Tata Motors: Old wine in an old bottle

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.

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.

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.

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 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.