brand positioning is not as strong.

-10%

10%

30%

50%

70%

90%

110%


Tata Group - Investment break-up by major companies (capex+acquisitions)

Voltas

Trent


Titan

Tata Tele

Tata Tele (Mah)

Tata Chemicals

Tata Sky

TCS

Tata Communications

Tata Power

Tata Steel

Tata Motors

139

93

4

2

1

1

1

1

0

-1.2

-4.4

-8.3

-8.7

-33

0 100 200

Tata Motors

Tata Comm.

Tata Tele

Tata Tele (Mah)

Voltas

Titan

Tata Chemicals

Trent

Tata Sky

Tata Global…

TCS

Tata Power

Tata Steel

Total

Change in investments (FY14-16)

Rs bn

32% 38% 61% 65% 57% 58% 59% 63% 67% 67% 67%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Tata Group: Revenue break-up

International India

Globalisation of the Group through two large acquisitions - Corus and JLR

Businesses such as TCS and JLR have done well

13 July 2017

Tata Group 36

The Tata Group's consumer presence is low, in our view, and we believe it can leverage

these strong brands (and also the large distribution network) to propel its consumer

presence.

Figure 55: Tata Group's consumer presence is

low….

Figure 56: Titan is the largest consumer company in

the Group

Note: The above proportions exclude financial services Source: Company data, Credit Suisse research


Some initiatives are already under way

Some of these initiatives are already in place. For example, Voltas has recently signed a

JV with Turkey's Arcelik to offer consumer durable products in India, using Arcelik's

technology and leveraging the Voltas brand. In Titan, Tanishq has recently entered the

wedding jewellery segment (it was a missing piece of the overall portfolio earlier), has

acquired Caratlane (a jewellery ecommerce company) and has also been experimenting

with an apparel store in Bangalore (branded Taneira). Tata Chemicals launched a new

brand for its food portfolio—Sampann in 2015. Tata Global Beverages has also ventured

into the packaged water segment (including flavoured water), and Tata Coffee (subsidiary

of Tata Global Beverages) is now selling branded coffee through the Starbucks chain (JV

of Tata Global Beverages).

Ample opportunity to further leverage the brands

There is enough scope for each of these consumer companies to further expand their

product portfolios. Of the companies we cover, Voltas can further increase its product

portfolio by adding new categories in home and kitchen appliance segments (JV with

Arcelik will be operational towards the end of the year). Media reports (Business Today)

suggest that Tata Global Beverages can leverage the Tata brand and its existing

distribution network to launch new adjacent categories (the company has also been

contemplating to venture into the dairy segment, but there has been no progress so far, as

per Economic Times). Tata Chemicals also has plans to increase its consumer presence

(source: Live Mint). Titan can also tap the apparel segment (a large addressable market)

and introduce products in imitation jewellery.

17%

10%

8%

13%

7%

6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY06 FY11 FY16

Tata Group's India B2C revenue share

India B2C revenue India B2C revenue (excl. Telco)0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY06 FY11 FY16

Tata Group: India B2C portfolio (excl. Telcos)

Casa Décor

Infiniti Retail

Indian Hotels

Titan

Tata Chemicals

Tata Sky


Voltas

Trent

Tata Motors

Voltas' JV with Arcelik and Titan's wedding

jewellery segment are examples

13 July 2017

Tata Group 37

Figure 57: Tata Group companies have scope to leverage their brands better

Company Current presence in B2C segments Other segments that could be targeted

Voltas Air conditioners

Air coolers

Water coolers

Refrigerators*

Washing machines*

Microwaves*

Other consumer and home appliances

Tata Global Beverages Tea

Coffee

Packaged water

Flavoured water

Health drinks

Dairy and dairy products, etc.

Tata Chemicals Salt

Pulses

Gram flour

Water purifiers

Spices

Nutritional products

Grocery is a large market in India, and offers significant opportunities. Few examples:

Wheat flour

Rice

Other grain

Titan Jewellery

Watches

Eye wear

Men and women’s accessories

perfumes

Apparel

Imitation jewellery, etc.

* JV announced with Arcelik. Source: Company data, Credit Suisse research

#4 Some important segments need to scale up

While the Tata Group has a prominent presence in many of the large sectors in the Indian

economy, it is sub-scale in some of them. Prominent among the large Indian sectors

where the Tata Group has a sub-scale presence include retail/consumer, financial

services, e-commerce, healthcare and defence. Each of these segments hold immense

opportunities to scale-up.

Scope to scale-up retail

Retail is a large market in India. The overall retail market size is estimated to be over

US$650 bn and of this only a small fraction (8-10%) is organised (source: Technopak,

BCG). Apparel and footwear, which are about 10% of the overall retail market, are

expected to grow at a rate faster than the overall retail market, and the organised market

may grow at an even faster rate, given the low penetration.

Only a few companies have managed to run their retail business profitably, and Trent

(Westside) is one of them. Overall, Trent Limited has a market cap of US$1.2 bn and this

has increased by 185% and 92% over the last five and three years, respectively. The

Westside business has done well for the company.

Westside is smaller in scale compared to some of the other fashion retail chains. For

example, Westside’s revenue of Rs16.4 bn is much lower than that of Shoppers Stop

(Rs49 bn), Future Lifestyle and Fashions (Rs.38.8 bn) and Pantaloons (Rs.25.5 bn). Of

these peers, Pantaloons may be most relevant in terms of store formats—Westside had

107 stores as at March 2017 vs around 200 stores of Pantaloons. Given better profitability

(helped by a large proportion of its own brands) and significant growth opportunity, we

believe there is potential to scale-up this business.

Smaller than other fashion retail chains but more profitable

13 July 2017

Tata Group 38

Figure 58: Westside is relatively smaller than other fashion retail chains, but has a much better margin

profile


Minor presence in grocery /departmental stores and is loss making

While the Tata Group has presence in grocery/departmental stores through Star Bazaar

(part of Trent Limited), it is very small at the moment—42 stores under Star Daily, Star

Market and Star Hyper brands. Competitors such as Big Bazaar and D-Mart are much

larger with 235 and 131 stores, respectively. This segment had a revenue of Rs8.9 bn and

an EBITDA loss of Rs167 mn in FY17. While the opportunity is larger in this segment,

Trent is yet to achieve profitability.

Financial services: Presence across segments, but small scale in most of them; lending business has a reasonable scale to grow

The Tata Group has presence in multiple segments of the financial services industry,

including insurance (Tata AIA Life Insurance and Tata AIG General Insurance), retail and

corporate lending (Tata Capital and Tata Motor Finance), broking and investment banking

(Tata Capital) and asset management (Tata Asset Management).

The Tata group lacks scale in most of the categories; however, the lending business is an

exception (carried through Tata Capital). Tata Capital’s book size is comparable to several

of its diversified financial peers such as L&T Finance, Edelweiss, IIFL and Reliance

Capital. This is a fast growing segment for the market, and Tata Capital’s existing platform

offers an opportunity to scale-up.

Potential for Tata AIA

Tata AIA has been selling products through IndusInd Bank and Citibank. In October 2016,

it entered into an agreement with HDFC Bank to sell its policies and recently has tied up

with Axis Bank as well. It has also tied up with DBS Bank, which will offer products through

its digital channel. With an increasing number of bancassurance partners, its share of

bancassurance has increased from 16% in FY15 to 49% in FY16.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

10,000

20,000

30,000

40,000

50,000

60,000

Shoppers Stop Central+BrandFactory

Pantaloons Westside

Revenue (Rs mn)

FY16 FY17 Growth [RHS]

0%

2%

4%

6%

8%

10%

12%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Shoppers Stop Central+BrandFactory

Pantaloons Westside

EBITDA (Rs mn)

FY16 FY17 Margin FY16 [RHS] Margin FY17 [RHS]

13 July 2017

Tata Group 39

Figure 59: Tata Group’s portfolio of assets in the financial services segment

Company Segment Parameter Value (Rs bn) Competitors Comments on Tata's positioning

Tata AIA Life Insurance Life Insurance Gross written premium 25 LIC, ICICI, SBI Life, HDFC, Bajaj

Allianz

Close to Rs.3.6 tn industry size.

Tata AIG General Insurance General Insurance Gross written premium 21 New India, United India, National

Insurance, Oriental Insurance, ICICI

Lombard

Close to Rs.950 bn industry size.

Tata Motor Finance

(subsidiary of Tata Motors)

Captive Auto Finance Loans 187 All major banks Currently finances only Tata vehicles.

Tata Asset Management Fund Management AUM 417 ICICI Pru MF, HDFC MF, Birla Sun

Life, Reliance MF, SBI MF

The Mutual Fund industry in India

has AUM of Rs.19 tn.

Tata Capital Diversified Financials

- Retail lending Including home, car,

personal, consumer and

business loans

Book size 228 IIFL, Motilal Oswal, Edelweiss

Capital, JM Financial, L&T Finance,

Reliance Capital

These six firms have book size of

close to Rs.750 bn and growing at a

fast pace.

- Corporate lending Book size 191 IIFL, Edelweiss Capital, JM

Financial, L&T Finance, Reliance

Capital

These five firms have book size of

close to Rs.830 bn and growing at a

fast pace.


E-commerce

Tata CLiQ is Tata Group's flagship e-commerce initiative and is run under Tata Unistore. It

is a horizontal e-commerce platform selling goods such as electronics, apparel and

footwear and was launched in 2016.

Tata Industries has seeded three businesses in the broad Internet/digital area—Tata CliQ,

a digital healthcare platform and TataiQ which is focused on analytics. Of these, Tata CliQ

is the e-commerce venture and was started about a year ago. The initial plan was to have

an omni-channel branded marketplace.

The Indian e-commerce market has become increasingly consolidated over the last two

years—the larger companies have used their scale and access to funds to build up key

areas of operations including customer experience, seller relationships, logistics and

technology. Based on industry sources, we estimate Flipkart and Amazon have increased

their combined market share from 50-60% two years back to over 80% today. As per

newspaper reports (Economic Times), Flipkart is looking to acquire Snapdeal which used

to be a strong #3 player at one point of time.

While there may be room for niche or vertical-focused players, we believe it is probably too

late for a new horizontal player to enter the market as the cash burn can be significant in

the first few years, if the new player hopes to capture any reasonable market share. And

even then, success is not guaranteed. Also, some of the key individuals that were involved

with this initiative initially are no longer a part of the Tata Group, post the change in the

Chairman.

Tata CLiQ appears to be following a somewhat different model. In Tata CliQ, the sellers

are curated and brands can have an online store—these include non-Tata brands as well.

It is somewhat similar to the T-Mall model. It started with apparel, electronics and

footwear. The number of sellers will be small and significantly lower as compared to the

larger horizontal e-commerce players.

It also plans to leverage the Group's physical retail infrastructure for delivery. It claims that

about 50% of orders were fulfilled by about 100 stores. Tata Unistore runs CliQ and Tata

Industries and Trent (a retail arm of the Group) have stakes in this.

Seller curation, online stores for brands and the Group's physical

infra are differentiators for Tata CLiQ

13 July 2017

Tata Group 40

Figure 60: The GMV has started growing again in

2017; based on the trends so far, GMV may increase

to about US$15 bn in 2017

Figure 61: India’s GMV mix is gradually shifting

from traditional electronics and books to new

categories such as fashion, FMCG etc. (2016)

Source: IAMAI, Euromonitor, Credit Suisse estimates Note: The up and down arrows next to the categories reflect the expected change in their share in the medium-term. Source: Credit Suisse estimates.

Defence: A promising market; Tata Group’s offerings are dispersed across multiple units

Tata Group has a presence in the defence segment through multiple entities. Some of the

notable ones are:

■ Tata Advanced Systems (TASL): A 100% subsidiary of Tata Sons, it is a systems

integrator for defence-related delivery to the Indian security forces, with partnerships

with leading defence players such as Sikorsky Aircraft, Lockheed Martin and Israel

Aircraft Industries. For example, it operates a part manufacturing facility for aircraft and

helicopters in a joint venture with Sikorsky. It is also involved in the command and

control systems for India's missile programmes.

■ Tata Motors: Tata Motors has offerings in logistics and has also been adding

capabilities in combat and combat support (offered through the 100% subsidiary TAL

Manufacturing Solutions). It has supplied over 150,000 vehicles to the military and

para-military forces.

■ Tata Power Strategic Engineering Division: It is a prime contractor and has

participated in projects such as launcher systems, missile development programme,

nuclear submarine control centre.

■ Tata Advanced Materials: A subsidiary of Tata Industries, it has offerings for

aerospace, defence and industrials—it offers composite materials for space and

industrial applications, structural components, engine components, and personal and

vehicle armour.

■ Tata Industrial Services: It also offers supply chain and programme management

services for aerospace and defence players.

Besides these, companies such as TCS, Tata Elxsi and Tata Technologies also participate

in defence work. Even Titan has a small presence in this segment—it performs precision

engineering work for international players.

With the 'Make in India' initiative of the government and the focus on defence (as per IHS

Markit, India was among the top-five spenders on defence in 2016), we believe this should

be one large area in the future. The Group had expected a revenue of Rs26 bn in FY16 as

per newspaper reports (Business Standard). Although small in the overall scheme of

things, the government expects this to be a large opportunity for the Indian companies

(source: Economic Times, Business Standard).

11-12 bn

14.5-15.5 bn

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2010 2011 2012 2013 2014 2015 2016E 2017

India e-tailing GMV (US$ mn)

Electronics and accessories

Apparel

Other fashion

Home furnishing Books

Others (incl. FMCG)

Current GMV mix

Small in the scheme of things (Rs26 bn

revenue in FY16) but promising

13 July 2017

Tata Group 41

Healthcare: No significant presence

Healthcare is another large segment of the Indian economy, and Tata Group has a very

small presence through two entities—Advinus Therapeutic and Tata Health. Advinus

Therapeutic is a contract research firm with revenue of Rs1.8 bn in FY16. This business

has been in existence for over ten years, but has not gained much scale. As per media

articles (Economic Times), Advinus laid off 50 people from its Pune office to improve

profitability.

In 2015, Tata Group forayed into digital healthcare, with Tata Health, with services ranging

from electronic medical records, e-solutions for practice management, remote monitoring

etc. This business is still in its initial stages, and we believe it would not have any

significant revenue at the moment.

In addition, the Group is involved in the healthcare sector through Tata Trust.

Aviation: Two ventures; gradual progress in a competitive market

The Tata Group has its presence in the aviation sector through its two joint ventures—

Vistara (joint venture with Singapore Airlines, with the Group owning 51%) and AirAsia

India (JV with AirAsia Berhad, 40% owned by the Tata Group). Both the airlines have a

relatively small market share (3.2%/3.1% in Jan/May 2017), but have made some

progress in the last couple of years (Vistara’s traffic share was 0.8% in Jan-May 2015,

while Air Asia’s share was 1.2% during the same period). The AirAsia venture was meant

to obtain a presence in the low-cost carrier market in India while in the case of Vistara, the

Tata Group has a majority stake and has international ambitions. The regulations to fly

international were recently diluted. There was a "5/20" rule earlier—operational for five

years and a fleet of at least 20 airplanes—which has now been diluted and the five-year

clause has been removed.

The market is competitive, and being marginal players, profit generation would be difficult.

As per media reports (Business Standard), Vistara generated a revenue of Rs7.1 bn in

FY16 and a net loss of Rs4 bn. Air Asia had a revenue of Rs8.3 bn in CY16 and loss

before tax of Rs1.4 bn.

Given these are relatively late entrants in the market, making losses due to the smaller

scale and expanding their fleet, they would require investments by the Tata Group and

their JV partners in the medium term.

Also, Air India is up for sale, and as per media articles (Business Standard), Tata Group

could be one of the bidders. The Tata Group used to own Air India decades ago, before it

was privatised in 1953. While on the one hand, Air India has attractive assets in terms of

its fleet and landing rights in many international airports, it is saddled with a large amount

of debt, high headcount and posts large operational losses on the other. Acquiring Air

India will be fraught with challenges. Interglobe Aviation (Indigo) has already evinced its

interest in participating in the Air India divestment programme—it would ideally like to own

just the international operations and plans to run that business as a low-cost one, similar

to Indigo's own domestic business. Indigo has significant market share in the domestic

market and has an excellent track record in running a profitable low-cost business. In our

view, the Tata Group's decision regarding Air India will depend on the eventual form of

divestment that the government chooses, and these are early days yet.

Very small market share currently through

Vistara and AirAsia

Will the Tata Group be interested in Air India?

It will be fraught with challenges

13 July 2017

Tata Group 42

#5 Restructuring of Group companies and their

divisions can add value

Voltas: A pure AC + consumer durable business could have more value

Being the market leader, Voltas has a strong brand in the air-conditioner category. The

recent venture into other consumer durable segments (JV with Arcelik for co-branded

consumer durable products) broadens its consumer portfolio. The company's Electro-

Mechanical Projects division (44% of revenue and 14% of the segmental EBIT) has

completely different business dynamics—it is more cyclical in nature, is spread across

multiple segments (rural electrification, water treatment, HVAC) and is also exposed to the

international markets (the Middle East).

We believe the demerger of the Electro-Mechanical Projects division can make Voltas

largely a consumer business. The Tata Group does similar EPC business through different

entities—the most significant of them being Tata Projects (engaged in EPC and industrial

infrastructure projects). The combination of these two entities can create a business with

scale (US$1 bn revenue), while at the same time help Voltas evolve as a pure-consumer

facing company. A pure consumer-facing company can also command a higher value, in

our view.

Figure 62: Demerger of the Projects division can make Voltas largely a 'AC+consumer durable' business;

Projects division can be merged with Tata Projects to create a US$1 bn revenue entity


Defence offerings spread across the group; would consolidation help?

Tata Group's defence portfolio is spread across different group companies. For example,

Tata Advanced Systems and Tata Advanced Materials are 100% subsidiaries of Tata

Sons, and Tata Industrial Services is a 100% subsidiary of Tata Industries. Tata Power

also has defence offerings through its Strategic Engineering Division (SED). Besides

these, several other group companies such as Tata Motors, TCS, Tata Technologies, Tata

Elxsi and Nelco have defence offerings.

We believe consolidating most of the defence related offerings together can bring greater

focus on this segment and that holds great potential. For companies such as Tata Motors,

TCS, Tata Technologies, Nelco and Tata Elxsi, the defence offerings are more integrated

with their core business—hence, separating them out would not make much strategic

sense. On the other hand, Tata Advanced Systems, Tata Advanced Materials and Tata

Industrial Services are independent entities with defence being their core business

(ownership and operational restrictions related to government procurement will need to be

studied though). Tata Power's SED also has a largely independent operation with a

separate plant at Bengaluru.

Tata Projects

EPC, Industrial Infra ProjectsRev (FY16): Rs 42.3 bnPAT (FY16): Rs 0.7 bn


Voltas

Electro-mechanical projects

EPC, electro-mechanical projectsRev (FY17): Rs 26.7 bnEBIT (FY17): Rs 0.8 bn

Tata Power

Tata Steel

Tata Chemicals

Tata Sons Tata Motors

48%

11%

10%

7% 7%

7%

Unitary Cooling Products

Comfort and commercial useRev (FY17): Rs 30.5 bnEBIT (FY17): Rs 4.4 bn

Consumer Durable*

Refrigerators, Washing Machines, Microwave

Rev (FY17): NA

EBIT (FY17): NA

Engineering Products and

ServicesTextile & Mining/Construction

Equipments

Rev (FY17): Rs 3.3 bnEBIT (FY17): Rs 1 bn

Projects business (EPC,

industrial, electo-mechanical projects)

AC + Consumer Durable

Business

Voltas' divisions

Combining the project business with that of

other group companies will give it scale and

make Voltas a consumer play

There are three or four relatively large entities

in defence currently

13 July 2017

Tata Group 43

Figure 63: Defence offerings spread across the group; could they be brought together to build scale?


Tata Elxsi and Tata Technologies' business complement each other, combination can create a well-sized engineering service business

Engineering services is one of the fastest growing segments in the IT services industry,

and the Tata Group has a presence in this segment through three entities—TCS, Tata

Technologies and Tata Elxsi. While TCS has just a 5% exposure to engineering services,

in absolute terms, it is close to a US$850 mn business. Tata Tech and Tata Elxsi are niche

players in the engineering services. Tata Tech is largely in the automotive segment and

also has some presence in the aerospace segment. Tata Elxsi also has the largest

exposure to the automotive segment (about 50% of its revenue), followed by broadcasting

(25% of revenue).

While individually, these businesses are doing well, a combined operation could offer

some synergies (source: Business Line). We believe TCS will not like to exit its

engineering services business. Tata Elxsi currently trades at a higher multiple than TCS as

per consensus estimates.

Warburg Pincus has recently picked up a 43% stake in Tata Technologies from Tata

Motors and Tata Capital—this may preclude any near-term consolidation involving the

company.

Figure 64: Tata Elxsi and Tata Technologies' business complement each other,

their combination could create a leading engineering service business

* L&T Technology Services ^ FY16 revenue Source: Company data

Tata Advanced Systems

Systems Integrator for defence related delivery



ROE (FY16): 2%

Tata Advanced Materials

Composite materials for aerospace, defence and

industrials


Net debt (FY16): Rs 1.3 bn

ROE (FY16): NA

Tata Industrial Services

Supply chain and program management

Rev (FY16): NA

PAT (FY16): NANet debt (FY16): NA

ROE (FY16): NA

Tata Power - Strategic

Engineering DivisionSystems Integrator for defence

equipments and solutions

Rev (FY16): Rs 5.5 bnPAT (FY16): NA

Net debt (FY16): NA

ROE (FY16): NA

Tata Sons Tata Industries

100% 100%

Tata Power

DivisionTata Motors Tata Technologies

TCS Nelco

Tata Elxsi

Other Tata Group companies with defence offerings

186

418

604

857

1,303

553484

385

261

0

200

400

600

800

1,000

1,200

1,400

Tata Elxsi Tata Tech TataElxsi+TataTata Tech

TCS HCL Tech Wipro LTTSL* QuestGlobal ^

Cyient

Engg svcs revenue (US$ mn, FY17)

13 July 2017

Tata Group 44

Financial services

As discussed earlier, Tata Group has its presence in financing through Tata Motor Finance

(captive arm of Tata Motors, with no outside business) and Tata Capital (diversified

financial services subsidiary of Tata Sons). If combined, these two entities will have a loan

book size of over Rs600 bn, that could be large enough to unlock value through a public

listing. However, Tata Motor Finance has so far been run as a captive arm of Tata Motors

(indirectly to push Tata Motors' sales), and making this company independent may not

help Tata Motors.

#6 Simplification of the cross-holding structure

There is a fair amount of cross-company holdings within the Tata Group companies and in

some cases, they also have cross-holdings in promoter entities (Tata Sons and Tata

Industries). We believe unlocking and monetising these investments can be helpful for the

companies as well as add value for investors.

■ The money realised from the cross-holdings in the Group companies can be used to

repay the existing debt of companies. This would be particularly relevant for companies

such as Tata Power that have a higher leverage.

■ This could add value for investors as well. Currently, any investment in Tata Power

also gives exposure to the telecom business (through its investments in Tata Tele and

Tata Communications) as well as the overall Group (given its cross-holdings in Tata

Sons and Tata Industries). Once Tata Sons simplifies the holding structure, anyone

investing in Tata Power will get an exposure to the Power business only. This is also

the case in other companies such as Tata Chemicals, Tata Global Beverages and Tata

Steel.

The process has already begun with Tata Steel selling its stake in Tata Motors for US$590

mn—Tata Sons bought this stake. Similar cross-holding elimination (of non-core cross

holdings) could require a further US$1.5-2 bn fund infusion by Tata Sons into the Group

companies.

Among the Group companies, Tata Chemicals, Tata Power and Tata Global Beverages

have the most significant exposure to other Group companies (shareholding), in

terms of value of investment as % of market cap (26%, 16% and 9%, respectively).

Figure 65: Tata Chemicals and Tata Power have significant holdings in other Tata Group companies

Rs bn Value of

investments in

listed Tata Group

cos. [A]

Book value of

investments in

unlisted Tata

Group cos. [B]

Total value of

investments in

Tata companies

[C]

Mkt cap

[D]

[C] as % of [D] Book value of

investments

Market value vs

book value

Tata Chemicals 41.6 1.8 43.4 165 26% 9 399%

Tata Power 28.6 7.0 35.6 221 16% 20 77%

Tata Communications 0.0 9.3 9.3 191 5% 9 0%

Tata Steel 4.3 4.4 8.7 538 2% 7 28%

Tata Global Beverages 7.4 1.2 8.5 99 9% 2 365%

Tata Motors 2.5 2.9 5.4 1,261 0% 5 1%

Voltas 0.1 0.3 0.4 155 0% 0 44%

Tata Coffee 0.1 0.0 0.1 27 0% 0 144%

Titan 0.0 0.0 0.0 473 0% 0 178%

TCS 0.0 0.0 0.0 4,465 0% 0 NA Note: 1. Did not include the investments in the subsidiary companies with related business operations (Tayo Rolls, Tinplate, Tata Metaliks and Tata Sponge Iron for Tata Steel, and Tata Coffee for Tata Global Beverages). 2. For the unlisted Tata Group companies, we have just considered the book value (net of impairment) Source: Company data, Thomson Reuters

While Tata Motor Finance and Tata

Capital can have a large book, combined, the former helps Tata

Motor sales

13 July 2017

Tata Group 45

#7 Sub-scale operations: Are they really needed?

Regardless of the size of the company, it occupies some of the management bandwidth—

every company's Board is chaired by Tata Sons or another Group company's senior

leaders. However, while some of the companies may be small and making losses today,

the investment may be justified by the addressable market opportunity (for example, the

airline businesses, Tata Housing, Tata Mutual Fund).

Looking at past financial performance, we believe there are certain companies (some

examples discussed below) that are small, with presence in business segments that do

not seem very strategic and have mediocre financials. Their strategic relevance from the

Tata Group's perspective, hence, needs a relook.

Tata International

Tata International is a global trading and distribution company, with presence in five key

verticals—leather and leather products (including manufacturing at Chennai and Dewas in

India), metals trading, minerals trading (including some ownership in a couple of blocks),

distribution (including distribution of Tata Motors' vehicles in Africa) and the recently

started agri-trading business.

Tata International’s revenue has grown at 11% CAGR over FY14-16 (FY17 financials not

available), EBITDA margin is low (typical of a trading company) and EBITDA has grown at

a 9% CAGR. The company has made net losses for the last three years (close to Rs1 bn

in FY14 and FY15, and Rs500 mn in FY16). The company had a net debt of over Rs18 bn

in FY16 (on an EBITDA of Rs1 bn) and barely had positive free cash flows in FY16

(negative free cash flows of Rs11.4 bn and Rs2.6 bn in FY15).

Figure 66: Tata International—financial snapshot

Rs mn FY14 FY15 FY16

Revenue 105,449 126,496 130,449

EBITDA 852 375 1,007

PAT -967 -1,277 -504

Net debt 27,146 19,740 18,411

FCF -11,435 -2,642 -57

Source: Company data, Capitaline

Tata Business Support Services

The company is a wholly-owned subsidiary of Tata Sons, and provides support services

for business operations (for industries ranging from telecom, media, retail and BFSI). The

company had revenue of Rs6 bn, with an EBITDA margin of 8% in FY15 and has a current

employee base of over 25,000. The margins are very low from the standard of a services

company.

Given the lack of scale in the business (there are several BPO companies with much

larger scale and better margin profile), low margins and threat of automation, this may not

be a strategic fit in Tata Group's portfolio.

Tata Asset Management

Tata Asset Management is owned 68% by Tata Sons and 32% by Tata Investment

Corporation (TICL). The company had an AUM of Rs417 bn vs an overall AUM of Rs9 tn

for the Indian mutual fund industry. The profitability is also low—it generated a revenue of

Rs14 bn in FY16 and PAT of Rs56 mn, with a below 1% ROE.

Advinus Therapeutic

Advinus Therapeutic is a contract research firm with revenue of Rs1.6 bn in FY16. This

business has been in existence for over ten years, but has not gained much scale. As per

media articles (Economic Times), Advinus laid off 50 people from its Pune office to

13 July 2017

Tata Group 46

improve profitability. The company had a revenue of Rs1.6 bn in FY16, and generated

PAT of Rs67 mn in FY15 (FY16 PAT not available) and had a net debt of Rs3.2 bn in

FY15.

Tata Petrodyne

Tata Petrodyne is an upstream oil and gas company with interests in exploration and

production blocks in India, Indonesia and Tanzania. While the company has been in

operation for over 23 years, it remains a minor player in the segment that has some very

large-scale players. Although the company generated profits of Rs465 mn on the sales of

over Rs1 bn, the business may not make strategic sense.

Tata Pigments

Tata Pigments is another such company (wholly owned subsidiary of Tata Steel). The

company sells flooring colours, decorative paints and pigments under Tata and other

brands. It was primarily formed to process the acidic waste generated from the Steel sheet

mills into pigments—over the years, it has become the largest producer of synthetic iron

oxide pigments. However, this business also lacks scale with just over Rs1 bn revenue

and Rs56 mn PAT in FY16.

Tata Ceramics

Tata Ceramics is a 57% owned subsidiary of Tata Power and sells fine-bone china

crockery and tableware in India and other markets. The company had been struggling, and

saw a management change around 2013—as part of the restructuring, management

increased the domestic focus of the business. However, things do not seem to have

changed much—in FY15, the company’s revenue was Rs500 mn and it broke even at the

PAT level, but it made a loss of Rs37 mn in FY16.

#8 Divestments may be value accretive for few

companies

While the overall ambition of the Tata Group management is likely to grow the business,

we believe certain divestments cannot be ruled out if they bring significant value to the

companies and the Group or prevent significant destruction of value. This process has

already begun to some extent with the sale of certain European assets by Tata Steel and

the sale of its urea business by Tata Chemicals. We believe there are certain pockets of

opportunities for the Tata Group to realise value by divesting some of its value destroying

business. Some of these include:

Tata Steel: European operations

As discussed earlier, Tata Steel's European business has two parts—Netherlands and the

UK. While the former has historically done well, the latter has been a drag on the

company's operations. Tata Steel sold part of the UK business (speciality steel) for £100

mn, and has also implemented a transformation programme to improve the performance

of the remainder of the European business.

Tata Steel's strategy on turning around the European portfolio hinges upon: (1) the sale of

its peripheral businesses (several of them have been already sold), (2) resolution of the

UK pension issue, and (3) a broader strategic JV with ThyssenKrupp. The UK assets have

already been largely written down, and hence, there is little risk of a big impairment in the

future.

Tata Power: Mundra

As we have discussed earlier, the Mundra power plant remains a significant overhang on

Tata Power's overall business, given the under-recoveries in the project. The best

outcome under the circumstances would be for Tata Power to forego the asset. However,

this would require intense coordination with the regulator, state DISCOMs (distribution

Select divestments can either unlock value or

prevent value destruction

Includes sale of small businesses, fixing the

pension issue and a JV with ThyssenKrupp

The best outcome for Tata Power would be to

forego the asset

13 July 2017

Tata Group 47

companies) and banks. The street currently assigns a negative value to the Mundra Power

project, and hence, even if the company manages to forego the asset without any

consideration, this could be value accretive. This may not be easy to do, however.

Tata Teleservices

As discussed earlier, business-as-usual is not possible for Tata Teleservices for long,

given its weak market positioning, a challenging environment for telecom operators and a

high level of debt on its balance sheet. What option the Tata Group will take is far from

certain. The option that has been speculated about in the press (the Economic Times, for

example) in recent days, involves combining the operations of Tata Teleservices, Tata

Communications and Tata Sky with the Airtel group, with the Tata Group possibly

continuing to hold a stake. Tata Teleservices' spectrum has value for Airtel. Tata Sky is

likely the leading DTH player in revenue terms and is one of four key players in subscriber

terms—Airtel's DTH business is one of the other three. Tata Communications is the largest

wholesale voice carrier and has the largest submarine fibre network.

#9 Selective M&A approach in some businesses

While the Tata Group was very aggressive in terms of acquisitions between 2000 (started

with the Tetley acquisition) and 2008, especially of international assets, there were no

significant acquisitions post that, until Welspun Energy's renewal assets acquisition by

Tata Power in 2016. Challenges post the Corus acquisition may have made the

management more cautious.

Acquisitions can add value, particularly when they are synergistic and done at reasonable

valuations, and are an important part of any company's growth strategy. The Tata Group

has made several acquisitions (see the table below for some of the key acquisitions), most

of them being international. Tata Group has had a mixed M&A track-record—large

acquisitions such as JLR (by Tata Motors) and Citigroup Global Services (by TCS) have

proved to be value accretive, while Corus (by Tata Steel, and also the largest acquisition

by the Tata Group so far) has proved to be value destructive. Welspun Energy's

renewable assets' acquisition has also been criticised for a variety of reasons, including

valuations—as per newspaper reports (Economic Times), Tata Sons may consider a

forensic audit of this transaction, given concerns of valuations and the swiftness in

execution.

We believe the Group can be more active in terms of selective M&A, particularly in the

businesses where new capabilities need to be added (such as TCS) or the product

portfolio needs to be expanded (Voltas). Also, if the Group needs to increase its presence

in segments where it aspires to scale up (such as consumer retail for example), purely

organic growth may not be adequate.

Spectrum sale would be one option

No significant acquisition in the past

8-9 years, except for Welspun's renewables

The historic track record has been mixed

http://economictimes.indiatimes.com/news/company/corporate-trends/merger-with-tata-to-help-bharti-airtel-close-gap-with-vodafone-idea/articleshow/59536303.cms

http://economictimes.indiatimes.com/industry/energy/power/tata-sons-may-put-welspun-deal-under-lens-due-to-concerns-over-corporate-governance/articleshow/59150516.cms

13 July 2017

Tata Group 48

Figure 67: Tata Group's key acquisitions

Acquired company Acquirer Year Consideration (US$ mn)

Corus Group Tata Steel 2007 ~12,000

Jaguar Land Rover Tata Motors 2008 2,300

Welspun Energy's renewable assets Tata Power 2016 1,380

Bumi Resources Tbk's coal mines Tata Power 2007 1,300

Soda ash business of General Chemical Industrial Products Inc Tata Chemicals 2008 1,005

Glaceau* Tata Tea 2007 677

Citigroup Global Services TCS 2008 505

Tetley Tata Global Beverages (erstwhile Tata Tea) 2000 450

Millennium Steel Tata Steel 2005 400

NatSteel's Steel business Tata Steel 2004-05 286

Teleglobe International Holdings Tata Communications (erstwhile VSNL) 2005 239

Eight O'Clock Coffee Tata Coffee 2006 220

Ritz Carlton, Boston Taj Hotels (Indian Hotel) 2006 170

Tyco Tata Communications (erstwhile VSNL) 2004 130

Daewoo Commercial Vehicle Tata Motors 2004 102

* Later sold to Coca-Cola. Source: Company data, Credit Suisse estimates

#10 Culture

While Tata Sons' objective in selecting Chandra as the Chairman would have been to

ensure continuity of culture (Chandra has been with the Tata Group for about 30 years), a

new Chairman would bring in some changes in culture. When Chandra took over TCS, we

believe that he brought in a more assertive sales approach, for example. While we do not

see any major cultural changes likely in the Tata Group, changes to some management

personnel cannot be ruled out, and the levels of accountability increased [will increase?].

Chandra has also got in new faces as part of his corporate team, including the CFO, and

the head of legal and head of strategy.

13 July 2017

Tata Group 49

Shift in focus will raise returns Within the broad themes highlighted in the earlier section, and the consequent key

imperatives, we believe Tata Motors, Tata Steel, Voltas and Titan could be the potential

beneficiaries among the stocks we cover. Additionally, going by press reports, Tata

Chemicals and Tata Global Beverages may also be impacted by some of these initiatives.

Tata Motors can gain from a better execution in the domestic business, while Tata Steel

can gain from better returns on the European operations and increasing focus on India.

Voltas can leverage its consumer brand for new consumer products (outside AC and air

coolers), and a demerger of its projects business can also make it a pure consumer play.

Titan may benefit from the Group's focus on the domestic consumption theme. Tata

Chemicals can leverage the Tata brand for new consumer offerings, and there can be

further elimination of non-core businesses. Tata Global Beverages could witness greater

domestic presence and sharper focus of its brand, and there can be sale of cross holdings

in the Group entities. Tata Power has long been hamstrung by the Mundra plant—while it

may not be easy to get out of, management may endeavour to do so. Tata

Communication may get impacted by any realignment of Group entities (as discussed in

newspaper reports—Economic Times) but it is not clear what form this will occur in. The

government also owns 26% stake in the company. TCS and Tata Elxsi may perform some

of the work for the Group's digital initiatives but the benefit will not be material for TCS,

given its scale. Tata Elxsi has a significant revenue contribution from the automobile

sector.

Within the Tata Group, we have an OUTPERFORM rating on Tata Motors, Tata Steel,

Titan and Voltas; we are NEUTRAL on TCS.

Figure 68: Companies that could be impacted from the likely strategy of new management

Themes Key imperatives Companies that could be impacted Incremental value (% of current market cap)

Return ratios Focus on the “big guns” (return optimisation)

Higher investment share for domestic B2C businesses going forward

Better leveraging of the strong consumer brands

Scaling up of current sub-scale segments such as Retail, Financial Services, Defence

Realignment of Group companies/divisions for value addition

Relook at the M&A approach

Divestments

Simplification of the cross-holding structure

Subscale, non-strategic operations rationalisation

Change in culture: Increased accountability

Tata Motors: Domestic focus

Tata Steel: Domestic focus, international restructuring

Voltas: Expansion of consumer business

Titan: Focus on domestic consumption

Tata Chemicals: Consumer, cross-holding

Tata Global: Domestic, cross-holding

US$5 bn (22%)

US$2 bn (18%)

US$0.5 bn (21%)

US$3 bn (37%)

US$0.5 bn (19%)

US$0.6 bn (34%)

Domestic consumption

Simplicity, in structure and holdings

Relevance, in segments where the Group has presence

Digital initiatives across segments

Source: Credit Suisse estimates, Credit suisse HOLT Lens

Tata Motors: Domestic business turnaround can

offer upside

Tata Motors' domestic PV business currently makes losses (due to a low market share,

and hence, lower capacity utilisation) and the CV business has lost significant market

share. The domestic business' margins are currently close to 4% vs 15% for Maruti and

12% for Ashok Leyland, and there is a significant gap in the volume growth as well (Tata

Tata Motors, Tata Steel, Voltas and Titan could

be the potential beneficiaries

Additionally, Tata Global and Tata

Chemicals may be impacted



http://www.businesstoday.in/magazine/corporate/tata-global-beverages-india-business-focus-after-acquisitions/story/214453.html

http://economictimes.indiatimes.com/news/company/corporate-trends/merger-with-tata-to-help-bharti-airtel-close-gap-with-vodafone-idea/articleshow/59536303.cms

13 July 2017

Tata Group 50

Motors' domestic volumes grew at -1% over the last three years vs 11%/23% volume

CAGR for Maruti/Ashok Leyland). Tata Motors' domestic business currently gets a lower

multiple (8x FY19 target EV/EBITDA for our SOTP valuation) than its peers (13x for Maruti

and 10x for Ashok Leyland), given weaker fundamentals.

Any improvement in this business (higher market share in passenger vehicles, protection

of market share in commercial vehicles and material margin expansion—close to Maruti

and Ashok Leyland) can lead to an earnings upgrade as well as rerating. This could add a

significant value to the domestic business that currently accounts for just 13% of our

SOTP (or US$3.6 bn in absolute terms vs the market cap of US$35 bn for Maruti and

US$5 bn for Ashok Leyland).

We have an OUTPERFORM rating on the stock, with a TP of Rs630. FY17-19E earnings

CAGR will be strong (from a low base) at +70% (helped by platform consolidation, strong

momentum in Land Rover). The JLR business is currently trading at 3x FY18E

EV/EBITDA, and our estimates do not factor in any significant recovery in the domestic

business.

Incremental value for Tata Motors

We have tried to understand what is the kind of incremental value that can be created if

some of these decisions get the desired results. We believe the key upside on Tata Motors

can come from a turnaround in the domestic business. The recent change of guard at the

CV business is a good sign as it signals a strong intention. However, more needs to be

done especially in terms of filling white spaces and making the organisation agile to

respond quickly to market changes. For this scenario, we assume a 15% CAGR in CV

volumes in two years on the back of market share improvement. We believe that could

also warrant an increase in multiples from 8x to 9x and could provide a Rs50/share

upside. Its financing subsidiary, Tata Motors Finance has not been run properly and has

had large asset quality issues. We believe if it is run properly, it can easily trade at a 30%

ratio to AUM (currently the more expensive NBFCs trade at 60% to 80% ratio). We reckon

the valuation of the China JV can be improved by setting a benchmark for the same by

listing it on the HK stock exchange like Brilliance. These two initiatives could provide an

additional Rs50/share and hence a total Rs100/share incremental upside is possible.

Figure 69: Tata Motors: Incremental value

Current value per share Possible incremental value

in the medium term

What needs to happen?

Domestic business 80 130 Revival in CV business where company recoups some market share; will

lead to rerating of India business to 9x EV/EBITDA.

Tata Motors Finance 10 30 Needs to be run like a proper NBFC; other Auto OEMs owned NBFCs

getting much better value today as run well and diversified beyond Autos

China JV 70 100 A separate HK listing (like Brilliance) of the China JV can set a

benchmark valuation for the JV

Value of the above businesses 160 260


Tata Steel: The European business turnaround can

improve returns significantly

An EU turnaround, if properly executed, can make the European business self-sufficient

and may improve the overall returns significantly. The company has already moved its

active employees in the UK from a defined benefit pension plan to a defined contribution

plan. Additionally, steps to de-link the pension fund from the scheme sponsor are

separately under way. That should pave way for an eventual JV with ThyssenKrupp, and

possibly help the business become self-sufficient. The ThyssenKrupp synergy is hard to

quantify, but looking at the last four major EU deals, (our European team believes

13 July 2017

Tata Group 51

~US$24/t of synergy may come through cost savings, market consolidation and better

utilisations). This could potentially add ~Rs100/ share to Tata’s current market price

In the India operations, we may see a capex breather for some time (key to deleverage

balance sheet) before Tata embarks on the Kalinganagar expansion (potentially adding

another 3-5mt of capacity at a very efficient sub-US$500/t of capex).

We have an OUTPERFORM rating on the stock, with a TP of Rs650. We expect the global

steel cycle to remain supportive: (1) While China’s steel demand will gradually moderate, it

will still remain strong in the near term, supported by 15-20% growth in infrastructure

investments, (2) policy remains broadly supportive ahead of the 19th National Congress of

the CPC, and (3) inventory levels have corrected in the last three months, and we see

upside risks to the raw material prices (iron ore, coking coal). With this backdrop, the

ongoing restructuring in the EU operations (pension de-linking, likely JV with

ThyssenKrupp) could further de-risk future cash flows and yield synergies.

Incremental value for Tata Steel

We start with a base case of 12.5 mt domestic output at US$160/t (Rs10,400/t) of EBITDA

for the domestic operations and 10.2mt of EU sales at US$60/t of EBITDA in FY19.

Assigning the domestic EBITDA a 7x multiple and that for the EU operations 6.5x, we

arrive at a Rs650 valuation (CS’s current target price).

Synergy from the Tata-TK Joint Venture could be ~US$600 mn (US$24/t for a 25mt

combined capacity). That would add Rs100/share (assuming a 50% share in the JV and

80% utilisation). The Tata-TK JV talks are still in the initial phases however (Tata awaits a

full and final pension resolution, though an in-principle approval from the regulator is

already in place).

The Kalinganagar greenfield project is designed to eventually ramp up to a 12-15mt

facility. With most infrastructural bottlenecks taken care of, while executing the 3mtpa

Phase-I (access to road, rail, water, power), the follow-on capex should come at sub-

industry levels of US$900-1,000/t. We believe it could be as low as US$500/t and thus,

would be immensely value accretive. A 3 mt plant would add Rs56/share, even if fully

funded by debt, once operational (say three years later). Adjusting for the time value of

money, it could add Rs40/share.

All of the above could potentially take the fair value up to Rs740. We see local positives as

well: (1) Anti-dumping duties remain in place till 2021 and (2) the ongoing IBC proceedings

against five indebted steel makers may lead to industry consolidation, further helping

supply discipline.

However, one must note the key assumption here, that the broader steel cycle remains

supportive, with prices in China and elsewhere holding steady (valuation highly sensitive

to EBITDA/t courtesy financial leverage). Given uncertainties around the demand in China

(demand should moderate; 2018 won’t be as strong as 2017), we do not build in any of

these benefits (JV synergies/ Kalinganagar expansion gains) in our fair value at the

moment.

Voltas: Consumer business expansion, demerger of

projects can make Voltas a good consumer play

Being the market leader, Voltas has a strong brand in the air-conditioner category. The

recent venture into other consumer durable segments (JV with Arcelik for co-branded

consumer durable products) broadens its consumer portfolio.

The size of the opportunity is fairly large, and 7% market share in three years in this

opportunity basket would be equivalent to the current size of the entire room AC segment.

There can potentially be other products that can add further upside potential.

13 July 2017

Tata Group 52

Figure 70: Market size and key players—manifold opportunity vs just ACs

Product Mkt size (US$mn) Five year CAGR (%) Key players

Washing machines 1,369 10.4% LG (26%), Samsung (20%), Videocon (16%), Whirlpool (11%), Godrej (7%),

IFB (6%)

Microwaves 285 10.2% LG (29%), Samsung (26%), IFB (15%), Whirlpool 6%), Godrej (6%),

Panasonic (6%)

Refrigerators 3,217 17.3% LG (25%), Samsung (22%), Whirlpool (13%), Godrej (12%), Videocon (9%),

Haier

ACs 2,015 11.3% Voltas (+21%), LG (~19%), Samsung (~10%), (3%), Bluestar (~10%),

Daikin (9%), Videocon (7%)


Furthermore, if the Electro-Mechanical Projects division is demerged (into another similar

Group company such as Tata Projects) this can make Voltas largely a consumer business.

A pure consumer-facing company can also command a higher value.

We have an OUTPERFORM rating on Voltas with a TP of Rs585 on (1) an attempt at

addressing a large opportunity in consumer durables, (2) strong AC business performance

including possible benefit from the exit of LG from fixed speeds, (3) better project segment

outlook, and (4) market valuation of its peers. Our valuation is supported by segmental

SOTP analysis and uses 33x multiple on FY19E consumer facing business earnings.

Incremental value for Voltas

Key areas where Voltas can see additional value creation are: (1) strong traction in the

consumer durables segment, where the company has entered into a JV with Arcelik to

manufacture and sell consumer durables products; (2) strong growth in the AC market

leveraging the brand better with Voltas maintaining its ~20% market share, and (3)

divestment of the engineering and projects business which may unlock some more value

from that assumed. Voltas is already geared towards introducing consumer durables

products by Diwali (Sep/Oct) this year. The entry into the consumer durables segment is

likely to strengthen Voltas' channel presence as the company will be addressing a higher

share of a consumer's wallet, and will have multiple products to offer as compared to only

ACs. This, in turn, can have a beneficial effect on the AC business as well. The sale of the

projects business at an EV/EBITDA multiple of 8-9x assuming normalised operating

margins can release Rs 28-31 bn of capital. This capital can then be used to strengthen

the consumer durables business. The sale of projects business will also improve overall

growth and margins, and offer a cleaner play on Indian consumer durables business,

where current low penetration levels will ensure sustained growth over the medium to long

term. This can potentially lead to better multiples for the AC and consumer durables

businesses. Better operating performance of the AC business and higher market share in

consumer durables can add an incremental Rs100 per share from what is already

assumed.

Scenario analysis based on HOLT

(Note: HOLT is not part of Credit Suisse Research.)

HOLT is a value-based, return on capital framework proprietary to Credit Suisse. HOLT

provides an objective view of over 20,000 companies in 65 countries using a methodology

that examines accounting information, converts it to cash, and then values that cash,

allowing investors to identify key drivers of value

13 July 2017

Tata Group 53

Figure 71: Scenario analysis based on HOLT

Company CMP (Rs) Default (consensus) If some of the above initiatives work

Assumptions (FY19, FY20, FY21) HOLT derived value Assumptions (FY19, FY20, FY21) HOLT derived value

Titan

531

Rev. growth (17%, 17%, 17%)

550

Rev. growth (22%, 22%, 22)

750 EBITDA margin (10%, 10%, 10%) EBITDA margin (10%, 10%, 10%)

Asset Turns (2.1, 2.2, 2.3) Asset Turns (2.1, 2.2, 2.3)

Tata Global Beverage

173

Rev. growth (6%, 6%, 6%)

160

Rev. growth (12%, 12%, 12%)



Tata Chemicals

642

Rev. growth (7%, 7%, 7%)

580

Rev. growth (12%, 12%, 12%)



Source: Credit Suisse HOLT LensTM

Overall Group financials likely to improve over the

next two years

Using our estimates and consensus expectations for non-covered stocks, we believe the

Group's financials should improve over the next couple of years. As per our calculation,

the Group ROE was 18.5% in FY16, likely to have declined to below 17% in FY17, and is

expected to improve to over 19% in FY19. The major contributors to the ROE are likely to

be Tata Motors (we expect ROE to improve from 10% in FY17 to 17% in FY19) and Tata

Steel (from 14% to 20%).

Net debt to equity is likely to trend down as well—from 1.7x in FY17 to about 1.2x in FY19.

Tata Steel, Tata Motors and Tata Power may likely witness a better debt coverage. We

expect Tata Steel's net debt to EBITDA to decline from 4.4x in FY17 to 3.7x in FY19, and

Tata Motors' net debt to EBITDA to improve from 1.2x to 0.3x. As per Thomson Reuters

consensus estimates, Tata Power (from 6.4x to 5.1x) and Tata Chemicals (1.4x to 0.5x)

are also likely to witness an improvement.

We do not think analyst estimates factor in any of the major changes that have been

discussed in this report. If the Group is able to execute on any of these, the improvement

can be far more significant.

Figure 72: Tata Group's ROE is likely be on an

uptrend over FY17-19

Figure 73: And net debt to EBITDA is likely to trend

down over the next two years

Source: Company data, Thomson Reuters, Credit Suisse research Source: Company data, Thomson Reuters, Credit Suisse research

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

FY16 FY17 FY18 FY19

Tata Group - ROE

0.0

0.5

1.0

1.5

2.0

2.5

FY16 FY17 FY18 FY19

Tata Group - Net debt to EBITDA

13 July 2017

Tata Group 54

Asia Pacific/India Auto Parts & Equipment

Tata Motors Ltd. (TAMO.BO) Rating OUTPERFORM [V] Price (13-Jul-17, Rs) 458.40 Target price (Rs) 630.00 Upside/downside (%) 37.4 Mkt cap (Rs/US$ mn) 1,323,561 / 20,541 Enterprise value (Rs mn) 1,732,576 Number of shares (mn) 2,887 Free float (%) 66.0 52-wk price range (Rs) 589-420 ADTO-6M (US$ mn) 55.0 Target price is for 12 months.

[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

Vaibhav Jain

91 22 6777 3968

[email protected]

COMPANY UPDATE FOCUS LIST STOCK

JLR-driven product cycle to drive performance

■ It's a JLR story now. Tata Motors' (TTMT) acquisition of Jaguar Land Rover

(JLR) in 2008 has worked out very well for the company, in our view, and now

~85% of the company's value is attributed to JLR. The stability provided by

Tata's ownership, combined with a series of exciting new launches, helped

JLR increase its luxury market share from ~4.5% in 2008 to ~6.0% in 2015.

JLR margins, however, have been patchy, given the wide difference in

margin profile between Jaguar, and Land Rover (LR) products.

■ Product cycle once again shifting to higher-margin LR products. JLR

witnessed a significant margin dilution over FY15-17, as its product cycle

shifted to lower-margin Jaguar products and a part of its highly profitable

China business turned into a JV. With product action lined up on all the

higher-margin LR products (RR, RR Sport, Discovery, new launch Velar), LR

will likely drive volume growth and margin expansion in the next 12 months.

Moreover, these launches come on existing platforms and, hence, should

help drive platform consolidation-related cost benefits. A reduction in foreign

exchange drag should also support reported margins.

■ What can change? The domestic business needs a big shake-up, in our

view. While the passenger vehicle (PV) business gets a lot of negative

coverage, we believe the commercial vehicle (CV) business has been a

bigger negative surprise, losing ~15% market share in the past seven years.

The PV business, which incurs EBITDA losses, clearly needs a partner to

share the burden of investments into new products and help improve

utilisations. On the CV side, the company really needs to be a lot more

proactive in addressing customer needs, instead of resting on past laurels.

■ Strong EPS growth, reasonable valuations. We value JLR at 4x FY19E

EV/EBITDA (Rs456), the domestic business at 8x FY19E EV/EBITDA (Rs80),

its China JV at 10x FY19E P/E (Rs69), and others adjusted for debt (Rs25) to

arrive at our TP of Rs630. We expect a strong FY17-19 earnings CAGR (from

a low base) of 70%+. The JLR business is trading at 3x FY18E EV/EBITDA.

Share price performance

The price relative chart measures performance against the

S&P BSE SENSEX IDX which closed at 32,037.38 on

13/07/17. On 13/07/17 the spot exchange rate was

Rs64.44/US$1

Performance 1M 3M 12M Absolute (%) 2.0 1.2 -4.5 Relative (%) -1.0 -7.5 -19.7

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 2,755,611.1 2,696,925.1 2,979,479.8 3,340,699.4 EBITDA (Rs mn) 402,366.6 369,123.6 428,311.7 533,850.7 EBIT (Rs mn) 232,224.8 190,073.7 240,153.3 309,619.5 Net profit (Rs mn) 131,433.0 74,543.6 158,941.9 221,270.7 EPS (CS adj.) (Rs) 38.70 21.95 46.80 65.16 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rs) n.a. 18.74 37.85 52.31 EPS growth (%) (12.1) (43.3) 113.2 39.2 P/E (x) 11.8 20.9 9.8 7.0 Dividend yield (%) 0.0 0.3 0.4 0.4 EV/EBITDA (x) 4.2 4.7 4.0 3.0 P/B (x) 1.93 1.77 1.51 1.25 ROE (%) 19.2 8.8 16.6 19.4 Net debt/equity (%) 46.0 46.5 38.3 21.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

13 July 2017

Tata Group 55

Tata Motors Ltd. (TAMO.BO / )

Price (13 Jul 2017): Rs458.40; Rating: OUTPERFORM [V]; Target Price: Rs630.00; Analyst: Jatin Chawla

Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E

Sales revenue 2,755,611 2,696,925 2,979,480 3,340,699 Cost of goods sold 2,166,891 2,145,417 2,349,675 2,580,928 EBITDA 402,367 369,124 428,312 533,851 EBIT 232,225 190,074 240,153 309,620 Net interest expense/(inc.) 46,207 43,541 34,661 30,661 Recurring PBT 161,004 121,103 178,010 251,197 Profit after tax 111,083 60,636 140,628 198,446 Reported net profit 110,237 74,544 158,942 221,271 Net profit (Credit Suisse) 131,433 74,544 158,942 221,271

Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E

Cash & cash equivalents 328,800 291,748 255,512 338,109 Current receivables 129,900 127,186 140,573 157,746 Inventories 333,990 299,744 328,507 361,430 Other current assets 331,490 360,188 391,756 426,481 Current assets 1,124,179 1,078,866 1,116,349 1,283,766 Property, plant & equip. 655,106 735,604 801,924 851,258 Investments 204,661 204,661 204,661 204,661 Intangibles 681,766 772,218 846,740 902,174 Other non-current assets 0 0 0 0 Total assets 2,665,712 2,791,349 2,969,673 3,241,859 Current liabilities 1,194,293 1,248,320 1,322,615 1,428,443 Total liabilities 1,849,002 1,903,030 1,927,325 1,983,153 Shareholders' equity 807,827 878,414 1,031,422 1,246,758 Minority interests 8,883 9,905 10,927 11,949 Total liabilities & equity 2,665,712 2,791,349 2,969,673 3,241,859

Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E

EBIT 232,225 190,074 240,153 309,620 Net interest (46,234) (42,380) (35,436) (32,729) Tax paid (10,430) (32,512) (37,382) (52,751) Working capital (20,068) 62,289 577 21,007 Other cash & non-cash items 157,918 172,548 214,923 256,521 Operating cash flow 313,412 350,018 382,835 501,667 Capex (296,904) (350,000) (329,000) (329,000) Free cash flow to the firm 16,507 18 53,835 172,667 Investing cash flow (348,198) (350,000) (329,000) (329,000) Equity raised 135,700 0 0 0 Dividends paid (730) (3,956) (5,934) (5,934) Financing cash flow 116,146 (2,934) (54,912) (54,912) Total cash flow 81,360 (2,916) (1,077) 117,755 Adjustments 0 0 0 0 Net change in cash 81,360 (2,916) (1,077) 117,755

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 3,396 3,396 3,396 3,396 EPS (Credit Suisse) (Rs) 38.70 21.95 46.80 65.16 DPS (Rs) 0.21 1.17 1.75 1.75 Operating CFPS (Rs) 92.29 103.07 112.73 147.73

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue 4.9 (2.1) 10.5 12.1 EBIT (19.2) (18.2) 26.3 28.9 EPS (12.1) (43.3) 113.2 39.2 Margins (%) EBITDA 14.6 13.7 14.4 16.0 EBIT 8.4 7.0 8.1 9.3

Valuation (x) 03/16A 03/17E 03/18E 03/19E

P/E 11.8 20.9 9.8 7.0 P/B 1.93 1.77 1.51 1.25 Dividend yield (%) 0.0 0.3 0.4 0.4 EV/sales 0.6 0.6 0.6 0.5 EV/EBITDA 4.2 4.7 4.0 3.0 EV/EBIT 7.3 9.1 7.2 5.1

ROE analysis (%) 03/16A 03/17E 03/18E 03/19E

ROE 19.2 8.8 16.6 19.4 ROIC 17.0 9.9 13.8 16.5

Credit ratios 03/16A 03/17E 03/18E 03/19E

Net debt/equity (%) 46.0 46.5 38.3 21.2 Net debt/EBITDA (x) 0.93 1.12 0.93 0.50

Company Background

Tata Motors is an India-based company in the commercial and passenger vehicles business. The company, through its subsidiary Jaguar and Land Rover, is present in Europe, US and Chinese markets as a luxury car company.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (Rs) 800.00

Our blue sky scenario of Rs800 assumes a multiple of 4.5x for JLR and further foreign exchange benefit.

Our Grey Sky Scenario (Rs) 400.00

Our grey sky scenario of Rs400 assumes a multiple of 2.5x for JLR and lower margins on a sharp rise in incentives.


The price relative chart measures performance against the S&P BSE SENSEX

IDX which closed at 32,037.38 on 13-Jul-2017

On 13-Jul-2017 the spot exchange rate was Rs64.44/US$1


13 July 2017

Tata Group 56

Asia Pacific/India Steel

Tata Steel Ltd (TISC.BO / TATA IN) Rating OUTPERFORM Price (13-Jul-17, Rs) 563.00 Target price (Rs) (from 600.00) 650.00 Upside/downside (%) 15.5 Mkt cap (Rs/US$ mn) 546,794 / 8,486 Enterprise value (Rs mn) 1,366,792 Number of shares (mn) 971.22 Free float (%) 68.0 52-wk price range (Rs) 563-350 ADTO-6M (US$ mn) 50.6 Target price is for 12 months.

Research Analysts

Ravi Shankar

91 22 6777 3869

[email protected]

Neelkanth Mishra

91 22 6777 3716

[email protected]

Prateek Singh

91 22 6777 3894

[email protected]

INCREASE TARGET PRICE

Catalysts ahead; steel cycle supportive

■ Leading steel maker; stable Indian operations, now healthier post surgery

in the UK operations. Tata Steel is one of the largest steel producers globally

(capacity: ~25 mtpa) with operations in India (integrated, highly profitable) and

the EU (hitherto struggling, but restructuring has helped meaningfully). Tata’s

Indian operations have now fully ramped up, with its 3 mt greenfield steel plant

at Kalinganagar operating at close to full utilisation. Thanks to a barrage of

duties put in place by the government, there exists a floor price for imports/

domestic prices, if India is a net importer of steel.

■ Supportive macro, and restructuring in EU operations create tailwinds.

We expect the global steel cycle to stay supportive: (1) while China’s steel

demand would gradually moderate, it should still remain strong in the near

term, supported by 15-20% growth in infrastructure investments, (2) policy

remains broadly supportive ahead of the 19th National Congress of the CPC,

and (3) inventory levels have corrected in the past three months, and we see

upside risks to raw material prices (iron ore, coking coal). Against this

backdrop, the ongoing restructuring in EU operations (pension de-linking,

likely JV with ThyssenKrupp) could further de-risk future cash flows and yield

synergies.

■ What can change? We expect continued focus on the EU turnaround plans,

despite much of the strategy having been chalked out while Mr Cyrus Mistry

was at the helm. In the Indian operations, we may see a capex breather for

some time (key to deleverage balance sheet), before Tata embarks on the

Kalinganagar expansion (potentially adding another 3-5 mt of capacity at a

very efficient sub-US$500/t of capex).

■ Clear catalysts lined up. Although synergy is hard to quantify, looking at the

last four major EU deals, our European team believes ~US$24/t of synergy

could come through cost savings, market consolidation and better utilisations).

This potentially adds ~Rs100/share to Tata’s current market price.





Rs64.44/US$1

Performance 1M 3M 12M Absolute (%) 10.7 21.3 57.4 Relative (%) 7.7 12.6 42.2


Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 1,159,517.4 1,127,158.5 1,215,572.2 1,228,280.1 EBITDA (Rs mn) 63,858.0 160,390.5 185,462.2 188,775.8 EBIT (Rs mn) 13,039.6 103,606.8 127,675.1 129,631.3 Net profit (Rs mn) (30,493.2) (41,685.7) 98,040.6 66,040.3 EPS (CS adj.) (Rs) (31.01) (42.39) 99.69 67.15 Change from previous EPS (%) n.a. - 52.9 (0.0) Consensus EPS (Rs) n.a. 41.67 49.60 59.09 EPS growth (%) n.m. n.m. n.m. (32.6) P/E (x) (18.2) (13.3) 5.6 8.4 Dividend yield (%) 1.4 1.4 1.4 1.4 EV/EBITDA (x) 20.6 8.6 7.1 6.7 P/B (x) 1.94 2.36 1.71 1.45 ROE (%) (10.2) (16.1) 35.1 18.7 Net debt/equity (%) 254.6 333.3 228.7 181.2


13 July 2017

Tata Group 57

Tata Steel Ltd (TISC.BO / TATA IN)

Price (13 Jul 2017): Rs563.00; Rating: OUTPERFORM; Target Price: (from Rs600.00) Rs650.00; Analyst: Ravi Shankar


Sales revenue 1,159,517 1,127,159 1,215,572 1,228,280 Cost of goods sold 689,623 484,312 649,498 635,746 EBITDA 63,858 160,390 185,462 188,776 EBIT 13,040 103,607 127,675 129,631 Net interest expense/(inc.) 41,286 50,723 50,678 51,028 Recurring PBT 23,008 65,531 126,015 91,748 Profit after tax 7,959 37,750 97,964 65,964 Reported net profit 9,255 37,826 98,041 66,040 Net profit (Credit Suisse) (30,493) (41,686) 98,041 66,040


Cash & cash equivalents 115,783 66,796 115,240 162,985 Current receivables 117,012 113,746 122,669 123,951 Inventories 203,560 197,879 213,401 215,631 Other current assets 201,121 195,508 210,844 213,048 Current assets 637,475 573,929 662,152 715,615 Property, plant & equip. 812,636 829,866 856,093 860,962 Investments 20,845 20,886 20,927 20,968 Intangibles 130,722 127,779 124,835 121,891 Other non-current assets 30,821 26,450 23,413 19,540 Total assets 1,632,500 1,578,910 1,687,420 1,738,976 Current liabilities 549,142 529,598 556,998 559,438 Total liabilities 1,330,969 1,327,927 1,347,076 1,341,265 Shareholders' equity 284,789 234,240 323,602 380,969 Minority interests 16,542 16,542 16,542 16,542 Total liabilities & equity 1,632,500 1,578,910 1,687,420 1,738,976


EBIT 13,040 103,607 127,675 129,631 Net interest (41,286) (50,723) (50,678) (51,028) Tax paid (15,050) (27,782) (28,050) (25,785) Working capital (20,041) (8,483) (10,631) (1,528) Other cash & non-cash items 63,622 (10,004) 106,881 72,366 Operating cash flow 284 6,615 145,197 123,657 Capex (48,894) (70,000) (77,056) (57,056) Free cash flow to the firm (48,610) (63,385) 68,140 66,601 Investing cash flow (44,240) (66,740) (78,074) (57,238) Equity raised 9,548 (1,091) (907) (903) Dividends paid (7,760) (7,771) (7,771) (7,771) Financing cash flow 57,243 11,138 (18,679) (18,674) Total cash flow 13,287 (48,987) 48,444 47,745 Adjustments 0 0 0 0 Net change in cash 13,287 (48,987) 48,444 47,745

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 983 983 983 983 EPS (Credit Suisse) (Rs) (31.01) (42.39) 99.69 67.15 DPS (Rs) 7.99 8.00 8.00 8.00 Operating CFPS (Rs) 0.29 6.73 147.65 125.74

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue (16.2) (2.8) 7.8 1.0 EBIT (75.9) 694.6 23.2 1.5 EPS 22.3 (36.7) 335.2 (32.6) Margins (%) EBITDA 5.5 14.2 15.3 15.4 EBIT 1.1 9.2 10.5 10.6

Valuation (x) 03/16A 03/17E 03/18E 03/19E

P/E (18.2) (13.3) 5.6 8.4 P/B 1.94 2.36 1.71 1.45 Dividend yield (%) 1.4 1.4 1.4 1.4 EV/sales 1.1 1.2 1.1 1.0 EV/EBITDA 20.6 8.6 7.1 6.7 EV/EBIT 100.8 13.4 10.4 9.8


ROE (10.2) (16.1) 35.1 18.7 ROIC 0.4 5.5 9.0 8.3


Net debt/equity (%) 254.6 333.3 228.7 181.2 Net debt/EBITDA (x) 12.02 5.22 4.20 3.82

Company Background

Tata Steel Limited is a diversified steel producer. It has a global presence in 50 markets and manufacturing operations in 26 countries. It provides steel for different industries, which include construction, automotive, aerospace, consumer goods.


Our Blue Sky Scenario (Rs) (from 680.00) 750.00

To our base case scenario (domestic hot-rolled steel prices at US$485/t and EU EBITDA assumed at US$60/t), we add ~US$600 mn of synergies from a potential Tata-Thyssen Krupp Joint Venture ($24/t of synergy for a combined 25mt of capacity). This adds Rs100/share to our base case, throwing up a blue sky fair value of Rs750/share.

Our Grey Sky Scenario (Rs) (from 400.00) 430.00

We assume that either the Tata-Thyssen Krupp JV does not go through or no synergies accrue out of it. Further, we assume Indian steel prices drop by US$30/t and EU EBITDA contracts by US$10/t vs. the base case assumption. This results in a grey sky scenario value of Rs430/share.






13 July 2017

Tata Group 58

Asia Pacific/India Luxury Goods

Titan Company Ltd (TITN.BO) Rating OUTPERFORM Price (13-Jul-17, Rs) 534.60 Target price (Rs) 560.00 Upside/downside (%) 4.8 Mkt cap (Rs/US$ mn) 474,610 / 7,366 Enterprise value (Rs mn) 472,585 Number of shares (mn) 887.79 Free float (%) 50.0 52-wk price range (Rs) 552-303 ADTO-6M (US$ mn) 14.0 Target price is for 12 months.

Research Analysts

Arnab Mitra

91 22 6777 3806

[email protected]

Rohit Kadam, CFA

91 22 6777 3824

[email protected]

COMPANY UPDATE

Moving from market leadership to dominance

■ Transformed wedding jewellery strategy and other initiatives to drive

market dominance. Titan’s jewellery growth over FY17-19 will likely

accelerate, driven by (1) wedding jewellery, (2) high-value diamonds, (3)

collections, (4) Golden Harvest, and (5) network addition. Wedding jewellery

constitutes over 50% of the market, but for Titan it is less than 20% of sales.

Over the past 1-2 years the company has significantly improved the product

and price offering. Titan now offers wedding jewellery customised for the 13

major communities in India and has attractive bulk discounts for weddings.

This is backed with advertising, so that Tanishq is seen as a destination for

wedding jewellery.

■ Regulatory headwinds over for the organised sector; share gains to

accelerate from here on. The GST rate on jewellery has been set at 3%,

which is similar to the current taxation, removing a potential risk. This ends

the series of regulatory headwinds that Titan has faced since FY13, such as

discontinuation of the Golden Harvest and PAN requirements. Over the next

2-3 years, the GST should gradually force the unorganised sector to become

tax-compliant and take away their price advantage.

■ Strong growth should lead to margin expansion. Over FY13-16, Titan

nearly doubled its retail space in jewellery but there was a 40% drop in sales

per sq ft. Thus, when growth in same-store-sales picks up, the fixed cost base

will see operating leverage. Titan’s model does not have very high operating

leverage, but can add 40-50 bp of margins if SSSG is over 10%. We also

expect margin expansion in watches due to cost controls.

■ What can change? Titan is organically attempting to build new business

segments, e.g., ethnic Indian wear and perfumes. The company might also

consider inorganic options and entering into JVs with international brands, like it

did for Mont Blanc, to move faster on this. Within jewellery there could be

opportunities to acquire regional players, to drive growth and market share.





Rs64.44/US$1

Performance 1M 3M 12M Absolute (%) 2.6 10.7 32.3 Relative (%) -0.4 2.0 17.1


Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 112,645.3 130,035.5 154,719.1 181,835.1 EBITDA (Rs mn) 9,453.2 12,324.9 15,353.8 18,830.3 EBIT (Rs mn) 8,484.1 11,235.4 14,128.5 17,469.0 Net profit (Rs mn) 7,056.8 8,316.8 10,473.3 12,927.9 EPS (CS adj.) (Rs) 7.95 9.37 11.80 14.56 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rs) n.a. 8.98 11.38 13.61 EPS growth (%) (14.3) 17.9 25.9 23.4 P/E (x) 67.3 57.1 45.3 36.7 Dividend yield (%) 0.4 0.5 0.6 0.8 EV/EBITDA (x) 50.2 38.4 30.7 24.9 P/B (x) 13.30 11.56 9.79 8.24 ROE (%) 21.2 21.7 23.4 24.4 Net debt/equity (%) 0.0 Net cash Net cash Net cash


13 July 2017

Tata Group 59

Titan Company Ltd (TITN.BO / )

Price (13 Jul 2017): Rs534.60; Rating: OUTPERFORM; Target Price: Rs560.00; Analyst: Arnab Mitra


Sales revenue 112,645 130,035 154,719 181,835 Cost of goods sold 82,963 96,523 114,280 133,664 EBITDA 9,453 12,325 15,354 18,830 EBIT 8,484 11,235 14,128 17,469 Net interest expense/(inc.) 423 381 419 460 Recurring PBT 8,705 11,434 14,347 17,709 Profit after tax 7,057 8,618 10,473 12,928 Reported net profit 7,057 7,614 10,473 12,928 Net profit (Credit Suisse) 7,057 8,317 10,473 12,928


Cash & cash equivalents 1,117 2,737 4,209 7,661 Current receivables 1,951 2,253 2,680 3,150 Inventories 44,422 51,280 61,014 71,708 Other current assets 5,945 6,826 8,077 9,450 Current assets 53,435 63,095 75,980 91,969 Property, plant & equip. 8,747 9,657 10,432 11,070 Investments 740 740 740 740 Intangibles 0 0 0 0 Other non-current assets 0 0 0 0 Total assets 62,921 73,492 87,152 103,779 Current liabilities 26,112 31,296 37,546 45,026 Total liabilities 27,242 32,427 38,676 46,157 Shareholders' equity 35,679 41,066 48,476 57,622 Minority interests 0 0 0 0 Total liabilities & equity 62,921 73,492 87,152 103,779


EBIT 9,128 11,815 14,766 18,170 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital (4,058) (2,856) (5,163) (5,056) Other cash & non-cash items (1,142) (3,112) (3,067) (3,881) Operating cash flow 3,927 5,847 6,536 9,233 Capex (2,334) (2,000) (2,000) (2,000) Free cash flow to the firm 1,593 3,847 4,536 7,233 Investing cash flow (2,748) (2,000) (2,000) (2,000) Equity raised 0 0 0 0 Dividends paid (2,081) (2,244) (3,080) (3,798) Financing cash flow (2,165) (2,227) (3,063) (3,781) Total cash flow (985) 1,620 1,472 3,452 Adjustments 0 0 0 0 Net change in cash (985) 1,620 1,472 3,452

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 888 888 888 888 EPS (Credit Suisse) (Rs) 7.95 9.37 11.80 14.56 DPS (Rs) 2.32 2.51 3.45 4.26 Operating CFPS (Rs) 4.42 6.59 7.36 10.40

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue (5.4) 15.4 19.0 17.5 EBIT (20.4) 32.4 25.7 23.6 EPS (14.3) 17.9 25.9 23.4 Margins (%) EBITDA 8.4 9.5 9.9 10.4 EBIT 7.5 8.6 9.1 9.6

Valuation (x) 03/16A 03/17E 03/18E 03/19E



ROE 21.2 21.7 23.4 24.4 ROIC 21.0 22.5 24.3 26.4


Net debt/equity (%) 0.0 (3.9) (6.4) (11.3) Net debt/EBITDA (x) 0.00 (0.13) (0.20) (0.35)

Company Background

Titan Company Limited is engaged in manufacturing of watches, jewellery, precision engineering products and eyewear. Titan owns Tanishq, India’s largest organised jewellery business.



Our blue sky scenario of Rs700 assumes strong recovery in jewellery demand in India can bring growth back in the business.


Our grey sky scenario of Rs448 assumes subdued demand trends in the industry remain so for longer than expected.






13 July 2017

Tata Group 60

Asia Pacific/India Electrical Equipment

Voltas (VOLT.BO / VOLT IN) Rating OUTPERFORM Price (13-Jul-17, Rs) 484.75 Target price (Rs) 585.00 Upside/downside (%) 20.7 Mkt cap (Rs/US$ mn) 160,396 / 2,489 Enterprise value (Rs mn) 144,883 Number of shares (mn) 330.88 Free float (%) 69.7 52-wk price range (Rs) 509-293 ADTO-6M (US$ mn) 12.3 Target price is for 12 months.

Research Analysts

Lokesh Garg

91 22 6777 3743

[email protected]

Vaibhav Jain

91 22 6777 3968

[email protected]

COMPANY UPDATE

Consumer foray excites; project presence drags

■ Much-needed foray into consumer durables to extend brand. After a long

wait and emerging as a market leader in the AC category, Voltas announced a

JV with Arcelik to launch co-branded consumer durable products. This foray

mitigates concerns about its single-segment exposure, opens up a large

opportunity, mutually fortifies its AC position, and is likely to spread risk between

partners while leveraging strengths. Arcelik is bringing in technology,

manufacturing, and sourcing skills, apart from a globally recognised brand. The

JV shortens the learning curve and time to market. Voltas aims to hit the stores

with its JV products this year itself and envisages manufacturing as well over a

period of time. The opportunity is significant as a 7% market share in these

categories could be equivalent to the scale of its current consumer business.

Early success in air coolers may provide it a platform for more gains.

■ Projects spread across many group entities; awaiting cycle. The outlook

for the projects segment seems more positive, with legacy projects mostly

closed now and thus the resulting backlog is better quality. Voltas’ projects

business is spread across rural electrification, water treatment, HVAC (heating,

ventilation and air conditioning) projects in India and the Middle East. Voltas

should evolve as a pure consumer-facing company while its projects business

could be consolidated in other group entities such as Tata Projects.

■ Engineering segment adds to the spread. Voltas' engineering products and

services segment, as an agent, offers sales and services support to equipment

manufactured by its principals. It is suffering from a cyclical downturn and is

spread across textiles, mining, construction, and material handling.

■ Retain OUTPERFORM and TP of Rs585. We retain our OUTPERFORM

rating, given Voltas' (1) attempt at addressing a large opportunity in consumer

durables, (2) strong AC business performance including a potential benefit on

the exit of LG from fixed speeds, (3) a better project segment outlook, and (4)

valuation compared to the market valuation of its peers. Our valuation is

supported by a segmental SOTP analysis and uses 33x P/E multiple on

FY19E consumer-facing business earnings.





Rs64.44/US$1

Performance 1M 3M 12M Absolute (%) -1.4 19.6 49.7 Relative (%) -4.4 10.8 34.6


Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 58,574.4 60,437.0 70,559.6 79,932.2 EBITDA (Rs mn) 4,369.3 5,573.8 6,612.7 7,468.8 EBIT (Rs mn) 4,091.2 5,307.2 6,328.1 7,155.2 Net profit (Rs mn) 3,449.1 5,021.3 5,573.6 6,411.3 EPS (CS adj.) (Rs) 10.43 15.18 16.85 19.38 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rs) n.a. 15.35 16.93 19.47 EPS growth (%) 2.0 45.6 11.0 15.0 P/E (x) 46.5 31.9 28.8 25.0 Dividend yield (%) 0.5 0.8 0.9 1.0 EV/EBITDA (x) 33.5 26.1 21.7 18.8 P/B (x) 6.69 5.84 5.11 4.47 ROE (%) 15.3 19.5 18.9 19.1 Net debt/equity (%) Net cash Net cash Net cash Net cash


13 July 2017

Tata Group 61

Voltas (VOLT.BO / VOLT IN)

Price (13 Jul 2017): Rs484.75; Rating: OUTPERFORM; Target Price: Rs585.00; Analyst: Lokesh Garg


Sales revenue 58,574 60,437 70,560 79,932 Cost of goods sold 41,261 42,755 50,093 57,077 EBITDA 4,369 5,574 6,613 7,469 EBIT 4,091 5,307 6,328 7,155 Net interest expense/(inc.) 83 74 10 7 Recurring PBT 5,114 7,241 8,127 9,104 Profit after tax 3,515 5,214 5,567 6,236 Reported net profit 3,449 5,021 5,574 6,411 Net profit (Credit Suisse) 3,449 5,021 5,574 6,411


Cash & cash equivalents 1,971 1,428 3,569 6,269 Current receivables 14,326 14,791 17,268 19,561 Inventories 8,927 9,860 11,512 13,041 Other current assets 12,031 12,325 14,390 16,301 Current assets 37,255 38,404 46,738 55,172 Property, plant & equip. 2,117 1,764 1,980 2,166 Investments 15,182 15,182 15,182 15,182 Intangibles 892 892 892 892 Other non-current assets 541 541 541 541 Total assets 55,988 56,784 65,334 73,954 Current liabilities 29,361 28,042 32,672 36,994 Total liabilities 31,777 29,059 33,738 38,071 Shareholders' equity 23,952 27,467 31,369 35,856 Minority interests 258 258 258 258 Total liabilities & equity 55,988 56,784 65,365 74,185


EBIT 4,091 5,307 6,328 7,155 Net interest 153 148 88 88 Tax paid (1,599) (2,028) (2,560) (2,868) Working capital (262) (2,911) (1,514) (1,402) Other cash & non-cash items 278 267 285 314 Operating cash flow 2,661 784 2,627 3,288 Capex (567) 0 (500) (500) Free cash flow to the firm 2,094 784 2,127 2,788 Investing cash flow (4,811) 86 (500) (500) Equity raised 194 0 0 0 Dividends paid (860) (1,255) (1,393) (1,603) Financing cash flow 403 (3,155) (1,760) (2,012) Total cash flow (1,748) (2,285) 367 776 Adjustments 0 0 0 0 Net change in cash (1,748) (2,285) 367 776

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 331 331 331 331 EPS (Credit Suisse) (Rs) 10.43 15.18 16.85 19.38 DPS (Rs) 2.60 3.80 4.21 4.85 Operating CFPS (Rs) 8.04 2.37 7.94 9.94

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue 13.0 3.2 16.7 13.3 EBIT 7.1 29.7 19.2 13.1 EPS 2.0 45.6 11.0 15.0 Margins (%) EBITDA 7.5 9.2 9.4 9.3 EBIT 7.0 8.8 9.0 9.0

Valuation (x) 03/16A 03/17E 03/18E 03/19E



ROE 15.3 19.5 18.9 19.1 ROIC 28.3 33.1 31.6 31.7


Net debt/equity (%) (57.6) (53.8) (53.9) (54.7) Net debt/EBITDA (x) (3.19) (2.67) (2.58) (2.64)

Company Background

Voltas offers engineering solutions in areas such as heating, ventilation, air conditioning, refrigeration, electro-mechanical projects, materials handling and water management. Voltas is among the leading companies in domestic AC products in India.



Our blue sky scenario of Rs650 takes into account a possibility that competition and commodity prices have no impact on the AC market overall and within that Voltas continues to retain its position of strength in terms of market share (22%) and margins (13%). In such a scenario market multiple can expand to about 35x for the stock.


Our grey sky scenario of Rs400 assumes the impact of competition and higher prices on the AC market is sharp and persistent apart from Voltas losing its position of strength in the market. In such a scenario apart from earnings even the multiple would derate.






13 July 2017

Tata Group 62

Asia Pacific/India Computer Services & IT Consulting

Tata Consultancy Services (TCS.BO / TCS IN) Rating NEUTRAL Price (13-Jul-17, Rs) 2,444 Target price (Rs) 2,250 Upside/downside (%) -7.9 Mkt cap (Rs/US$ mn) 4,678,615 / 72,610 Enterprise value (Rs mn) 4,225,235 Number of shares (mn) 1,914 Free float (%) 26.0 52-wk price range (Rs) 2,732-2,105 ADTO-6M (US$ mn) 51.6 Target price is for 12 months.

Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Nitin Jain

91 22 6777 3851

[email protected]

COMPANY UPDATE

Well placed, but lacks near-term momentum

■ Industry bellwether with an impressive track record. TCS is the bellwether

of the Indian IT services industry with revenue of close to US$18 bn, industry-

leading EBIT margin of 26%, and superior employee retention. Its revenue

has witnessed above 13% CAGR (organic, constant currency) over the last

five years vs the industry growth of slightly above 12%, despite a significantly

larger revenue base (1.3x of Cognizant and 1.7x of Infosys). The EBIT growth

has been in line with the industry average.

■ Industry going through structural shifts; TCS well placed. The Indian IT

industry is going through structural shifts. Automation and cloud have a

deflationary impact on the clients’ IT spending, and without a commensurate

increase in spends in the new area (likely to happen, but delayed due to the

current macro and political uncertainties), growth has slowed. TCS remains

among the best-placed IT companies to ride through the ongoing shifts in the

technology landscape, given its scale, diversified portfolio (across verticals

and service lines), long-term client relationships, and capabilities.

■ What can change? TCS has, so far, grown its business largely organically

(more so in the recent years). An active M&A approach, particularly in new

technology, could be helpful in making the transition quicker. Also, while

TCS's payout has been reasonably high, it has been lumpy. There is scope to

enhance the average payout and make it more consistent, given the cash pile

(over US$4.5 bn, after buyback) and free cash flow.

■ Stock trades below historical multiples; recovery in BFSI should be the

near-term trigger. TCS trades at 17x 12-month forward P/E, >10% below its

five-year average of 19x. Any recovery in BFSI spends (expected for some

time) could be a near-term trigger for the stock. A consistent and high

dividend payout should also help the P/E multiples.





Rs64.44/US$1

Performance 1M 3M 12M Absolute (%) -0.4 5.0 -1.9 Relative (%) -3.4 -3.8 -17.1


Year 3/17A 3/18E 3/19E 3/20E Revenue (Rs mn) 1,179,660.0 1,234,106.3 1,365,456.8 1,503,403.5 EBITDA (Rs mn) 324,910.0 333,407.2 369,630.2 406,949.7 EBIT (Rs mn) 303,240.0 312,567.4 346,572.1 381,562.0 Net profit (Rs mn) 262,890.0 257,913.2 282,087.9 310,168.1 EPS (CS adj.) (Rs) 133.41 134.72 147.35 162.02 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rs) n.a. 138.17 150.29 161.63 EPS growth (%) 8.2 1.0 9.4 10.0 P/E (x) 18.3 18.1 16.6 15.1 Dividend yield (%) 1.9 2.8 3.0 3.4 EV/EBITDA (x) 12.9 12.8 11.3 10.0 P/B (x) 5.45 5.66 4.96 4.38 ROE (%) 32.6 30.2 31.9 30.8 Net debt/equity (%) Net cash Net cash Net cash Net cash


13 July 2017

Tata Group 63

Tata Consultancy Services (TCS.BO / TCS IN)

Price (13 Jul 2017): Rs2,444; Rating: NEUTRAL; Target Price: Rs2,250; Analyst: Anantha Narayan


Sales revenue 1,179,660 1,234,106 1,365,457 1,503,403 Cost of goods sold 668,870 698,028 771,585 849,558 EBITDA 324,910 333,407 369,630 406,950 EBIT 303,240 312,567 346,572 381,562 Net interest expense/(inc.) (29,477) (23,715) (25,613) (27,662) Recurring PBT 345,130 340,283 372,185 409,224 Profit after tax 263,570 258,713 282,968 311,128 Reported net profit 262,890 257,913 282,088 310,168 Net profit (Credit Suisse) 262,890 257,913 282,088 310,168


Cash & cash equivalents 497,290 421,847 518,804 624,278 Current receivables 280,350 304,186 335,872 369,803 Inventories 0 0 0 0 Other current assets 31,060 32,494 35,952 39,584 Current assets 808,700 758,526 890,627 1,033,665 Property, plant & equip. 117,410 118,345 119,378 120,517 Investments 82,160 82,160 82,160 82,160 Intangibles 41,569 41,569 41,569 41,569 Other non-current assets 3,691 3,691 3,691 3,691 Total assets 1,053,530 1,004,291 1,137,426 1,281,602 Current liabilities 143,754 150,351 166,267 182,982 Total liabilities 165,354 171,951 187,867 204,582 Shareholders' equity 883,150 826,514 942,853 1,069,353 Minority interests 3,660 4,460 5,340 6,300 Total liabilities & equity 1,052,164 1,002,925 1,136,060 1,280,236


EBIT 303,240 312,567 346,572 381,562 Net interest 0 0 0 0 Tax paid (81,560) (81,570) (89,217) (98,095) Working capital (19,665) (18,672) (19,228) (20,849) Other cash & non-cash items 21,670 20,840 23,058 25,388 Operating cash flow 223,685 233,166 261,185 288,005 Capex (19,890) (18,895) (19,976) (21,379) Free cash flow to the firm 203,795 214,271 241,209 266,627 Investing cash flow 10,057 (21,774) (24,092) (26,526) Equity raised (3,279) (160,000) (0) 0 Dividends paid (108,360) (154,550) (165,749) (183,668) Financing cash flow (69,149) (286,834) (140,136) (156,006) Total cash flow 164,593 (75,443) 96,957 105,474 Adjustments 0 0 0 0 Net change in cash 164,593 (75,443) 96,957 105,474

Per share 03/17A 03/18E 03/19E 03/20E

Shares (wtd avg.) (mn) 1,971 1,914 1,914 1,914 EPS (Credit Suisse) (Rs) 133.41 134.72 147.35 162.02 DPS (Rs) 47.00 69.00 74.00 82.00 Operating CFPS (Rs) 113.51 121.80 136.43 150.44

Earnings 03/17A 03/18E 03/19E 03/20E

Growth (%) Sales revenue 8.6 4.6 10.6 10.1 EBIT 5.3 3.1 10.9 10.1 EPS 8.2 1.0 9.4 10.0 Margins (%) EBITDA 27.5 27.0 27.1 27.1 EBIT 25.7 25.3 25.4 25.4

Valuation (x) 03/17A 03/18E 03/19E 03/20E



ROE 32.6 30.2 31.9 30.8 ROIC 55.4 56.3 59.7 62.7


Net debt/equity (%) (53.5) (48.1) (52.4) (56.0) Net debt/EBITDA (x) (1.46) (1.20) (1.34) (1.48)

Company Background

TCS is the largest Indian IT services company providing consulting and software services.


Our Blue Sky Scenario (Rs) 2,760

Our blue sky scenario of Rs2,760 assumes revenue growth accelerates significantly during FY18, getting ahead of Infosys and margins remain protected YoY. No material change in visa policies assumed under Trump administration. In this scenario, the stock can potentially rerate.

Our Grey Sky Scenario (Rs) 1,860

Our grey sky scenario of Rs1,860 assumes macro headwinds, including those emerging from Brexit and US visa policies, slow down revenue growth and margins. In this scenario, earnings cuts may be coupled with a P/E derating.






13 July 2017

Tata Group 64

Tata Power (NOT COVERED) (Bloomberg Ticker: TPWR IN, Mkt cap: US$3,495 mn, CMP: Rs83))

■ Integrated power player. Tata Power is present across the three segments of power:

generation (over 10GW of capacity including fossil fuel-based plants and renewables),

transmission (Mumbai, Bhutan-Delhi line), and distribution (Mumbai, Delhi,

Jamshedpur). Tata Power has also set up power plants at overseas locations

comprising hydro- and wind-based capacities. The company owns stakes in coal mines

in Indonesia, which provide fuel security to its Mundra plant (4,000MW) in Gujarat. It

also has exposure to the defence business, where it provides solutions to Indian

defence establishments, and is also partaking in two large defence projects—

Battlefield Management Systems (BMS) and Tactical Communication Systems (TCS)

for the Indian Army, via a joint venture with L&T. While Tata Power is staying away

from incremental greenfield fossil fuel-based projects due to the ongoing sector issues

(low demand, lack of new PPAs, weak health of the distribution sector), the company

has invested in a platform (26% stake) with ICICI Ventures and other partners, which

intends to acquire stressed assets. On the renewables front, the company is treading

cautiously, given the reasonably aggressive competition in the sector.

■ Mundra Power plant resolution key, according to the company. The key issue

faced by the company is viability of the Mundra Power plant, where changes in

Indonesian regulations have impacted profitability of the asset (under-recovery of 60

paisa/unit in FY17, loss of Rs8.5 bn). The company is looking at various solutions to

mitigate the losses at the Mundra plant itself. Among the options, Tata Power has

offered to sell its 51% stake in the company to beneficiaries (state electricity boards led

by Gujarat SEB) at a nominal amount of Rs1/share. This can help the company pass

on the Mundra debt burden to SEBs, according to the company.

■ Another potential concern for Tata Power is related to its renewables portfolio

acquired from Welspun (~1.3GW of assets), where the projects were developed over

the past five-six years, when average tariffs of wind/solar were much higher. All these

projects have PPAs with state electricity boards. However, there seems to be some

pushback from SEBs in the recent past on honouring their commitments on renewable

assets.

■ The company's revenue has grown at about 1% CAGR over FY12-17, and the net

profit has also improved from a large loss in FY12 to profit in FY17. While FY17

revenue fell 5%, PAT improved on a YoY basis. The stock price has been up 14% over

the last 12 months, down 18% over the last three years, and is down 4% over the last

five years vs. Sensex' returns of 17%, 27% and 85%, respectively during these time

periods. Tata Power currently trades at 1.5x 12-month fwd P/B multiple (Bloomberg

consensus estimates) vs. the last five-year average of 1.4x.

Figure 74: Tata Power—consolidated financial summary

(Rs mn) FY13 FY14 FY15 FY16* FY17*

Revenue 330,254 356,487 337,276 295,009 278,977

Revenue growth 7.9% -5.4% 11.1%# -5.4%

EBITDA 64,509 69,173 63,012 71,470 58,465

EBITDA margin 20% 19% 19% 24% 21%

PAT 7,646 -2,600 1,678 7,600 13,969

EPS (Rs) 4 -2 0 2 5

EPS growth nm nm nm 98%

Net debt/equity 3.3 3.6 3.0 2.9 3.5

ROE (%) 7% -2% 1% 6% 11%

* Ind-AS numbers. # FY16 revenue growth is adjusted for Ind-AS changes. Source: Company data, Capitaline

Analysts:

Lokesh Garg Vaibhav Jain

13 July 2017

Tata Group 65

Tata Communications (NOT COVERED) (Bloomberg Ticker: TCOM IN, Mkt cap: US$2,916 mn, CMP: Rs659)

■ Driving global connectivity. TCOM has the world’s largest wholly owned submarine

fibre network, accounting for nearly 20% of global submarine fibre capacity, based on

company data. With this infrastructure as the backbone, the company handles more

than 24% of global internet traffic, and is the largest wholesale voice carrier globally,

according to management. In India, TCOM claims to be a market leader in enterprise

communication services.

■ Growing share of data services. While TCOM’s traditional strength lies in the

wholesale voice business, the company notes that it has been actively growing the

data business as a counter to structural problems in voice. Over the last couple of

years, data revenues have grown from 51% of sales to 63%, overtaking voice as the

primary revenue engine, according to management; in this context, it thinks the

company’s position as a Leader in Gartner’s Magic Quadrant for network services over

the last couple of years is a significant boost for its market position. TCOM has been

focusing on growing managed services (higher margin, stickier revenues) within the

data services segment.

■ Divestment of non-core assets. TCOM has divested/reduced stakes in a number of

assets, which it believes to be of lower strategic importance, to reduce leverage. In

FY17, the company stated that it completed the sale of its operations in South Africa

(held via erstwhile subsidiary, Neotel) to Liquid Telecom. Besides, it also sold a 74%

stake in its data centre business in India and Singapore to ST Telemedia for ~Rs18 bn.

These transactions, it claims, have helped it reduce leverage from 4x net debt/EBITDA

in FY16 to 2.7x as of FY17. Outside of management control, the company also has

significant surplus land across India, the fate of which it said depends on government

actions. Minority shareholders in TCOM would have access to benefits from the sale of

these assets, according to the company.

■ Valuation. On a trailing basis, TCOM’s EV/EBITDA at 11.3x places it at a premium to

peers such as Bharti and Idea (Bloomberg consensus estimates).

Figure 75: Tata Communications—consolidated financial summary

Rs mn FY13 FY14 FY15 FY16 FY17

Revenue 174,395 178,486 182,644 185,452 179,800

Revenue growth 2.3% 2.3% 1.5% -3.0%

EBITDA 14,922 21,393 23,620 24,293 23,990

EBITDA margin 8.6% 12.0% 12.9% 13.1% 13.3%

PAT -6,233 1,014 13 87 12,329

EPS (Rs) -21.9 3.6 0.1 0.3 43.3

EPS growth -116% -99% 500% 14320%

Net debt/equity 7.6 13.8 32.9 -33.7 5.1

ROE 9% 0% -42% 201%

FCF -3,884 6,062 5,372 4,181 7,594 Note: (1) FY16 and FY17 financials based on Ind AS numbers. (2) In FY17, the company sold 74% of its data centre business to ST Telemedia. Reported profits for the year include Rs24.2 bn of profits on sale of the business; (3) On entering into an agreement to sell its South African business 'Neotel' to Vodacom, Tata Communication recognised an impairment charge of Rs1.9 bn (Rs1.5 bn in FY14); (4) FY13 numbers included costs pertaining to retrenchment of Rs854 mn and Rs1.9 bn of profit on sale of property at Chennai location.


Analysts:

Sunil Tirumalai Viral Shah

13 July 2017

Tata Group 66

Tata Chemicals (NOT COVERED) (Bloomberg Ticker: TTCH IN, Mkt cap: US$2,532 mn, CMP: Rs640)

■ A diversified conglomerate. Tata Chemicals is a diversified conglomerate, with

manufacturing facilities across Asia, Europe, Africa and North America, whose

businesses can be categorised into three key segments, according to management.

Industry essentials: As per the company, Tata Chemical is world's second-largest

producer of soda ash, operating ~8% of world capacity.

Farm essentials: As per management, it is a leading manufacturer of fertilisers, crop

protection chemicals and agri-solutions.

Living essentials: Market leader with a ~70% market share in the national branded

salt segment (source: management). The company is also leveraging its large

distribution network to sell branded pulses and spices.

■ Historical performance and recent performance. While the stock was largely range-

bound over 2010-13, it saw a strong rerating over the course of 2014, rising 65% over

twelve months. According to management, the stock has doubled from its February

2016 bottom driven by the sale of its urea fertiliser business to Yara (for Rs27 bn) and

Tata Chemicals' exit from this low-return, working-capital-intensive business.

■ Management outlook, any recent changes. Management acknowledged that, over

the past few years, it has been attempting to undo some of its historical mistakes (such

as purchasing high-cost assets in overseas markets) and investing in higher-return

(consumer) businesses. Its strategy has been a combination of: (a) shutting down (or

scaling back output) loss-making units—such as its plants in the UK and Kenya, (b)

investing in improving cost competitiveness (such as steam turbines in the UK, which

cuts opex), (c) directing investment towards consumer segments such as pulses,

where the company attempts to leverage its large salt distribution reach and convert

another product from the unorganised to the organised sector, and (d) expanding into

neutraceuticals and related businesses, targeting a sales split of ~50% from branded

and non-commodity businesses (from just 22% in FY15).

■ Management has indicated its priorities on consumer products, and the stock has seen

a sharp re-rating. Tata Chemicals trades at 15.0x one-year forward (Bloomberg

consensus) earnings, at a 50% premium to historical averages. Consensus earnings

have not seen large movements either way over the course of the stock doubling (Feb

2016 until now), and the rally has been almost entirely due to multiple expansion.

Figure 76: Tata Chemicals—consolidated financial summary

Rs mn FY13 FY14 FY15 FY16 FY17*

Revenue 147,110 158,854 172,045 177,081 129,418

Revenue growth 7.7% 8.0% 8.3% 2.9% -26.9%

EBITDA 21,629 18,140 23,612 21,711 23,897

EBITDA margin 14.7% 11.4% 13.7% 12.3% 18.5%

PAT 4,004 -10,320 5,965 7,802 12,341

EPS (Rs) 16 -41 23 31 48

EPS growth -52.2% n.a. n.a. 30.8% 58.2%

Net debt/equity 73.5% 106.3% 88.9% 97.8% 32.3%

ROE 6.3% -17.2% 10.7% 13.2% 17.4%

FCF 682 4,951 11,979 8,301 18,637

* Ind AS. Source: Company data.

Analyst:

Bandrinath Srinivasan

13 July 2017

Tata Group 67

Indian Hotels (NOT COVERED) (Bloomberg Ticker: TGBL IN, Mkt cap: US$1,928 mn, CMP: Rs125)

■ One of the leading hotel companies in India. Indian Hotels has properties under Taj,

Vivanta, Gateway and Ginger brands. The company had a total of 118 properties in

India as of 31 March 2017, with an inventory of 14,041 rooms. It has an international

presence as well, with 16 properties (inventory of 2,634 rooms). In all, the group had

139 hotels with an inventory of 16,778 rooms. The company also has an air catering

business (through a JV—Taj SATS). The India business accounts for slightly over 70%

of the revenue.

■ Recovery in standalone margins, international business has lower margins.

Indian Hotels had a 6% revenue CAGR over the last five years (4% CAGR in room

count). Standalone revenue (largely domestic) is growing faster than the subsidiaries

(international hotels, Ginger etc.), given divestment of some of its loss-making

international properties. Standalone business' profits have improved over the last three

years (EBITDA margins up from -18% in FY14 to 22% in FY17), while the subsidiaries'

margins have deteriorated (16.5% to 5.5%). The company had a negative PAT for the

last five years, and had a net debt to EBITDA of over 5x in FY17.

■ Focus on fixing the P&L, asset-light strategy. The company, in the last couple of

years, has restructured the international business; according to management, all the

operations are brought into one holding company for better monetisation and it has

also divested a few properties. For the India business as well, the company has sold a

few properties in the last 2-3 years and for new properties, the company stated that it

has been following an asset-light model (management contracts vs ownership model).

■ The stock has not moved much over the last one and three years. It trades at 17x

FY19 EV/EBITDA, same as East India Hotels (Oberoi and Trident), based on

Bloomberg consensus estimates.

Figure 77: Indian Hotels - financial summary


Revenue 37,434 40,662 41,886 40,230 40,103

Revenue growth 9% 9% 3% 10% 0%

EBITDA 933 47 892 5,522 6,096

EBITDA margin 2.5% 0.1% 2.1% 13.7% 15.2%

PAT -4,302 -5,539 -3,781 -2,311 -632

EPS (Rs) -5.4 -6.9 -4.7 -2.3 -0.6

EPS growth nm nm nm nm nm

Net debt/equity 1.2 1.5 2.1 1.4 1.3

ROE -14% -20% -16% -9% -2%

FCF 790 1,990 1,836 2,605 NA

Source: Company data * Ind AS numbers. The growth is calculated on like-to-like basis for FY16 (based on Indian GAAP) and FY17 (based on Ind AS)

Figure 78: Rooms have grown at a 4% CAGR (five

years)++

Figure 79: Standalone subsidiaries' margins

+++++++


13,522 14,33115,393 15,751

16,759 16,675

-2%

0%

2%

4%

6%

8%

0

5,000

10,000

15,000

20,000


Total rooms YoY growth [RHS]

-10%

0%

10%

20%

-25%

0%

25%

50%

FY12 FY13 FY14 FY15 FY16 FY17*

Revenue growth - StandaloneRevenue growth - SubsidiariesEBITDA margin - Standalone [RHS]EBITDA margin - Subsidiaries [RHS]

Analysts:

Anantha Narayan Nitin Jain

13 July 2017

Tata Group 68

Tata Global Beverages (NOT COVERED) (Bloomberg Ticker: TGBL IN, Mkt cap: US$1,717 mn, CMP: Rs.175)

■ A global branded beverages company. Tata Global Beverages owns multiple

beverage brands such as Tata Tea, Tetley, Teapig, Good Earth, Eight O'Clock, and

Grand Coffee. The company has also ventured into the water and energy/health drink

segments with brands such as Tata Water Plus, Himalayan and Tata Gluco. The

branded business accounts for about 88% of the company's revenue (non-branded

business is largely Tata Coffee), with tea accounting for 80% of the branded business,

and coffee being 19%. The India business accounts for about 40% of revenue, the

US/Canada 25%, and the UK about 17%. It also has JVs with partners such as

Starbucks, and Pepsi (Himalyan, Tata Water Plus, and Tata Gluco+). The company is

backward integrated and owns tea and coffee estates. Tata Coffee is 57%-owned by

Tata Global.

■ India business leads the growth. The company's revenue has grown at about 5%

CAGR over FY12-17, and the net profit has been volatile. The India business has been

growing at a faster rate (12% CAGR over FY12-16), while the international business

has been muted (-2% CAGR in the UK, and 4% CAGR in the US/Canada). FY17

revenue grew 2% (3% in constant currency). Lower commodity costs (helped by

hedging), and operational efficiency measures helped margins in FY17, despite an

increase in advertisement costs. On like-for-like basis (Ind AS), EBITDA margins

improved from about 10% in FY16 to 11.7% in FY17.

■ Focus on new product launches for growth. Management is focusing on health and

wellness-related products such as vitamins-fortified tea and ayurveda inspired products

(Tata Tea Veda and Tetley Balance), ready-to-drink tea (iced and cold tea), and e-

commerce for growth. It started re-investing in the Tata Tea brand in FY17 and has

launched several new products, including the ones discussed above. Some

restructuring initiatives are under way for the Eastern Europe business (minor part of

the business) and the Middle East is one region which is in the incubation stage.

■ The stock price has been up 17% over the last 12 months, flat over the last three

years, and is up 34% over the last five years vs Sensex' returns of 15%, 23% and 79%,

respectively, during these time periods. Tata Global currently trades at slightly over 20x

12-month forward P/E multiple (Bloomberg consensus estimates) vs the last five-year

and three-year average of 18x.

Figure 80: Tata Global Beverages—financial summary

(Rs mn) FY13 FY14 FY15 FY16 FY17*

Revenue 73,510 77,376 79,934 81,105 67,796

Revenue growth 11% 5% 3% 1% 2%

EBITDA 7,685 7,519 6,440 6,747 7,911

EBITDA margin 10.5% 9.7% 8.1% 8.3% 11.7%

PAT 3,728 4,805 2,478 3,259 3,894

EPS (Rs) 6.0 7.8 3.9 5.2 6.2

EPS growth 4.7% 28.9% -49.4% 31.3% 19.6%

Net debt/equity 0.1 0.1 0.1 0.1 0.0

ROE 8% 8% 6% 5% 6%

FCF -64 2,180 2,386 -547 NA

* Ind AS numbers. The growth is calculated on like-to-like basis (using Ind AS numbers for FY16) Source: Company data

Analysts:

Anantha Narayan Nitin Jain

13 July 2017

Tata Group 69

Trent Ltd (NOT COVERED) (Bloomberg Ticker: TRENT IN, Mkt cap: US$1,283 mn, CMP: Rs249)

■ Business description. Trent’s flagship business has been operating the ‘Westside’

chain of retail stores selling apparel and accessories. The chain has 108 stores across

61 cities in India. Trent also operates two JVs (1) one owns a 49% stake in Zara’s India

operations with 20 stores currently and (2) the second one owns a 50% JV with Tesco

Plc of UK and operates 42 stores across hypermarket and convenience stores selling

personal care, food and grocery items.

■ Details on individual businesses:

Westside, with Rs1.6 bn in revenues, is the largest contributor to Trent’s revenues and has been delivering steady same-store sales growth for the last five years despite a slowdown. It generates around 9-10% EBITDA margins. Westside’s private label brands are exclusively sold through its own outlets. Management plans to accelerate expansion into newer cities and towns and will also explore smaller stores in non-metros/ emerging markets.

Joint ventures. Star Bazaar hypermarket (JV with Tesco) chain is still in ramp-up mode and currently loss-making at the EBITDA level. The company is now focusing on direct sourcing and private label offerings to improve profitability. Zara India (JV with Iditex) has grown sales at a 55% CAGR since FY13 and makes a ~5% PAT margin.

Figure 81: Operating metrics for Westside Figure 82: Ramp-up in Zara sales (49% JV)


■ Valuation. The stock trades at 41x/30x FY18/19 EPS on Bloomberg consensus

estimates, versus peer Shoppers Stop (SHOP IN) at 97x/39x FY18/19 consensus.

Figure 83: Trent Limited—consolidated financial summary


Revenue 23,074 25,474 26,362 17,774 20,304

Revenue growth 20.7% 10.4% 3.5% 4.9%^ 14.2%

EBITDA 629 810 2,962 1,762 2,148

EBITDA margin 2.7% 3.2% 11.2% 9.9% 10.6%

PAT -268 -186 1,293 551 849

EPS (Rs) -9 -6 39 2 3

EPS growth NM NM NM NM 55%

Net debt/equity 10.4% 27.2% 14.9% 25.5% 23.1%

ROE -2.2% -1.7% 10.7% 3.8% 5.6%

FCF -2,444 -941 -3,163 110 587

Note: FY16 & FY17 financials per IND AS; earlier years basis I GAAP. Revenue base resets downwards in FY16 as JV revenue is not included in headline revenues under IND AS as was the case under I GAAP. ^ Calculated using I GAAP revenue for FY16 and FY15 Source: Company data.

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%


EBITDA margin (LHS) SSSG (RHS)

0

5

10

15

20

25

0

2000

4000

6000

8000

10000

12000


# of stores (RHS) Sales (Rs mn, LHS)

Analysts:

Arnab Mitra Rohit Kadam

13 July 2017

Tata Group 70

Tata AIA Life Insurance (Not Listed) Tata AIA is a joint venture between Tata Sons (51%) and AIA International (49%), which

commenced operations in April 2001. Post the increase in foreign ownership limit in Indian

insurance companies to 49%, AIA increased its stake from 26% to 49% in April 2016,

reportedly paying Rs20 bn, valuing the company at ~Rs90 bn (source: Economic Times).

After a phase of consolidation, private insurers' new business growth picked up to 14-16%

levels in FY15/16 and has improved to 22% in FY17. Bancassurance has emerged as the

primary distribution channel with 53% share (from 21% in FY10) among the private

insurers. It contributes 60-75% to the retail premiums for the top private insurers now, as

insurers with strong bank tie-ups have gained market share.

Tata AIA currently has a ~3% market share among the private life insurers, increasing

from ~1% in FY15. Since FY15, post the appointment of a new MD and CEO, the

company has broadened its product offerings, launching 15 new products in FY16,

resulting in a steady pick-up in premium income, after several years of decline. Premium

growth picked up to 28% in FY17, with APE growth at 55%. The company has also been

focusing on digital initiatives and ~60% of its sales in FY16 were paperless.

Tata AIA has been selling products through IndusInd Bank and Citibank. In October 2016,

it entered into an agreement with HDFC Bank to sell its policies and recently has tied up

with Axis Bank as well, which will help the company continue to expand its reach and see

strong premium growth. It has also tied up with DBS Bank, which will offer products

through its own digital channel. With the increasing number of bancassurance partners, As

stated in its annual report, Tata AIA’s share of bancassurance has increased from 16% in

FY15 to 49% in FY16.

Figure 84: Tata AIA—consolidated financial summary


GWP (Rs mn) 36,182 27,460 23,118 21,056 24,358 31,153

YoY growth (%) -24% -16% -9% 16% 28%

Renewal prem % of GWP 74% 80% 81% 85% 70% 64%

APE (Rs mn) 31,180 35,320 34,440 2,968 7,262 11,270

YoY growth (%) -22% 13% -2% -91% 145% 55%

Commission/GWP 3.90% 3.80% 4.00% 4.40% 6.10% 8.50%

Opex/GWP 21% 22% 19% 24% 20% 24%

Benefits paid/GWP 55% 37% 116% 168% 119% 81%

Profit/(loss) (Rs mn) 2,603 -3,315 4,129 2,636 636 1,135

Conservation Ratio 72% 64% 72% 81% 83% 83%

61st Month Persistency 41% 43% 38% 35% 36% 49%

Solvency Ratio (%) 284% 341% 409% 417% 348% 315%


Figure 85: Growth in premiums Figure 86: Comparison of persistency ratios


-30%

-20%

-10%

0%

10%

20%

30%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


GWP (Rs mn) YoY growth (%) (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

ICICI Pru HDFC Life Tata AIA BirlaSunlife

Reliance SBI BajajAllianz

61st month persistency

Analysts:

Ashish Gupta Kush Shah

13 July 2017

Tata Group 71

Appendix: HOLT Analysis (Note: HOLT is not a part of Equity Research)

Tata Power (TTPW)—A sub cost of capital business with 46% DCF upside on HOLT default model

Source: Credit Suisse HOLT Lens

Tata Chemicals (TTCH)—Volatile historical CFROI trend with 30% DCF upside on HOLT default model


13 July 2017

Tata Group 72

Tata Global Beverage (TAGL)—Relatively stable CFROI that is fairly priced on HOLT default scenario (9%)


Tata Communications (TATA)—A low CFROI business with 66% warranted downside on HOLT DCF, suggesting market already embeds significant recovery in future returns


13 July 2017

Tata Group 73

Indian Hotels (IHTL)—Lower than peers CFROI with 22% downside on HOLT default model


Trent (TREN)—Significant turnaround in CFROI but warrant 27% downside on HOLT default scenario


13 July 2017

Tata Group 74

Tata Elxsi (TTEX)—Firm with consecutive years of CFROI improvement and 41% DCF upside on HOLT


Rallis India (RALL)—Company with stable and persistent CFROI (10%+) with 88% upside on HOLT, which is under-appreciated by market


HOLT® is not part of Equity Research. Materials in this section are not prepared by Equity Research. The HOLT methodology uses a proprietary performance measure known as Cash Flow Return on Investment (CFROI®). This is an approximation of the economic return, or an estimate of the average real internal rate of return, earned by a firm on the portfolio of projects that constitute its operating assets. A firm's CFROI can be directly compared against its real cost of capital (the investors' real discount rate) to see if the firm is creating economic wealth. By removing accounting and inflations distortions the CFROI allows for global comparability across sectors, regions and time, and is also a more comprehensive metric than the traditional ROIC and ROE.

13 July 2017

Tata Group 75

Companies Mentioned (Price as of 13-Jul-2017) ASL (AVEU.BO, Rs914.6) Accenture Plc (ACN.N, $125.47) Arcelik (ARCLK.IS, TL26.56) Ashok Leyland Ltd (ASOK.BO, Rs106.1) BMW (BMWG.DE, €84.36) Bharti Airtel Ltd (BRTI.BO, Rs402.95) Cognizant Technology Solutions Corp. (CTSH.OQ, $68.13) Daimler (DAIGn.DE, €65.15) Edelweiss Financial Services Ltd (EDEL.BO, Rs194.95) Future Consumer (FTRE.BO, Rs37.1) HCL Technologies (HCLT.BO, Rs857.9) HDFC Bank (HDBK.BO, Rs1681.2) ICICI Bank (ICBK.BO, Rs297.75) IIFL Hldg (IIFL.NS, Rs597.3) Idea Cellular (IDEA.NS, Rs87.8) Indian Hotel (IHTL.NS, Rs125.6) Infosys Limited (INFY.BO, Rs976.3) International Business Machines Corp. (IBM.N, $153.7) JM Financial (JMSH.BO, Rs127.0) L&T Fin Holdings (LTFH.NS, Rs151.4) MOFSL (MOFS.BO, Rs1109.35) MTNL (MTNL.BO, Rs21.65) Maruti Suzuki India Ltd (MRTI.BO, Rs7566.25) Nelco (NELC.NS, Rs103.1) RCOM (RLCM.NS, Rs23.95) Rallis India (RALL.BO, Rs248.65) Reliance Capital Ltd (RLCP.BO, Rs663.3) Shoppers Stop (SHOP.BO, Rs349.0) State Bank Of India (SBI.BO, Rs288.6) TRF (TTRO.NS, Rs246.05) Tata Chemicals (TTCH.BO, Rs640.5) Tata Coffee (TACO.BO, Rs143.9) Tata Communi (TATA.NS, Rs659.2) Tata Consultancy Services (TCS.BO, Rs2444.05, NEUTRAL, TP Rs2250.0) Tata Elxsi (TTEX.BO, Rs1730.6) Tata Global (TAGL.BO, Rs175.45) Tata Investment (TINV.NS, Rs772.85) Tata Metaliks (TMET.BO, Rs759.7) Tata Motors Ltd. (TAMO.BO, Rs458.4, OUTPERFORM[V], TP Rs630.0) Tata Power Company Ltd (TTPW.BO, Rs83.25) Tata Sponge Iron (TTSP.NS, Rs836.55) Tata Steel Ltd (TISC.BO, Rs563.0, OUTPERFORM, TP Rs650.0) Tata Teleservice (TTML.BO, Rs7.58) Tayo Rolls (TTYO.BO, Rs60.0) ThyssenKrupp (TKAG.DE, €26.82) Titan Company (TITN.NS, Rs534.15) Titan Company Ltd (TITN.BO, Rs534.6, OUTPERFORM, TP Rs560.0) Trent (TREN.NS, Rs248.7) Videocon (VEDI.BO, Rs31.95) Vodafone Group (VOD.L, 220.85p) Volkswagen (VOWG_p.DE, €143.35) Voltas (VOLT.BO, Rs484.75, OUTPERFORM, TP Rs585.0) Welspun Entp (WELS.NS, Rs127.6) Wipro Ltd. (WIPR.BO, Rs264.2)

Disclosure Appendix

Analyst Certification Anantha Narayan, Nitin Jain, Arnab Mitra, Ashish Gupta, Badrinath Srinivasan, Jatin Chawla, Ravi Shankar, Sunil Tirumalai and Lokesh Garg each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

13 July 2017

Tata Group 76

3-Year Price and Rating History for Tata Consultancy Services (TCS.BO)

TCS.BO Closing Price Target Price

Date (Rs) (Rs) Rating

18-Jul-14 2405.16 2850.00 O

30-Sep-14 2738.20 3100.00

13-Oct-15 2597.40 3000.00

12-Jan-16 2324.05 2900.00

19-Apr-16 2522.40 3000.00

18-Jul-16 2433.50 2575.00 N

15-Sep-16 2328.05 2500.00

25-Nov-16 2300.85 2300.00

18-Apr-17 2308.65 2250.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Tata Motors Ltd. (TAMO.BO)

TAMO.BO Closing Price Target Price


11-Aug-14 442.66 504.60 N

23-Sep-14 512.32 633.22 O

17-Nov-14 539.33 643.12

26-Mar-15 520.58 R

04-May-15 506.70 640.00 O

18-May-15 520.25 620.00

27-May-15 471.65 610.00

03-Aug-15 388.15 490.00

12-Feb-16 298.65 470.00

31-May-16 458.20 530.00

27-Jun-16 448.60 430.00 N

29-Aug-16 524.70 510.00

07-Nov-16 507.30 720.00 O

15-Nov-16 457.25 680.00

15-Feb-17 436.55 630.00


N EU T RA L

O U T PERFO RM

REST RICT ED

3-Year Price and Rating History for Tata Steel Ltd (TISC.BO)

TISC.BO Closing Price Target Price


13-Aug-14 534.70 260.00 U

21-May-15 342.90 210.00

11-Aug-15 246.90 180.00

19-Apr-16 335.00 440.00 O *

10-Oct-16 417.40 500.00

14-Nov-16 426.85 515.00

08-Feb-17 470.70 560.00

17-Mar-17 502.05 600.00


U N D ERPERFO RM

O U T PERFO RM

13 July 2017

Tata Group 77

3-Year Price and Rating History for Titan Company Ltd (TITN.BO)

TITN.BO Closing Price Target Price


14-Jul-14 321.75 360.00 O

04-Aug-14 342.30 380.00

25-Aug-14 361.75 415.00

30-Nov-14 370.05 430.00

08-May-15 353.60 390.00 N

03-Aug-15 317.35 360.00

29-Jan-16 363.90 370.00

30-Mar-16 338.30 350.00

06-May-16 364.10 340.00

03-Aug-16 414.40 380.00

04-Nov-16 368.50 370.00

15-Nov-16 328.00 330.00

10-Jan-17 361.75 340.00

07-Feb-17 393.40 425.00

15-May-17 483.45 500.00

05-Jun-17 552.40 560.00 O


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Voltas (VOLT.BO)

VOLT.BO Closing Price Target Price


24-Jul-14 193.57 NR

20-Nov-14 263.95 315.00 O *

16-Feb-15 249.60 300.00

25-May-15 323.70 380.00

12-Aug-15 298.80 360.00

09-Nov-15 275.25 345.00

15-Feb-16 237.95 315.00

25-Apr-16 293.00 345.00

19-May-16 323.85 390.00

03-Aug-16 346.25 400.00

20-Sep-16 382.70 415.00 N

21-Nov-16 295.70 335.00

24-May-17 447.55 480.00 O

01-Jun-17 508.90 585.00


N O T RA T ED

O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the re levant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

13 July 2017

Tata Group 78

Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (65% banking clients) Neutral/Hold* 40% (60% banking clients) Underperform/Sell* 14% (52% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Tata Consultancy Services (TCS.BO)

Method: Our target price of Rs2,250 for TCS is based on 15x 24-month forward EPS (earnings per share), slightly below the stock's historical average, reflecting slightly moderate growth prospects and macro uncertainties. We have a NEUTRAL rating on the stock as we believe that moderate growth rates (given a relatively soft start to the year) and macro uncertainties will cap any P/E rerating - earnings growth are likely to be a moderate 10-11%.

Risk: Potential upside risks to our target price of Rs2,250 and the NEUTRAL rating for TCS include: (1) no material impact of macro/regulatory uncertainties on the clients' spending sentiments, (2) revival of growth in the next 2-3 quarters, and (3) favourable currency moves (INR depreciation and strengthening of other currencies against USD). The downside risks are (1) a significant slowdown in the global economies (particularly in Europe due to Brexit), which could lead to a decline in the UK in revenues, (2) adverse visa policies under the Trump administration, and (3) a sharp appreciation in the INR vs. the USD.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Tata Motors Ltd. (TAMO.BO)

Method: We set a sum-of-the-parts (SOTP)-based target price of Rs630 for Tata Motors. We value the JLR business at Rs450/share (4x EV/EBITDA), China JV at Rs70/ share (10x P/E), India business at Rs80/share (8x EV/EBITDA) and other subsidiaries at Rs50/share and net debt is Rs 25/share (adjusted from sum of parts). Our OUTPERFORM rating on Tata Motors is predicated on our view that JLR margins will surprise positively as the benefit of GBP depreciation flows through the P&L leading to earning upgrades.

Risk: The key downside risk to our target price of Rs630 and OUTPERFORM rating for Tata Motors Ltd. is a faster-than-expected slowdown in key auto markets such as China, the US and Europe.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Tata Steel Ltd (TISC.BO)

Method: Our target price of Rs650 for Tata Steel is based on valuing the domestic/EU business at 7.0/6.5x EV-EBITDA. We have assumed domestic hot-rolled steel prices at US$485/t and EU EBITDA assumed at US$60/t for the next four quarters. Our OUTPERFORM rating is based upon this target price and reflects our expectations of a stable domestic EBITDA and improvement in EU profitability as that business gets restructured gradually.

Risk: The risks to our Rs650 target price and OUTPERFORM rating for Tata Steel include: (1) domestic steel prices settling below what we have assumed for the next four quarters (US$485/t); (2) little/ no progress in the EU restructuring and (3) contraction in EU spreads leading to lower profitability .

Target Price and Rating Valuation Methodology and Risks: (12 months) for Titan Company Ltd (TITN.BO)

Method: We value Titan Industries at 37x Mar-2019 earnings (in line with one-year average multiple) giving us a target price of Rs560. We have an OUTPERFORM rating as Titan remains the best run organised jewellery play in India and is rapidly gaining share from the unorganised market.

Risk: Key risks that may impede achievement of our Rs560 target price and OUTPERFORM rating for Titan Industries include a sharp correction in gold prices without pick-up in volume, slower-than-expected recovery in discretionary demand and uncertainity over regulations persisting.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Voltas (VOLT.BO)

Method: Our target price of Rs585 for Voltas is based on 30x March-2019E consolidated earnings, our multiple being supported by SOTP (sum-of-the-parts) valuation of individual segments. Our target price and OUTPERFORM rating take into account: (1) the strong market position that the company enjoys in the room AC business; (2) low penetration levels in India, which makes Voltas a structural growth story; (3) expectation of cyclical economic recovery vs past five years in projects business; and (4) Voltas' attempt to build a broader consumer durable business.

Risk: Key downside risks to our target price of Rs585 for Voltas include slower-than-expected recovery in commercial and infrastructure construction activity in both India and the Middle East, a sharp drop in the AC business market share or profitability as well as delays in fruition of broader consumer business. If these risks were to pan out, there could be downside risk to our OUTPERFORM rating.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): TCS.BO, TAMO.BO, VOD.L, BRTI.BO, ICBK.BO, SBI.BO, HDBK.BO, ACN.N, INFY.BO, HCLT.BO, WIPR.BO, CTSH.OQ, IBM.N, TKAG.DE, ARCLK.IS Credit Suisse provided investment banking services to the subject company (TAMO.BO, ICBK.BO, SBI.BO, HDBK.BO, ACN.N, CTSH.OQ, IBM.N) within the past 12 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: TCS.BO, TAMO.BO, TITN.BO, TISC.BO, ICBK.BO, SBI.BO, HDBK.BO, EDEL.BO, WIPR.BO, CTSH.OQ, IBM.N, TKAG.DE Credit Suisse has managed or co-managed a public offering of securities for the subject company (TAMO.BO, ICBK.BO, IBM.N) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): TAMO.BO, ICBK.BO, SBI.BO, HDBK.BO, ACN.N, CTSH.OQ, IBM.N Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (VOLT.BO, TCS.BO, TAMO.BO, VOD.L, BRTI.BO, ICBK.BO, SBI.BO, HDBK.BO, EDEL.BO, ACN.N, INFY.BO, HCLT.BO, WIPR.BO, CTSH.OQ, IBM.N, TKAG.DE, ARCLK.IS) within the next 3 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): TCS.BO, TAMO.BO, TITN.BO, TISC.BO, ICBK.BO, SBI.BO, HDBK.BO, EDEL.BO, WIPR.BO, CTSH.OQ, IBM.N, TKAG.DE A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (VOLT.BO, TCS.BO, TAMO.BO, TITN.BO, TISC.BO, MRTI.BO, ASOK.BO, VOD.L, BRTI.BO, ICBK.BO, SBI.BO, HDBK.BO, EDEL.BO, ACN.N, HCLT.BO, WIPR.BO, IBM.N, TKAG.DE, ARCLK.IS) within the past 12 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (TACO.BO, TREN.NS, TTCH.BO, IHTL.NS, TTYO.BO, TTML.BO, TATA.NS, TMET.BO, NELC.NS, TTRO.NS, TINV.NS, TTPW.BO, RALL.BO, TTEX.BO, TAGL.BO, TTSP.NS, TITN.NS, IDEA.NS, RLCM.NS, VEDI.BO, MTNL.BO, FTRE.BO, SHOP.BO, AVEU.BO, RLCP.BO, MOFS.BO, LTFH.NS, JMSH.BO, IIFL.NS, WELS.NS, VOLT.BO, TCS.BO, TAMO.BO, TITN.BO, TISC.BO, MRTI.BO, ASOK.BO, BRTI.BO, ICBK.BO, SBI.BO, HDBK.BO, EDEL.BO, INFY.BO, HCLT.BO, WIPR.BO)

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Credit Suisse has a material conflict of interest with the subject company (HCLT.BO) . Credit Suisse is acting as advisor to HCL Technologies Ltd for buyback of equity shares through tender offer.

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Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (TAMO.BO, ASOK.BO, ICBK.BO, SBI.BO, HDBK.BO, IBM.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (India) Private LimitedAnantha Narayan ; Nitin Jain ; Arnab Mitra ; Ashish Gupta ; Badrinath Srinivasan ; Jatin Chawla ; Ravi Shankar ; Sunil Tirumalai ; Lokesh Garg ; Vaibhav Jain ; Neelkanth Mishra ; Prateek Singh ; Rohit Kadam, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private LimitedAnantha Narayan ; Nitin Jain ; Arnab Mitra ; Ashish Gupta ; Badrinath Srinivasan ; Jatin Chawla ; Ravi Shankar ; Sunil Tirumalai ; Lokesh Garg

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