India August 11, 2009, 3:16PM EST

Tata: Still Reeling from Its Jaguar-Land Rover Buy

The Indian automaker's $850 million debt on the purchase contributed to a credit-rating downgrade. Meanwhile, the luxury-car market idles

Story Tools

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."