The Rise Of The Wildcat - Jaguar

Published by MBA Skool Team, Published on September 22, 2014

The year was 2007. Greed and euphoria had gripped the markets and the bourses were rising to the sky. In the midst of an ebullient equity market, the M&A (mergers and acquisitions) space was really heating up. Deal Street was witnessing deals worth billions of dollars, as alliances and takeovers were consummated. However, even as the economy was surging and the automotive sector booming, one particular auto giant was hurtling towards financial disaster. Ford, the American giant, was losing millions of dollars and it was in the process of implementing a do-or-die turnaround plan christened ‘One Ford’. The order of the day at the Detroit headquarters was to cut Ford’s excess flab, jettison the unprofitable divisions and strengthen the arms of the business that held some promise for the future. After months of deliberation, Ford decided that it needed to get rid of Volvo, Jaguar and Land Rover.

When Ford turned to the task of divesting its loss-making British marquee brands, Jaguar and Land Rover, its merchant bankers, who had been mandated with the task of finding buyers for the two brands, drew up a list of companies who had thrown their names into the hat. After a protracted bidding war for the two auto-makers, the signing of a $2.3 billion deal saw Tata Motors gain unrivalled control of the 2 brands, which were merged to form a combined entity, Jaguar Land Rover (JLR). The deal, which was personally spearheaded by Ratan Tata, came hot on the heels of Tata Steel’s $12 billion acquisition of Corus Steel. The Tata Group’s buyouts, both of which were completed a few months before the economic crisis, were expected to catapult the Tata Group’s subsidiaries into the big leagues. In fact, the markets expected Corus to be the easier turnaround and there were even talks of JLR being a white elephant, a millstone around Tata Motors’ neck. But just as the financial apocalypse showed in late 2008, the markets as usual would turn out to be dead wrong.

When the closing months of 2008 set in, Wall Street collapsed and it took the global automobile industry down with it. And the timing of the JLR deal couldn’t have been worse. Demand for JLR’s cars receded in the USA and Europe, as did that for Tata Motors’ commercial vehicles, a bread-and-butter segment for the company. As the company’s cash flows began drying up, Tata Motors’ working capital pressures reached critical levels and its debt levels began mounting. Even as the company’s debt reached an alarming level of over Rs. 20000 crores, thousands of workers were laid off at JLR’s British plants and production cuts were undertaken on the commercial vehicles front. Tata Motors’ declared an annual loss of a little over Rs. 2500 crores and its stock went into a freefall. The company had to go to its parent, Tata Sons, with a begging bowl, for funds just to sustain itself. Even to this day, rumours still persist of the Tata Group’s cash cow, Tata Consultancy Services (TCS), having chipped in financially to keep Tata Motors going during its time of crisis.

In the midst of all its internal turmoil, Tata Motors did have a saving grace. The Nano, which was pushed as the world’s cheapest car, was widely touted to be the next big thing that would enable the company to capture the numero uno position in the Indian automobile market. However, after a glitzy and publicized launch, the Nano failed to live up to the hype. Its image as the world’s cheapest car didn’t go down too well with the masses. Furthermore, incidents involving Nanos catching fire began to call into question the safety of Tata Motors’ vehicle for the masses. While the Nano wasn’t a runaway hit, it did manage to rake in a decent number of orders that helped shore up Tata Motors’ finances in the short run. That, along with the cash infusions from the parent company, was what kept Tata Motors going in 2009 and 2010. Another factor that bogged down the company was its joint venture with Fiat in India. Fiat, which was in the hunt for a wide dealership network, had jumped into bed with Tata Motors and the JV was losing money (refer ‘Wheels Of Change’). Ultimately, both Fiat and Tata Motors decided to go their separate ways. The year 2011 was when Tata Motors’ engine really began to rev up. And it was powered by the combined thrust of a dragon and a wildcat.

Enter The Dragon. In 2011, just as the Eurozone began sliding into a deep fiscal crisis, China was already on the road to recovery. As its economy slowly began to return to its 7-8% growth rates, China’s automobile sector began to see a quick recovery. The country’s luxury car market grew at a much faster pace and as a result, JLR found itself in a sweet spot. The oddity is that in China, Jaguar is perceived to be a more prestigious brand than even BMW and Mercedes-Benz. And that oddity began to work in Tata Motors’ favour. Moreover, Tata Motors had spent millions of pounds over the past two years towards design, R&D and technological upgrades and those initiatives were slowly starting to reap rich dividends. The XF and the XJ sedans from Jaguar’s portfolio notched up market-leading sales numbers over the next two years and Land Rover’s Freelander and the new Range Rover Evoque all helped to steer Tata Motors back to the glory of its heyday.

After clocking consolidated losses of close to Rs. 7000 crores for 3 years on the trot, Tata Motors raced back into the green in 2011, lead from the forefront by JLR. The bourses gave the company a thumbs-up and sent its stock skywards. But if the top brass at Tata thought that it would be a smooth ride for the company from that point forward, they were sorely mistaken. With both industrial production growth and passenger cars’ offtake slowing down in India, Tata Motors’ commercial vehicles and passenger cars segments began facing the heat. The impact of the slowdown was so drastic that the company had to resort to clampdowns on its production and cost-cutting measures, efficiency and rationalization became the order of the day. With the company’s commercial vehicles segment coming to a virtual standstill on the back of a lacklustre economy, the passenger vehicles segment had to keep the entity’s engine running. While JLR was doing brisk business, Tata Motors’ domestic cars segment was having difficulty keeping pace. The company was going along with a less-than-exciting portfolio of offerings, with the Aria being the only new launch at that time. The company sorely lacked a presence in the small cars segment and the compact SUV market, both of which were witnessing buoyant growth. Tata Motors, which was once India’s second largest automobile maker by market share was rapidly losing ground and slipping down the rankings to a dismal sixth place. Soon enough, it began to reflect on the company’s bottom line.

In FY13, Tata Motors’ domestic cars business posted a loss, as did the commercial vehicles unit. JLR continued to grow its sales numbers and contributed to over 100% of the combined entity’s profits. Even today, while JLR sells anywhere between 30000 and 40000 units each month and is by far the golden goose for Tata Motors, the domestic business is all set to post a loss exceeding Rs. 1000 crores for the financial year ending in March 2014. The company already has a turnaround plan in place for its laggards, which hinges on a recovering economy and new launches. Tata Motors is all set to launch a new range of Nanos, along with new offerings in the small car and compact SUV segments. It is also in the midst of developing new platforms to introduce a range of new vehicles that would encompass all the existing segments, while taking advantage of the cost efficiencies and synergies that arise from the common platforms.

All these initiatives would kick in from 2015. Tata Motors’ scrip has jumped by more than 15 times from its 2009 lows, largely due to the turnaround and the stellar show put up by JLR. Of course, in recent times, the poor showing by the domestic business has only dampened the performance of the stock. As far as JLR is concerned, a third of its volumes come from the Asia-Pacific region and it is growing its sales at a 25-30% rate each year. While JLR may not really be a threat to Audi, Mercedes-Benz and BMW in the Indian market in the immediate future, the British subsidiary does have exciting growth and expansion plans for the Indian market. But all that, of course, would be contingent on the financial recovery and health of Tata Motors, as a consolidated entity. All that, from here on, is largely dependent on the turnaround plan that the company plans to put into gear in 2015. The year 2015 may be a little while away but Tata Motors continues to chug along. For now, its engines are powered by the roar of a Jaguar.

This article has been authored by Ronak Ravindran from SPJIMR

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