On 29 November, Singapore Airlines and Tata Sons said they plan to merge Air India and Vistara, with Singapore Airlines holding 25.1% of the merged entity. The merger is expected to be completed by March next year.
“The board (of Tata Sons) has to decide on the exact amount to be invested by the Tata group in Air India-Vistara, among other initiatives. A significant portion may be set aside for joint investment in Air India-Vistara,” said one of the two people cited above, both of whom spoke on condition of anonymity.
Both people said the investment would primarily be used for fleet expansion; Increase your market share by more than 30%; increase in the quality of customer service; Increase global slot facilities and enjoy the highest flight service quality around the world.
“The investment by Tata Sons will be made from the income received in the form of dividend income from TCS (Tata Consultancy Services) and other group firms. Around 80% of Tata Sons’ dividend income comes from TCS. Aviation is one of the major businesses under Tata Sons. The capital to be invested in the entity is equivalent to 50-60% of the dividend income from TCS in FY2023,” said the person cited above.
As part of its strategy, Tata Sons may start capital infusion in tranches in the first quarter of FY24.
“Most of the plans are ready with regard to the funding requirements for various segments of the aviation business. Once regulatory approval for the merger is received and allocations are formally budgeted, the work will begin. A total investment of about $3 billion in phases should be enough to get started. Further funding could be done after FY24 if current investments work as per plan,” the person had said earlier.
According to regulatory filings, Tata Sons earned total dividend income of around $2.92 billion from TCS in FY23 alone.
Tata Sons is the flagship investment holding company of the Tata Group. Public charitable trusts hold 66% of the share capital of Tata Sons, which is registered with the Reserve Bank of India as a major investment company.
According to a Crisil report dated December 8, 2022, Tata Sons’ financial strength comes from its ability to raise funds through the sale or pledging of equity shares in its large portfolio of investments, primarily TCS. Tata Sons has Tata Group Ltd, Tata Steel Ltd and Tata Power Co. Ltd has equity stake in several other Tata Group firms. As on 6 December 2022, the market value of Tata Sons’ investments was 11 trillion, of which TCS accounts for about 80%, according to Crisil.
Even though the dividend is Tata Sons’ income and not part of any plan to fund specific projects, there are several initiatives under the Tata group that need the money, according to the two people. He added that the aviation business is one of the primary initiatives expected to garner a major chunk of Tata Sons’ FY23 dividend income.
A Tata Sons spokesperson said the company did not wish to comment. TCS, Air India and Singapore Airlines did not respond to queries.
The first person said, “The merged entity could receive at least $1.5 billion from Tata Sons, besides an investment of about the same amount from Singapore Airlines.”
Apart from the aviation business, Tata Neu could invest a significant portion of its FY23 dividend income in renewable energy, semiconductors and the group’s ambitious digital initiative, according to the two people.
For Tata Sons, TCS, India’s largest IT and software services company, has been a cash cow for the past decade.
Tata Sons, which owns about 73% of TCS, earned dividend income 19,832 crore in Q3 of FY23. is in addition to the income from the two interim dividends of 8 per share each, announced in the last two quarters.
According to both the people, Tata Sons may also use the second part of the dividend income from TCS to strengthen the Tata New app. Tata Digital has taken several initiatives to give Tata New a makeover so that it can compete with the likes of Reliance Industries Limited’s JioMart, Amazon and Flipkart.
However, it is not known how much Tata Sons will set aside for its business ventures other than aviation.
“The company (Tata Sons) remains adequately resourced, providing sufficient cash flows to service debt repayments along with regular dividend/buyback income from TCS. Annual income was exhausted by dividend/buyback 20,000 crore in the last financial year. CRISIL Ratings believes that Tata Sons will continue to manage its liabilities and cash in a prudent manner. The CRISIL report said the proposed investments in this financial year are likely to be funded largely through dividends of group companies.
On 12 January 2022, the TCS board approved a proposal to buy back 40 million equity shares of the company for an aggregate amount not exceeding Rs 18,000 crore, or Rs 1.08% of its total paid-up equity share capital. 4,500 per share.
In recent times, Tata Sons has invested in Tata group companies such as Tata Motors, Tata Steel and Tata Power through preferential issues and rights issues.
“It is also investing in new growth businesses such as Tata Digital, Tata Electronics and Air India. Crisil said, over the past few years, the Tata group has been reorganizing businesses by operating them under different groups to enable synergies and simplify its structure.
Examples include the full merger of the defense businesses of various group entities into Tata Advanced Systems Limited and the acquisition of the branded food business of Tata Chemicals Limited by Tata Consumer Products Limited (formerly Tata Global Beverages Limited). Similarly, Air India (through Tata Sons’ wholly owned subsidiary TALES Pvt Ltd) incorporated Air Asia India Limited as its wholly owned subsidiary.
“The management is focused on enhancing the contribution of digital, electronics and aviation businesses (Air India, Vistara, AirAsia) to group profitability, which may require funding from Tata Sons for growth capital in some of the entities . CRISIL Ratings believes that investments will be funded largely through dividend/buyback proceeds, with standalone debt stable or even declining,” CRISIL said.
Earlier, Tata Sons had reduced its dividend income to invest 5,882 crore in Tata Digital in April 2022.
In addition, the Tata group has plans to enter the semiconductor industry, for which a portion of Tata Sons’ dividend income will be used, according to the two people.
On the aviation front, Air India and Vistara will need approval from India’s Director General of Civil Aviation, the Competition Commission of India and the Reserve Bank of India, apart from several countries, to complete the merger.
In addition, the merger requires the approval of the National Company Law Tribunal and the redemption or conversion of certain outstanding liabilities by the Airports Authority of India to Tata Sons (and/or its affiliates) on or before the filing of the Scheme of Merger.
Vistara is a 51:49 joint venture between the Tata Group and Singapore Airlines. It usually takes six months for all necessary approvals.
As per the proposed merger agreement, Singapore Airlines’ 49% stake in Vistara will become about 20.6% in Air India after the merger. Singapore Airlines will pay a cash amount of Rs 2,058 crore at the time of completion of the merger to acquire an additional 4.5% stake. It has also agreed to invest up to Rs 5,020 crore for various plans put in place by the Tata group in FY23 and FY24 for fleet modernisation, aircraft induction and other objectives related to Air India operations.
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