IPO set to unlock value in group coompanies holding Tata Sons stake

Nine Tata companies, including both listed and unlisted entities, collectively own 12.8% of Tata Sons. This stake has remained unchanged for the past three decades, despite the lack of any exit strategy or public valuation. The upcoming IPO, in line with Reserve Bank of India's upper layer investment company rules, could potentially unlock value for these Tata Group companies. Shares of the listed Tata companies, such as Tata Steel, Tata Motors, and others, are anticipated to rise in value on Tuesday.

Tata Chemicals, in particular, has gained attention. A March 2024 estimate by Spark Capital suggests that Tata Sons' stake in Tata Chemicals is valued at 80% of the company's own market cap, equivalent to Rs 15,594 crore. Some analysts now assert that this value exceeds Tata Chemicals' own market cap, positioning it as the most promising listed proxy for value unlocked by the IPO.

The listed Tata companies acquired their stakes in Tata Sons through a 1995-96 rights issue. Tata Trusts, the promoter of Tata Sons, did not participate due to a law prohibiting public charities from investing in commercial entities. The listed shareholders, however, argued that the investment would prove profitable once Tata Sons went public.

Ratan Tata, chairman of Tata Sons at the time, believed that the investment would yield returns upon the IPO. Former Tata director Nusli Wadia contended that the cross-holdings merely served to strengthen Tata Trusts' voting power in Tata Sons.

In 2020, during a legal dispute with former group chief Cyrus Mistry, Tata Sons cited a valuation estimate by chartered accountant Y H Malegam, which valued Tata Sons at Rs 3.8-4.3 lakh crore. Mistry disagreed, asserting that his calculations placed the valuation at more than double that amount. Since then, the portfolio of Tata Sons has undergone significant changes, with Tata Electronics becoming a standout performer, Air India remaining loss-making, and the market value of its listed holdings increasing substantially, although Tata Consultancy Services (TCS) has faced some challenges due to AI-related concerns.

Market analysts have put the current value of Tata Sons at Rs 14 lakh crore. However, one analyst noted a crucial caveat: while Tata Sons is subject to a holding company discount, Tata Investment, which is itself a holding company, has historically traded at a premium to its underlying investments rather than a discount.