India Watch : Land Rover and Jaguar drag on Tata

Joe Leahy in Mumbai, Financial Times, 2nd July, 2009

Just when many thought Tata’s run of bad luck might be nearing its end, India’s largest conglomerate was this week forced to shift the venue of the glamorous launch of its newly acquired Jaguar and Land Rover brands in India. The event had to be quickly switched to the group’s Taj President Hotel in Mumbai after its flagship property, the Taj Mahal Palace and Tower Hotel, caught fire the night before.

Ratan Tata, Tata’s Chairman, nevertheless remained upbeat about the marques he bought from Ford last June for $2.5bn. “It was a terrific decision that we took to bid for these two brands and own them,” he told reporters. “We are going through a downturn today that has unfortunately somewhat condemned Jaguar and Land Rover in perception, [but] that perception is very wrong.”

However, even as Mr Tata rushed off to meet super-rich and celebrity clients at the new Mumbai showroom for the marques, most found it difficult to share his optimism. Tata Motors a few days earlier unveiled consolidated financial results that included Jaguar and Land Rover for the first time and showed that, thanks to the marques, India’s largest automotive maker had suffered its first loss in at least seven years.

While Tata Motors’ Indian business, which relies mostly on truck sales, made a profit, the group was dragged into a consolidated net loss of Rs25.1bn ($524m) by a 32 per cent fall in sales volumes at Jaguar and Land Rover combined. Worst hit was Land Rover with a fall in sales of 39 per cent, while Jaguar fell only 4 per cent, rescued by the release of a popular new model.

“The numbers are extremely disappointing,” said Mohit Arora, Senior Director at JD Power, the car consultancy. “But [it is] not surprising seeing the way the auto firms are doing globally. It is a wake-up call for [Tata].”

The numbers are extremely disappointing but [it is] not surprising seeing the way the auto firms are doing globally. It is a wake-up call for [Tata].” Mohit Arora, Senior Director at JD Power and Associates

More worrying for the markets was the fact that Tata Group has been forced to pour £821m ($1.35bn) into its new acquisition to cover losses. The purchase has also left the group with a debt overhang, with 50 per cent of its Rs163bn of debt due by 2011.

The crisis could eventually prove helpful for Tata as it seeks to improve profitability at the marques. The company has undertaken a cost-cutting programme, already slashing 2,000 positions, and is considering more job cuts. The crisis has also boosted the rationale for speeding up offshoring of production, with plans to increase sourcing of components from cheaper emerging markets from 23 to 35 per cent of the total.

The company said it is seeking a new loan from the European Investment Bank of £340m . This and other financing being negotiated should plug any future gap, Tata executives said. However, analysts believe that, at least in the short-term, Jaguar and Land Rover will be millstones around the neck of Tata Motors.

Nomura estimated that the two marques would need an injection of Rs43.8bn this financial year and, even after assuming a sharp recovery, would continue to require additional cash. “Jaguar and Land Rover may continue to destroy value for Tata Motors’ shareholders, either in the form of significant debt-raising at a standalone level or through equity issue,” the brokerage said, maintaining a sell on the stock.

While shareholders are hurting, Mr Arora urged patience on making a judgment on the deal. “With Tata’s good record in running companies, a five to 10-year time should be given.”

Domestic brokerage Angel Research warned that Tata Motors’ net debt was now 5.8 times equity, “which we believe is substantially high and would keep its cash flow under pressure at least for the next couple of years”.

The question persists whether Tata Motors should have completed the acquisition at all. While most analysts believe Tata’s launch of the Nano, the world’s cheapest car, fitted its strategy of providing low-cost vehicles for India, few have seen the logic in the Jaguar and Land Rover deal.

Tata Motors’ stock remains down more than 25 per cent in the 12 months since the deal was completed, even as the wider market has risen. Ravi Kant, the outgoing Managing Director, has argued that the marques were simply a victim of the global slowdown but many question why Tata did not pull out of the deal given that the crisis was well under way in June when it completed the transaction.

While shareholders are hurting, Mr Arora urged patience on making a judgment on the deal. “With Tata’s good record in running companies, a five to 10-year time should be given.”

[Source: Financial Times]

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