The contrasting fates of Tata and Shapoorji Pallonji on the bourses

On September 23, a day after the Shapoorji Pallonji (SP) Group of the Mistrys said that the family had been forced to reflect on the past, present, and possible future for all stakeholders of Tata Sons, the listed stocks of both the business groups showed contrasting market reactions.

The combined market capitalisation of the 28 listed stocks of the Tata group on Wednesday was ₹12.85 lakh crore, a decline of over 1.72% over Tuesday’s ₹13.07 lakh crore.

“The past oppressive actions, and the latest vindictive move by Tata Sons that impact the livelihoods of the wider SP Group community leads to the inexplicable conclusion that the mutual co-existence of both groups at Tata Sons would be infeasible,” the SP Group’s statement read. It said that the relationship was forged on mutual trust, good faith, and friendship. “Today, it is with a heavy heart that the Mistry family believes that a separation of interests would best serve all stakeholder groups.”

The SP Group’s statement led investors to believe that the two business groups would soon sever their 70-year-old ties, with many probably expecting a windfall if the Tata group bought the Mistrys’ 18.37% stake in Tata Sons. This possibly led to the combined market capitalisation of the SP Group’s listed entities jumping around 14.5% from ₹4,975.9 crore on September 22 to ₹5,697.2 crore on September 23. The SP Group has just two listed entities—Sterling and Wilson Solar and Forbes & Company.

Sterling and Wilson, which saw a nearly eightfold spurt in trading volumes on the BSE on Wednesday, touched its upper circuit of ₹235.9 a share on that day. But going by trade volumes (the traded quantity was just 359,000 shares and a turnover of only ₹8.37 crore), the spurt had more of sentimental value.

In terms of its stock price movement, compared to the previous day’s closing price of ₹196.6 a share, Sterling and Wilson Solar registered a jump of 19.99% at the upper circuit value of ₹235.9 a share, which was its closing price for the day. When compared to the stock’s 52-week high of ₹636—on September 24 last year—the stock at Wednesday’s close was 62.9% lower. And, compared to the 52-week low of ₹69.75—on March 31 this year— the stock gained over 238% compared to its low point. Sterling and Wilson Solar was up nearly 3.5% in morning trade on the BSE on Thursday, while Forbes & Company was up 5%.

In contrast, key stocks among the Tata group showed mixed reactions on Wednesday. Tata Consultancy Services (TCS)— the group’s crown jewel—registered a 2.23% decline in its market value on September 23 at ₹9.25 lakh crore, compared to Tuesday’s ₹9.47 lakh crore. In absolute terms the washout was over ₹21,163 crore—over 3.7 times higher than the SP Group’s combined market value of ₹5,697.2 crore. On Thursday, TCS was down nearly 5% in morning trade on the BSE.

Among other Tata group stocks, Tata Chemicals and Tata Power saw an increase of 4.69% and 3.88% in their market capitalisation, respectively, on Wednesday compared to a day ago. And, Tata Steel and Tata Motors saw a daily decline of 3.46% and 1.31%.

The SP Group has stated before the Supreme Court that a separation from the Tata group is necessary due to the potential impact that the continuing litigation could have on livelihoods and the economy. “They stated that it was crucial that an early resolution is reached to arrive at a fair and equitable solution reflecting the value of the underlying tangible and intangible assets.”

Meanwhile, Mumbai-headquartered proxy advisory firm Institutional Investor Advisory Services India (IiAS) said that providing an exit to the SP Group will compel the Tata group to reduce its equity holding in TCS, pledge equity of its listed companies against debt, or allow an outside investor in Tata Sons. “Any of these options will reduce Tata Sons’ financial flexibility, heightening the performance pressures of the group,” IiAS said. “With the SP Group’s exit, the Tata group will no longer resemble its past.”

Particularly for the SP Group, IiAS noted that their need to sell their Tata Sons stake to raise capital does not come as a surprise; the Sterling and Wilson Solar episode, the recent default on debt, and the attempt to pledge Tata Sons’ shares are telling signs of the SP Group’s despair, the proxy advisory firm added.

On the Tata group, IiAS said that the group is uniquely structured: it is essentially a philanthropic body that runs a commercial business. Tata Trusts exerts control over Tata Sons, which exerts control over operating companies, several of which are listed and subject to scrutiny by external shareholders and accountable to a wider set of stakeholders, IiAS explained. “Tata Sons plays the intermediary role of pushing for performance from the operating companies and supporting the Tata Trusts’ goals.”

According to IiAS, with the SP Group severing its relationship with the Tata group, Tata Sons needs to buy out the SP Group’s 18.37% stake, which is conservatively valued at $20 billion. In the view of IiAS, there are two possible scenarios that may play out. First, for Tata Sons to buy out the SP Group, it will need to sell about 16% of TCS, at the current market valuations, bringing down its shareholding to 56% from the current 72%.

This will mean that the Tata group will continue to control TCS, but its cash flows from the company will be lower than before, IiAS noted. “For the past several years, and even now, Tata Sons ability to infuse equity and provide liquidity support to its businesses has been driven by TCS’ dividends and buyback.”

The sale of 16% of TCS, in IiAS’ opinion, will restrict Tata Sons’ financial flexibility and somewhat weaken its ability to hold the group together. “Alternatively, Tata Sons can sell its non-core assets and pledge the equity of its listed companies to raise debt.”

Traditionally, the Tata group has pledged shares of listed companies with the financial services businesses of the Tata group. “While the debt was raised, there has rarely been a concern over potential loss of control,” IiAS noted. “But the amount to be raised is significantly large in this case, and one that will need external (non-group) financiers.”

The second possible outcome could be roping in strategic partners or outside investors (private equity, sovereign wealth funds) into Tata Sons. “This will come with conditions attached,” IiAS warns. Outside investors in Tata Sons will want the company to go back to being a public company from its current private limited state. “The group’s structural constraints will likely come to the fore.”

Given the current gloomy scenario, there could be a certain and strong element of desperation in the action of both the rival groups. And, while the severing of ties is a visibly easy solution, implementing it will be a herculean task.