India

Tata: Still Reeling from Its Jaguar-Land Rover Buy


Is Tata Motors (TTM) out of the woods? The Indian company shot into the international limelight in 2008 with the troubled launch of its ultra-cheap Nano and its debt-loaded purchase of Jaguar and Land Rover from Ford (F). Since then, its fortunes have been unsure, as the slump in demand for automobiles has depressed its revenues at the same time Tata has invested nearly $400 million in the Nano launch and struggled to pay off the expensive $3 billion loans it racked up for the Jaguar/Land Rover shopping bill. All through the fiscal year ended March 2009 the company bled money, losing a record $517 million on $14.7 billion in revenues, just on its India operations. Jaguar and Land Rover lost an additional $510 million in the 10 months Tata owned it until March 2009.

So when the company announced a surprise quarterly profit July 28 of just under $107 million, investors took notice. Operating profit was up 11.4%, even though exports were down 43% and domestic sales were down about 10%.

But look closely at those numbers, and it turns out they are more revealing for what they don't include—for instance, earnings figures for Jaguar and Land Rover, which make up more than half of revenues for Tata. (Tata said it was still consolidating its books and didn't give a date for when the most recent Jaguar/Land Rover results would be available.) Or, for that matter, the fact that the company, in both India and the foreign markets, faces a huge R&D bill for the coming year, a bill that company Chief Financial Officer C. Ramakrishnan told analysts in July could be as high as $1.1 billion. Most of that will go to Jaguar/Land Rover, which has seen its market share and revenues plummet during the past year as demand for luxury cars nearly vanished during the recession.

S&P Downgrade On Aug. 4, Tata got a thumbs-down from a key ratings agency. Standard & Poor's took a look at Tata Motors' total outstanding debt—close to $7 billion, of which $850 million remains outstanding for the Jaguar and Land Rover purchase—and downgraded the company's credit rating to B, from B+. S&P, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP).

The Jaguar and Land Rover acquisition remains key to the future of Tata Motors, and for now the prospects appear mixed. If the U.S. and European economies pick up, as analysts expect, in late 2010 or early 2011, Jaguar sales could increase with the rest of the world's premium car markets. Indeed, the recently launched Jaguar XJ has already received good reviews, with its high-tech interior display that allows passengers to watch movies or surf online on a screen that doesn't distract the driver.

But Land Rover remains a more complicated issue, says Paul Newton, a London analyst with Global Insight. With SUVs falling out of fashion, Land Rover will have to invest in a new line of smaller, more economical cars. The company has already done some of this, adding aluminum panels to reduce weight and meet emissions requirements, but a reinvention of the entire product line could take years and demand hundreds of millions more in investment. "Has Tata got the time, the will, and the energy? The trick really is that they if they can keep in survival mode and get to a subsistence level in the next year or two, there will be a kick-up in the premium segment," says Newton. "While all that is happening, they need to be investing in smaller segments, more economical cars. And that means that for the next few years Tata will really just have to bite the bullet here." In India, meanwhile, there's some reason for optimism. Total sales rose 18% last month, riding a recovery for demand in India's passenger-car markets that has buoyed competitors such as Maruti Suzuki and Hyundai. But Tata, which is India's No. 3 player in passenger cars and No. 1 in commercial vehicles, hasn't released a new car model in nearly 16 months—since the Nano was launched in January 2008—relying mostly on updates to existing cars, while both Hyundai and Maruti have diversified their product lines, entering the lucrative premium hatchback category with models such as the Suzuki A Star and the Hyundai i20.

Demand for Premium Cars Stalls Tata has launched a partnership with Fiat (FIA.MI) under a 50-50 joint venture that is still to build up steam. Tata has announced a new line of trucks, but sales for those have not yet begun. It delivered just under 2,500 of the $2,500 Nanos in July, which is a good beginning, but analysts estimate the company has to sell some 250,000 of those cars to break even on the project. Indian customers have placed orders for 203,000 Nanos, and Tata has pledged to deliver 100,000 of the cars by the end of 2010.

And even though Tata Group Chairman Ratan Tata was all smiles at a press conference in July when the company announced it would sell Jaguars in India, nobody expects Jaguar sales in India to make up for the still-deflated demand for premium cars, especially in Western Europe and the U.S., which account for 65% of Jaguar and Land Rover sales. The company cut 300 jobs at a plant in Britain in mid-July, after it had racked up $510 million in losses in the previous 10 months, and hired outside advisers to help cut costs. "It is unlikely that Tata will see any cash flow or profits from Jaguar and Land Rover in the next two to three years," says Vaishali Jajoo, a Mumbai auto analyst at Angel Broking. "They've started rationalizing things like the product portfolio so they can concentrate on just a few of the products, but all the efforts they are making won't make a clear impact for quite some time."

These factors—slowing revenue growth, the size of the company's outstanding debts, and other information it declined to disclose—led S&P to decide on a ratings downgrade. "They are certainly vulnerable, especially because of global economic conditions, and the difficulties of the global automotive sector," says Suzanne Smith, the managing director for corporate and government ratings for S&P in South Asia. "Jaguar and Land Rover is certainly not looking like a good (acquisition) in 2009. But if you are buying for the long term, that's a question that will best be answered two or three years down the line."

Tata Motors declined to speak about the JLR operations. Debasis Ray, a spokesperson for Tata Motors, said the company doesn't comment on credit ratings, but pointed out that Tata had been paying down debt on the Jaguar/Land Rover purchase aggressively, listing a $1.16 billion payment from a rights issue and $840 million through a debenture issue. It also negotiated an agreement on May 27 to extend the end date on the remaining $850 million to the end of 2010.

Stock Up More Than 150% This Year The best news, though, has come from the stock market. Shunned by the bourses all through 2008, when Tata stock traded for months at a 50% discount to book value, the shares have soared this year along with the rest of the Bombay Stock Exchange. Tata Motors is up almost 152% for the year (and 48% just in the past 30 days) compared with a 52% rise for the 30-stock Sensex. Much of that momentum comes from commercial-vehicle sales, where Tata has 67% of the Indian market. With the Indian economy rebounding, commercial-vehicle sales, also seen as a proxy for economic health in India, have picked up. That department makes up as much as 60% of Tata's Indian revenues, since the vast majority of its passenger-car business is for cheaper, small cars.

The higher stock price opens up some options for Tata. The company has included in its fund-raising options such ideas as rights issues, sale of holdings in other Tata companies, and even stake dilutions. The Indian newspaper Mint reported Tata was on the verge of receiving guarantees from the State Bank of India and Citigroup (C) for a loan it expects to receive from the British government to help pay for some of the Jaguar and Land Rover expenses for the year. "Depending on the details of the loan, this could be good for them," says Smith, the S&P analyst. "Whatever money they can get for R&D they can save toward debt repayments."

On Aug. 11, Tata announced it had secured a $288 million loan from unnamed private banks and a guarantee that will allow it to access more long-term, soft loans from the European Investment Bank. All of the new loan will go directly to Jaguar and Land Rover. That should buy it some breathing time, but for now it is obvious Tata is still digesting both Jaguar/Land Rover and the expenses of the Nano launch. With little room for any more adventures, Tata will spend the next year or two paying down debt and struggling to increase market share in India and overseas, hoping the relatively uncrowded market for commercial vehicles will provide an anchor for steady earnings.
Srivastava is a reporter-at-large for Bloomberg News in London. He also reports for Bloomberg Businessweek.

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