#985 Markets Brace For A Tough Week

The Core Report

The episode explores the intensifying boardroom conflict within Tata Sons regarding the reappponsibility of N. Chandrasekaran and the potential for

Key takeaways

• Tata Electronics is pursuing massive semiconductor projects, including a $3 billion facility in Assam and a $10 billion project in Gujarat with Powerchip.
• A boardroom clash has emerged between Chairman N. Chandrasekaran and Noel Tata, who represents the 66% controlling stake held by Tata Trusts.

Main topics

• Tata Sons Boardroom Battle
• Global Geopolitical Risks and Oil Prices

Notable quotes

The board and the management are effectively agents of the shareholders.

Conclusion

The episode highlights the precarious balance between political mandat

Transcript preview

Speaker 2 (0:02) Good morning. It's Monday, the 21st of September, and this is Govind Rajathiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, The Take. In 2024, Tata Electronics announced plans to build a state-of-the-art semiconductor assembly and test facility in Jagirot, Assam. at a cost of about 27,000 crore rupees or about $3 billion and projected that it would generate about 27,000 direct and indirect jobs in the region. So a neat 27 for 27. In the same year came an even grander gamble, a mega semiconductor fabrication facility in Dolera in Gujarat in partnership with Taiwan's Powerchip Semiconductor Manufacturing Corporation with a price tag of roughly 91,000 crore rupees or about over $10 billion. Now, complementing these mega projects, Tata Electronics and subsidiaries, have executed a string of aggressive alliances, partnerships and joint ventures, acquiring, for instance, the Indian manufacturing arms of Wistron and Pegatron to anchor their iPhone assemblies and other consumer electronics supply chains and manufacturing. And that brings us to the point, so to speak. These high-tech bets sit at the very center of what is shaping up to be a bitter battle for control at the top of one of India's oldest conglomerates. Tata Electronics, alongside the loss-making Air India and the e-commerce venture Tata Digital have emerged as the primary capital sinks for group holding company Tata Sons. Tata Electronics is also a fully owned subsidiary of Tata Sons. So is Tata Digital, owner of Big Basket and 1MG, which has swallowed about 26,000 crores in capital and piled up about 17,000 crores in losses. So the current boardroom clash, something that we are going to dive deeper into shortly between Tata Sun's chairman N. Chandrasekaran and Noel Tata, who represents the 66 % controlling stake held by the historic Tata Trust, is linked in good part to these massive balance sheet drains. As sources tell us, the core grievance is not merely that these investments were made, but that Noel Tata was denied the depth of information he requested, with major strategic moves and investments being presented instead as a fait accompli. Boardroom eyebrows have apparently also been raised over why capital was partly directed to remote Assam over established industrial ecosystems in Gujarat or Karnataka, where the other investments have gone. Now, there are two distinct trains of thought surrounding the friction that we've been seeing in the last few weeks. Critics of Chandra, as Chandrashekharan is called, within the Noel camp readily acknowledge his hard work and extraordinary track record at Tata Consultancy Services, or TCS, where as CEO, he lived on the road, quoting global enterprise clients almost every quarter. Yet they legitimately question whether he possesses the same instinct for volatile consumer-facing businesses like Air India or digital retail. The late Ratan Tata, who anointed Chandra, likely reasoned that a group chairman is not meant to be a hands-on functional CEO of individual units. Except, of course, that these current mega-investments sit directly on the Tata Sun's balance sheet. In retrospect, one might ask why TCS, the group's prodigal cash cow, did not simply run these digital and electronics forays. The answer is obvious. Public shareholders would have balked and sold off their shares in the IT services company. The second and more important train of thought concerns the geopolitical imperative driving the electronics outlay. The Indian government wants national champions like the Tata's to weigh in on critical capital-intensive sectors like semiconductors. The Tata's undeniably possess the institutional knowledge, technical ambition and balance sheet capacity to take on the challenge. But the bets are also exceedingly large, as we've discussed, and the commercial outcomes remain far from clear, at least at this point. Moreover, even when shareholders are conceptually aligned with the national interest, they may not all be on the same page regarding execution and disclosure. Even as Tarasand struggles with Air India, over 22,000 crores of fresh investments with 22,000 crores in losses, the government elsewhere has reportedly been nudging other domestic business groups to start airlines to address the industry capacity and the fact that there is a duopoly there. Now, all of this creates a fraught tension between political mandates and commercial realities. Steering Tata Sons, now or in future, will remain a precarious balancing act for precisely these reasons. And that brings us to the top stories and themes. The stock markets brace for a tough week with war intensifying in multiple theatres. Direct tax collections continue to rise. Did the Tata Sons board overstep its authority in reappointing Chandrashekharan? And which way could the Tata group battle for control evolve and what's at stake? Speaker 1 (4:34) This is a Coral Port with Govind Raj, Aity Raj. Speaker 2 (4:40) Few could predict the second-order effects of actions, including war. Who could have predicted even six months ago that the Russia-Ukraine war will intensify so suddenly after almost four years, with Ukraine now pounding refineries with drones, apparently 1,600 of them in the last day, the Houthis in Yemen taking control of critical territory, kicking out Saudi forces, and of course that oil prices, after showing some promise of retreating, are now back to highs and supplies of diesel are running dry in many parts of the world. Because Russia, who is a supplier of crude and refined product, never imagined its energy infrastructure would be under such severe attack. Or the Saudis, who could have not thought that the Houthis would bomb their land pipeline, which was to help them root oil following the logjam in the state of Hormaz, preventing ships from passing through. And of course, most importantly, that the US attack on Iran, along with Israel, seems to be the least thought-through military action of this century, particularly when it comes to knock-on effects on economies around the region, including India. Oh yes, and that interest rates will rise precisely because of all these misadventures we just spoke of. But that is where we are and will be for some time. And of course, if you know someone who got even 50 % of these events right, do let us know. Not surprisingly, JP Morgan, the investment bank, has said that it's struggling to predict how oil prices will be impacted by the US-Iran war, telling investors in an unusually candid note that we simply don't know how to model. The endgame. The bank said it assumed at the start of the conflict that there would be economic red lines that the Trump administration would be unwilling to cross and therefore it believed a deal could have been struck to open up the state of Orma shipping lane back in June. It said that such red lines included oil prices rising above $100 a barrel, inflation reaching 4%, gasoline topping $5 a gallon, and rates on 10-year government borrowing hitting 5%. Six months later, since the war began, says JPMorgan, many of these lines have been crossed, and yet the exit strategy is less clear, not more. And then President Trump has now armed himself with the powers to impose penal tariffs on imports from countries like India and China who buy oil from Russia. Possibly this will only be a negotiating tool, though for what is not clear. There is very little left on the table now and all the talks, including for a trade treaty between India and the United States, have pretty much gone nowhere. India has rightly pushed back, saying it will act in the interest of its 1.4 billion population, which means it will continue to buy Russian oil and take on the impact of any additional US tariffs. Better late than never, perhaps. With all this in the backdrop, the stock markets saw their sixth straight weekly decline on Friday last week, which is the longest losing streak since 2020. The Sensex swelled about 19 points to 74,294 and the Nifty 50 was up 75 points to 23,346. In the broader markets, the Nifty mid-cap and small-cap were up 1.2 % and 1.7 % each. Elsewhere, the National Stock Exchange's $2.3 billion IPO was fully subscribed on the second day of bidding and all eyes are now on the listing week. next week on the 24th. In the energy space, the French are also going back to Venezuela in a sign that the spoils of this new order are not going to be resting