What does N. Chandrasekaran elevation as CEO of Tata Sons mean?

The tiny district of Namakkal in Tamil Nadu may not be familiar territory for most Indians staying north of the Vindhyas. But this is the small district in Tamil Nadu where Mr. Natarajan Chandrasekhar, currently CEO of TCS and the next Chairman of Tata Sons, was born. The journey of Chandra has been a meteoric rise through the Tata ranks. Becoming the Chairman of Tata Sons is special for a variety of reasons. In the last 150 years of its existence, Tata Sons has only had 6 chairmen. Chandra will be the 7th. Of the 6 chairmen of Tata Sons, four who held the longest tenures were Tatas; Jamshedji Tata, Dorabji Tata, JRD Tata and Ratan Tata. The 2 non-Tatas, Mr. Saklatvala and Mr. Mistry had relatively shorter tenures. So effectively Chandra will be only the third non-Tata and the first person outside the Parsi community to hold the coveted position of Chairman of Tata Sons when he takes charge on Feb 21st, 2017…

Why Chandra was the right man for the big job…

Chandra has been a career-TCS person since he joined the company back in 1987. It was only in 2009 that Chandra took over as the CEO of TCS, filling up the shoes of two larger-than-life predecessors’ viz. F C Kohli and S Ramadorai. Year 2009 was also a crucial year for the world markets as global business was just coming out of the worldwide recession caused by the sub-prime crisis. BFSI was going through a major churn and Indian software industry was at a major inflection point. Traditional IT spending from BFSI, Telecom and Oil was either flattening or reducing. Digital was emerging as the next big story and the focus was beginning to shift towards Analytics, social media, mobility and cloud. It is to the credit of Chandra that over the last 8 years, TCS not only widened its leadership over other large software companies but also managed the growth with best-in-class operating margins of over 26% and relatively lower levels of attrition. The ability to handle this paradigm shift was the first quality that made Chandra the right man for the job.

The Tata group today is more global than Indian with nearly 69% of its overall revenues coming from outside India. TCS already accounts for over 60% of the group’s revenues and the group’s market capitalization. The leadership role at TCS has given Chandra the best ringside view of how the global business environment was evolving. To position effectively in the global market in every product be it, software, steel, automobiles or chemicals requires a 360 degree view which Chandra was best positioned to provide.

Thirdly, in the entire Tata-Mistry episode, the importance of the chairman of Tata Sons being in sync with the Tata culture was sharply underscored. With nearly 3 decades in TCS, Chandra probably understands the nuances of the Tata culture much better than any other contender for the job. After all, having built the most profitable cash cow of Tata Sons the Tata way, Chandra was the right choice.

Lastly, age was on Chandra’s side. The board of Tata Sons realizes that at 53, Chandra still has another 15 good years ahead of him and that is required to give stability and continuity to strategy and planning at Tata Sons. Other contenders like Mr. Manwani were a good 10 years older and that is also one factor that has worked in favour of Chandra. It must also be said to the credit of the Tata Sons board that by choosing a non-Tata and a non-Parsi, they have made a deliberate and conscious shift away from tradition. From the point of professionalizing and ensuring continuity, this is the right move on the part of Tata Sons.

Big challenges ahead for Chandra…

There are 6 major challenges ahead for Chandra once he takes over at the helm of Tata Sons on February 21st…

• The corporate battle between the Tatas on the one side and Mistry and Wadia on the other side is far from over. There is, probably, a temporary respite but neither side are likely to back away. With an 18% stake in Tata Sons, the Shapoorji Pallonji family continues to be a formidable force in Tata Sons. It will be Chandra’s challenge how he handles this delicate issue of ownership and control along with Ratan Tata in the next few months.

• The revenue mix of Tata Group is highly skewed. Out of the 30 listed Tata companies, TCS and the JLR division of Tata Motors account for over 80% of profits and market value. This makes the group overly dependent on just these 2 businesses. This anomaly has to be gradually resolved.

• Realignment and focus is necessary on what businesses to stay in and what businesses to move out of. These are hard decisions and these will be difficult decisions, considering the sensitivities involved

• Succession planning is a major challenge for each of the Tata group companies. Most institutional investors have expressed concern over this matter and want a more credible game plan and time table by which time investors will be able to rest assured about the longevity of strategy in each of the group companies.

• Selling the Tata story to the global institutional investors will be another big challenge for Chandra. Of course, having headed TCS during its most difficult times, Chandra is best poised for the job. The truth is that most Tata group stocks have either been erratic stock market performers or have underperformed their peers. Companies like Tata Tele, Tata Steel and even TCS of late have faced problems creating wealth for their shareholders.

• Last, but not the least, Chandra will have to seriously look at the cost structures and ROE of each business line in each of the Tata group companies. He will need to identify ways to cut costs and improve ROE so that it eventually translates into better valuation for these companies.

To sum it up, managing a conglomerate with revenues in excess of $105 billion across every conceivable business will not be an easy task. But Ratan Tata was of similar age when he took over at the helm of Tata Sons. Over the next 20 years, the market cap of Tata group multiplied manifold. That could be a good and optimistic starting point for Chandra!