9/12/2018 Tata Motors: Old wine in an old bottle

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BYSTANDER

Tata Motors: Old wine in an old bottle

Tata Motors market capitalisation is down 55% from its peak. If you go by history, the time to buy
may just be round the corner.

By T. SURENDAR,  Sep 1, 2018

6 min read

N. Chandrasekaran, chairman, Tata Group at the unveiling of the H5X concept car at Auto Expo 2018. 

Image: Sanjay Rawat

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One of my earliest stories on Tata Motors was at the turn of the century, when the
company had just posted its biggest ever loss of Rs 500 crore. At that time, the
company did not have a full time CEO. Ratan Tata personally oversaw its operations.
Having pushed sales hard in the years leading up to its ADR offer in 1996 and the
subsequent slowdown of the economy, its dealers had built up massive inventory which
wouldn’t sell. Tata Motors saw its market capitalisation drop from Rs 1,500 crore in
June 2001, Rs 50 crore less than where it was at the same time in 1990. In the
intervening years, it touched a peak of Rs 11,800 crore in June 1997.

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Back then, it was a fairly simple company to analyse–nearly all of its business came
from making commercial vehicles and the Indian market for all kinds of trucks was
about 80,000 vehicles. The car business was already on stream but no one cared much
about it. Much to the dismay of analysts, the company wouldn’t say how many cars it
sold and it also wrote off the initial research expenditure so that it didn't weigh too
heavily on its profitability. Everything about Tata Motors was about the commercial
vehicles business.

Also Read Tata Motors posts surprise loss in first quarter

Also Read Tata Nano drives downhill with zero exports over last six months

At the turn of the century, the business was suffering so badly that the company, which
prided in its leadership building skills, had to hire an outsider, Ravi Kant, to run its
commercial vehicle business. Kant came from Philips and took six months to
understand and draft his first strategy, which consisted of a 90-page presentation that
laid out the turnaround strategy. There was no turning back and Kant later took over as
managing director. Kant had pared costs, invigorated the sales team and later
introduced the Tata Ace, a runaway hit, that drove up sales and profits–perhaps the last
dream run for the commercial vehicles business. 
In January 2007, TML's market capitalisation touched Rs 37,000 crore, while its sales
touched Rs 40,900 crore in 2008 and its profits stood at Rs 2,300 crore, the last year
before it started reporting consolidated sales of Jaquar Land Rover (JLR). When TML
acquired JLR at the peak of booming global markets for $2.3 billion from Ford Motors,
TML was valued at Rs 29,000 crore.

Shortly after the JLR acquisition, the global finance world went into a tizzy with the
Lehman crisis and Tata couldn't find lenders to finance the deal. By November that
year, as the hard facts about finances required for funding the mammoth acquisition
became evident, its value was dropped to Rs 5,600 crore.

Again, Kant was despatched to put JLR's house in order, which required cutting down
costs without sending home people, an agreement that Tata gave Bill Ford when signing
the deal. The year after the acquisition, Tata Motors reported its second loss of the
decade. Its net loss stood at Rs 2,465 crore though the domestic business had turned in
a profit of Rs 1,016 crore. Its market value stood at Rs 9,400 crore shortly after
announcing its first consolidated sales of Rs 81,500 crore. Thanks to the acquisition,
TML became the biggest company in the group and it still continues to be.

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What followed was nothing short of spectacular. Though not many in Bombay House,
the Tata Group's headquarters, understood the luxury car business, the TML board
gave a free hand to Ralph Speth, the JLR boss to run his business. In the next five years,
over $20 billion flowed into it for new product design and models. The company
expanded its sales operations in China and the U.S. By March 2015, Tata Motors sales
shot up to Rs 2,67,700 crore and JLR’s annual profits stood at Rs 18,800 crore. By
January 2015, TML was worth Rs 165,000 crore.

But the annual results for 2015 were spooked by a massive loss in domestic operations
which reported their highest ever loss of Rs 4,600 crore on the back of slowing
commercial vehicle sales and sliding passenger vehicle sales. Valuations fell more than
50% by February 2015, but started rising again as the local business picked up and
JLR’s growth showed no signs of ebbing. By September 2016, the TML stock was
rocking again, setting a new record of Rs 170,000 crore in market value.

Cut to the present, TML announced its biggest ever quarter loss for the first three
months of the current financial year ending June 30. A sharp slide in JLR volumes
wrecked havoc even though the local commercial vehicle business posted Rs 1,100 crore
profits. Quite naturally, TML market valued has whittled down to Rs 65,000 crore.

The prognosis for JLR is stark as analysts say it is bound to further suffer the effects of 
Brexit, which will make U.K.-manufactured goods expensive in the rest of Europe.
Nearly all of JLR factories are in the U.K., though it is fast changing. A recent report by
equity research firm UBS says the on-going wave against diesel in Europe will further
dent JLR’s prospects and there is bound to be additional pressure on sales and
profitability. JLR is expected to have debt on its books from being cash-positive, further
denting its profitability. All this means that TML's valuation is surely headed south
from here. In the coming months, it won’t be surprising if TML’s value falls below Rs
50,000 crore.

But, therein lies the opportunity. JLR has already began several corrective measures–
by investing in a new plant in Slovakia to get around Brexit challenges, reducing its
diesel vehicles proportion to 30% from 55% over the next few years and also launching
an electric vehicle to keep up with the times. JLR’s Speth hopes to end the year
profitably but given his past record, you can expect the business to re-align itself in the
next 18 months.

In the domestic business, a lot of things are finally falling into place. The CEO and
managing director, Guenter Butschek, has bought a lot of order to the house, which had
again gone astray for lack of leadership. After Kant, TML saw two CEOs who had brief

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terms, leaving several projects unfinished. Butschek decided to start on a clean slate,
systematically putting a new management hierarchy and systems in place. Three years
later, his efforts are showing results with both the commercial and passenger vehicles
business showing a lot of traction.

The commercial vehicle business is headed by Girish Wagh, who was handpicked by
Kant to manage two critical projects within the group–the Nano and the Ace. Wagh
knows to cut costs, develop new products and keep deadlines like nobody else in the
group, and with his over 15 years of experience on the shop floor, knows both
engineering and commercial functions to smoothly execute a strategy. The passenger
cars business is in the hands of Mayank Pareek, who cut his teeth in India’s biggest car
company, Maruti Suzuki. Pareek, while in Maruti, launched several new products
including the runaway hit Ertiga. Under his leadership, after a long hiatus, the
passenger vehicle business has started gaining market share and its latest introduction
Nexon, a compact SUV, is among the top five car models sold in the country. You can
expect the commercial vehicles business to further ramp up when the economy picks up
steam.

Since the acquisition of JLR, the sum of parts of TML’s businesses has never added up.
In the last decade, when JLR did well the domestic business pulled down the overall
performance and the reverse is happening currently. As JLR set its business in order 
and the two able hands steer the local business to perform better, there is a possibility
that TML may fire on all cylinders. It may well be a Black Swan event but definitely
worth taking the risk for.

Also Read Tata Motors’ electric future

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