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PROFILE
The company's 24,000 employees are guided by the vision to be "best in the manner
in which we operate, best in the products we deliver, and best in our value system
and ethics."
Established in 1945, Tata Motors' presence indeed cuts across the length and
breadth of India. Over 5.9 million Tata vehicles ply on Indian roads, since the first
rolled out in 1954. The company's manufacturing base in India is spread across
Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar
(Uttarakhand) and Dharwad (Karnataka). Following a strategic alliance with Fiat in
2005, it has set up an industrial joint venture with Fiat Group Automobiles at
Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains.
The company is establishing a new plant at Sanand (Gujarat). The company's
dealership, sales, services and spare parts network comprises over 3500 touch
points; Tata Motors also distributes and markets Fiat branded cars in India.
Tata Motors, the first company from India's engineering sector to be listed in the New
York Stock Exchange (September 2004), has also emerged as an international
automobile company. Through subsidiaries and associate companies, Tata Motors
has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar
Land Rover, a business comprising the two iconic British brands that was acquired in
2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South
Korea's second largest truck maker. The rechristened Tata Daewoo Commercial
Vehicles Company has launched several new products in the Korean market, while
also exporting these products to several international markets. Today two-thirds of
heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In
2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish
bus and coach manufacturer, and subsequently the remaining stake in 2009.
Hispano's presence is being expanded in other markets. In 2006, Tata Motors
formed a joint venture with the Brazil-based Marcopolo, a global leader in body-
building for buses and coaches to manufacture fully-built buses and coaches for
India and select international markets. In 2006, Tata Motors entered into joint
venture with Thonburi Automotive Assembly Plant Company of Thailand to
manufacture and market the company's pickup vehicles in Thailand. The new plant
of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the
Xenon having been launched in Thailand in 2008.
Tata Motors is also expanding its international footprint, established through exports
since 1961. The company's commercial and passenger vehicles are already being
marketed in several countries in Europe, Africa, the Middle East, South East Asia,
South Asia and South America. It has franchisee/joint venture assembly operations
in Kenya, Bangladesh, Ukraine, Russia, Senegal and South Africa.
The foundation of the company's growth over the last 50 years is a deep
understanding of economic stimuli and customer needs, and the ability to translate
them into customer-desired offerings through leading edge R&D. With over 3,000
engineers and scientists, the company's Engineering Research Centre, established
in 1966, has enabled pioneering technologies and products. The company today has
R&D centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea,
Spain, and the UK. It was Tata Motors, which developed the first indigenously
developed Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998,
the Tata Indica, India's first fully indigenous passenger car. Within two years of
launch, Tata Indica became India's largest selling car in its segment. In 2005, Tata
Motors created a new segment by launching the Tata Ace, India's first indigenously
developed mini-truck.
In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, which India
and the world have been looking forward to. The Tata Nano has been subsequently
launched, as planned, in India in March 2009. A development, which signifies a first
for the global automobile industry, the Nano brings the comfort and safety of a car
within the reach of thousands of families.
With the foundation of its rich heritage, Tata Motors today is etching a refulgent
future.
Milestones
• Rollout of the one millionth passenger car off the Indica platform.
2008 • Indica Vista – the new generation Indica, is launched.
• Tata Motors' new plant for Nano to come up in Gujarat.
• Latest common rail diesel offering- the Indica V2 DICOR, launched.
• Indigo CS (Compact Sedan), world’s first sub four-metre sedan,
launched.
• Tata Motors unveils its People's Car, Nano, at the ninth Auto Expo.
• Tata Motors signs definitive agreement with Ford Motor Company to
purchase Jaguar and Land Rover.
• Tata Motors completes acquisition of Jaguar Land Rover.
• On 26th April 2010, Tata Motors sold its 4 millionth Commercial Vehicle.
CASE
Tata Motors is the largest manufacturer of commercial and passenger vehicles in
India. In 2008 Tata Motors acquired from Ford Motor Company the two luxury car
brands Jaguar and Land Rover (JLR). The stock market's immediate reaction to the
JLR acquisition was negative. In the few days following the announcement of the
JLR acquisition, the stock price of Tata Motors underperformed the Sensex index by
about 5%. Balaji Jayaraman of Morgan Stanley said, buying Jaguar and Land Rover
was “value-destructive given the lack of synergies and the high-cost operations
involved”.
However, Tata Motors' officials expressed confidence in the deal's long-term
potential. Managing Director Ravi Kant said the company was "pretty confident that
Jaguar and Land Rover will add positively to our consolidated balance sheet."
"People are free to make their own opinions, but I think time will prove who is right,"
Kant said. Instead, the stock performance of Tata Motors worsened over the next
year, and its shares underperformed the Sensex index by 36%. It is, of course, true
that this period coincided with the recent economic turbulence in the world, and a
significant downturn in the global automotive market.
Ford purchased Jaguar and Land Rover for $5 billon and sold them to Tata Motors
for about half that price after several years of operating losses. It is difficult to see
how Tata Motors would have greater synergies than Ford with JLR. There are no
significant synergies between Tata Motors and JLR. The two companies operate in
different geographic markets, selling cars with different technology to very disparate
customer segments. Around the same time, Tata Motors was launching its much-
publicized car the Tata Nano, the world's cheapest car. Kant issued a clear directive:
keep these vehicle lines separate and distinct. "Each is going to chart its own future
and own course,” he says. "The conflict would come if we were to try to put them
together." Tata has experience taking over global brands, and its strategy has been
to let each business run its own entity, with modest input from the home office. This
is consistent with the view that there are minimal synergies between the two
companies.
Tata Motors financed the acquisition with debt significantly increasing its risk profile.
The company's ratio of EBITDA earnings to interest paid, an inverse measure of the
firm's debt risk, used to be in the range 9 to 11 during the years 2005-2007; after the
acquisition, the coverage ratio dropped to 5.9 in 2008. By comparison, the coverage
ratio for some successful auto companies in 2008 was: 86 for Toyota, 45 for Nissan,
and 31 for Audi. As mentioned earlier, Tata Motors had problems in refinancing he
bridge loan in 2009.
While discussing the disappointing performance of Corus and JLR,
Ratan Tata conceded in an interview with The Sunday Times in 2009 that, with
hindsight, he might have gone too far too fast, but that nobody saw the crash
coming. “If one had known there was going to be a meltdown then yes [Tata went
too far] but nobody knew. Both the acquisitions were made, I would say, at an
inopportune time in the sense that they were near the top of the market in terms of
price.”Even if we accept the view that the timing of the JLR acquisition was
unfortunate, there is still no positive rationale for the acquisition. Lacking synergies,
Tata Motors was behaving as a conglomerate in acquiring JLR. There is much
evidence that such conglomerate diversification does not create shareholder value;
in fact, conglomerates on the average trade at a discount to their break-up value.
This situation is made worse if Tata Motors overpaid for the JLR acquisition, even if
inadvertently. ICICI Securities values JLR at only about $850 million in 2010, in
contrast to the acquisition price of $2.3 billion.
REVIEW
Tata motors purchase of JLR was part of Tata Group’s ongoing strategy of
internationalisation. It can leverage group-wide competencies in various companies
such as TACO, TCS, Corus & Tata Technologies to manage JLR.
Impact:
Cost Synergies
Tata Auto Comp (TACO) - TATA group has a a rich ecosystem of JVs with leading
players in Auto ancillary space held through TACO, TCS, Corus and Tata
Technologies have varied competencies in the Auto space.
Backing up JLR
TACO
– Flagship company of TAMO’s ancillary biz
– Manufacturing, Engineering and Supply chain management
– Customers include Global OEMs like Ford, Daimler, Chrysler, FIAT.
INCAT
– Provides services like supplier programs, consulting services and global sourcing
– Major customers are Chrysler, Ford, GM, Honda and Nissan
Risks
The key risk after this acquisition would be the performance of JLR. Any drop in
profitability would have a material impact on TAMO’s consolidated financials.
A prolonged downturn in CV demand would stretch domestic profitability and
cashflow.
Any failure to launch the new products within the forecast time frame is also a risk to
the forecasted valuation of the company estimates.
PERFORMANCE
Tata Motors Ltd has reported results that are way beyond the Street expectations.
Consolidated net profit stood at Rs1,989 crore, compared with a median estimate of
net profit of Rs980 crore, based on a Reuters poll. But, even while analysts’
estimates were much lower, the markets seem to have anticipated the good results.
Tata Motors’ share price rose by as much as 15% in the run-up to the results in the
past week.
In less than three years after its acquisition, Jaguar Land Rover has metamorphosed
from a millstone around Tata Motors’ neck into its crowning jewel. In the June 2010
quarter, JLR division accounted for nearly 70% of the company’s net profit and over
60% of its revenues on the consolidated basis. This was more than what the market
has expected and the stock is up by nearly 150% in the past two trading sessions.
JLR benefited from an improvement in its pricing power and a favourable exchange
rate in the US dollar and the euro. The two worked in tandem and resulted in a sharp
60% jump in JLR revenue per unit to around £38,000 in June 2010 quarter
compared to the £23,800 a year ago. With the raw material costs remaining benign,
it led to a sharp improvement in the division’s operating margin and its reported net
profit of £221 million (`1,613.3 crore) in the first quarter as against a net loss of £64
million(`467crore a year ago.
JLR profitability was also aided by strong retail sales, which helped it spread its fixed
costs such as employee expenses, interest and depreciation on greater number of
units and thus, improve its margins. The management expects this trend to continue
as both Jaguar and Land Rover continue to report strong off-take in all its key
markets in Europe, North America, Russia and China. In June 2010 quarter, JLR
retail sales were up 25% with growth really marked in China with 104% growth over
the corresponding period a year ago.
JLR is likely to remain the biggest contributor to the group profits in forthcoming
quarters as well even as Tata Motor’s domestic operations continue to suffer from
lower profitability. In June 2010 quarter, Indian operations reported an operating
margin of around 9% of net sales, one of the lowest in the past five quarters. This is
was due to a combination of factors, including 2% hike in excise duty in the previous
budget, a small increase in raw material costs, upfront costs related to new model
launches and faster growth in low margin products such as Nano. Another trigger for
the company is likely moderation in its interest expenses as it repays its accumulated
debt from planned equity raising of around `4,700 crore and internal accruals. All this
means that June 2010 quarter numbers are only a precursor to the good days
ahead.