Tata vs RIL: Fortune favours the brave

Doing business in overseas markets is fraught with risks; more so when companies enter new markets through leveraged buyouts. But in some cases, the risk taken turns out to be well worth it.

Consider the Tata group. On the face of it, its bravado looks misplaced, as some of its big global bets are backfiring. Its investment in Corus Group Plc.—the largest ever acquisition by the group—is practically a write-off. Now, Brexit threatens to spoil things for Jaguar Land Rover (JLR) and the European operations of Tata Consultancy Services Ltd (TCS).

But despite these setbacks, the group’s market capitalization has grown by leaps and bounds vis-a-vis Reliance Industries Ltd (RIL), India’s second largest business group by market capitalization. RIL, it should be noted, has played relatively safe and stayed away from large global acquisitions.

In January 2008, when Indian markets had peaked ahead of the financial crisis, Tata group companies had a total market capitalization of Rs.3.14 trillion. This was roughly three-fourths the size of RIL, which had a market capitalization of Rs.4.14 trillion. Now, at over Rs.8 trillion, the market value of Tata group companies is about 2.6 times the size of RIL companies.

Of course, much of this is because of the splendid run of TCS’s shares, which accounts for 62% of the group’s total market value. But even after excluding TCS, Tata group companies have done far better than RIL companies. In January 2008, these companies had a combined market value of Rs.2.11 trillion, or about half RIL’s market value. Since then, they have outperformed RIL by about 88% and have nearly caught on in terms of their absolute market cap.

Much of the outperformance is because of Tata Motors Ltd’s extremely successful acquisition of JLR. But as it turns out, even the other Tata group companies put together have outperformed RIL.

Apart from some big global bets paying off, the Tata group also benefits from having separate companies for each industry vertical. RIL, on the other hand, houses diverse businesses such as refining and petrochemicals, telecom and retail in one entity. Investors typically apply a conglomerate discount in such cases. The group can unlock value by listing non-oil and unrelated businesses.

To be sure, it’s not that RIL hasn’t taken risks, even though it hasn’t made large global acquisitions. Its initial investment in its telecom venture is over $22 billion, far higher than the $12 billion Tatas spent in acquiring Corus.

Who knows, if it can get its pricing strategy and execution right, it may well outdo the Tata group on the valuation front in a few years. For now, though, it is clear that the risks taken by the Tatas have paid off.