Tata: Still Reeling from Its Jaguar-Land Rover Buy

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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 reports for BusinessWeek from New Delhi.

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