JLR steers Tata Motors fortune

Last Updated: Mon, Nov 26, 2012 05:13 hrs

The timing of the acquisition couldn't have been worse. Just days after Tata Motors bought Jaguar Land Rover for Euro 1.15 billion (about Rs 9,200 crore) four years ago, the world's financial markets collapsed. While funds became scarce and sales plummeted, Tata Motors posted a huge loss. Though domestic sales were robust, what brought the company down was the shoddy performance of the British car division.

The roles seem to have been reversed. In fact, if JLR had not paid a dividend of Rs 1,312 crore to Tata Motors in the second quarter of the current financial year, the parent company would have declared a loss - a point made by chief financial officer C Ramakrishnan while declaring the company's results.

JLR is now the crown jewel of Tata Motors, contributing 67 per cent of revenues and 81 per cent of operating profits in FY12.

In the last financial year, the launch of Range Rover Evoque helped the company boost its sales by nearly 30 per cent to 310,000 units. The company reported a 37 per cent rise in its revenue to Euro 13.5 billion (Rs 1.10 lakh crore) and a 43 per cent jump in its net profit to Euro 1.48 billion (Rs 12,062 crore) in FY12 – more than the acquisition price in 2008.

Obviously, Tata Sons director R K Krishna Kumar is elated. "In the long run, shareholders have benefited from our daring moves.... JLR being one of them," he said.

The company now has a 30-product actions (products with variants) planned for the next three to five years that has the potential to expand the market and boost profit. All-aluminum product line-ups targeting new customer segments and better geographical penetration are also in the works.

Bumpy beginning, then turnaround

The deal hasn't been without hiccups. Analysts' initial worry about the deal was that the JLR acquisition increased Tata Motors's debt-equity ratio 3.03 in 2008-09 from 1.1 a year ago. Just after taking over, Tata Motors faced its toughest challenge when it incurred a Euro 300 million loss in the first year, with JLR sales slumping by a third. This was followed by labour problems and negotiations with the British government for access to loans and guarantees. However, in August 2009, it raised Euro 469 million through global depository shares. It was the beginning of the turnaround story.

Since then, the company has raised money through several bond issues, which allowed it greater strategic flexibility to invest in modernisation of plant, product development, and expansion into emerging markets.

The company turned profitable in 2010-11, when it reported Euro 1.03 billion

When current CEO Ralf Speth joined the company about two years ago, Tata Motors retained most of the management, including the heads of marketing, product development and production. They continue to oversee the execution of its product strategy expansion and investments.

Crown jewel
According to analysts' estimates, investment in the company has trebled and cash flow quadrupled since the acquisition.

The fourth-generation Range Rover Evoque, under a new light-weight aluminium architecture platform and assembly line, was launched at the Paris Motor Show in September 2012. The new platform has reduced the vehicle's weight by 350 kg, with significant implications on fuel efficiency, power to weight, carbon emission, and pricing. It helped JLR offer smaller engines on existing Range Rovers, without significant loss of power for the vehicle. The new Range Rover base variant now comes with a three-litre engine option vis-a-vis the 4.4-litre option in the past. It is now priced at Euro 23,700 (Rs 20,95,401) onwards in London.

"Making a vehicle light while maintaining safety and comfort is extremely important for fuel efficiency. This kind of product strategy certainly helps bring more customers and helping the brand loyalty grow," said Abdul Majid, leader (auto practice) at management consultancy firm PricewaterhouseCoopers.

The company is now expected to launch the other flagship Land Rover brand, Range Rover Sport, from the new platform in September 2013, followed by Discovery in September 2014. Another Land Rover brand, Defender, is also expected to eventually move to the new platform.

This will help the company strengthen its position in the smaller engine, lower-priced vehicle segments, where rivals BMW and Daimler have higher exposure, over the next three to four years. Also, two-litre engine options in Jaguar are expected to be launched in the next three to four years, which will further accentuate its position in this segment.

Simultaneously, the company is also planning to enter more premium segments with the new F-Type sports car and upcoming 4WD sedans under the Jaguar brand, which will help its brand equity. Besides, it is working on new propulsion systems including hybrid and electric vehicles for introduction after 2015.

The company is also planning to boost its sales with greater penetration in markets such as China, which is the third largest and one of the fastest growing markets for luxury cars. In 2011-12, China contributed 16 per cent of sales volume, while North America and the UK had 21 per cent and 18 per cent market share, respectively. JLR has now formed a joint venture with Chery Automotive to develop, manufacture and sell vehicles for the Chinese market.

Aggressive investment
JLR has now developed operational and financial strength to invest in the next phase of growth. The company plans to invest Euro 2 billion (Rs 17,700 crore) annually for the next two to three years, according to the estimates of global brokerage Goldman Sachs.

It has hired 3,000 employees at its three manufacturing sites in the UK over the past 12 months to support new product initiatives.

According to the consolidated balance sheet, Tata Motors had cash and bank balances of Rs 18,238 crore at the end of March 2012.

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