Perfect Storm
Natarajan Chandrasekaran, chairman, Tata Sons would have hoped this year's annual general meeting of India's largest automobile manufacturer, Tata Motors, would pass off peacefully. Last year, Chandra, as he is better known, had to face the ire of the automaker's shareholders who had been denied dividend due to the company's deteriorating performance in the domestic market.
When Tata Motors finally closed its accounts for 2017/18, it had indeed done better consolidated revenues and profits were up, and the domestic business was showing signs of revival with reduced losses.
But just three days before the AGM was scheduled, the investors' mood had soured again. On July 31, Tata Motors announced the results for Q1 of 2018/19 and they were horrendous. It reported a consolidated loss of Rs1,863 crore. Jaguar Land Rover, or JLR, recorded a loss of 210 million pounds (approximately Rs1,890 crore), wiping off the meagre gains from the improved performance of the domestic business (see United We Stand).
JLR is not just another company for the Tata group. Till three years ago, JLR alone contriuted around 50 per cent of the groups total proftits. (JLR and TCS together contributed 90 per cent of Tata group's profits till 2015/16.After that, JLRs contribuion started falling). JLR contributes more than 77 per cent of the consolidated revenues of Tata Motors and till last year, all of its profits. In 2008, Ratan Tata had paid $2.3 billion (then roughly Rs9,200 crore) to buy the ailing luxury car maker from Ford Motors. It was the group's second biggest buy after Corus. JLR had turned around by fiscal 2010, and it was, along with TCS, holding up Tata group revenues and profits at a time when the other companies in the group were posting either average results or making losses. In fact, so good was the JLR performance that after the unceremonious exit of Cyrus Mistry as chairman of Tata Sons in 2016, one potential new chairman of Tata Sons was Ralf Speth, the head of JLR.
"The first quarter results reflected the impact of the duty reduction in China and planned stock reduction in the quarter. We continue to be impacted negatively by uncertainty over diesel
Both Speth and Chandra are hoping JLR operations turn around quickly because traditional auto makers are going through an upheaval due to the advent of electric vehicles and the ambitions of Tesla. They need lots of cash for developing EVs, and also for other innovations like autonomous cars, etc. As he was probably anticipating, several shareholders asked Chandra to divest JLR. "It is not fair to individual businesses to get shackled because of one unit's performance. We should, therefore, look at a demerger of the business," said a shareholder. Another asked the company to "do away with JLR if there are no returns", adding that it was dragging down Tata Motors with no sign of revival. Tata invested another 1 billion pounds on the two brands over and above the acquisition cost. In those crucial years, JLR spent 14 per cent of annual revenues towards R&D, outpacing the industry average of 5 per cent. The dividend came in the next few years as blockbuster products like the Jaguar F type and Range Rover Evoque, besides the refreshed versions of the existing portfolio ,were launched. The turnaround was quick. In 2015, an estimated 57 per cent of engines that power JLR's vehicles are diesel compared to 37 per cent for Mercedes Benz and 39 per cent for BMW. Post the 2015 diesel gate scandal, sale of diesel cars has been hit in Europe, where its share fell from 50 per cent to 44.8 per cent in 2017. It continues to fall every quarter. JLR's higher share in diesel 87 per cent in UK and the EU means this trend will continue to pinch it more. In the near and medium term, it has plans to bring down its dependence on diesel to 30 per cent while contribution of plug in hybrids and battery electric vehicles will go up from negligible right now to 20 per cent in the same period. For this, it has lined up 22 per cent or nearly 3 billion pounds of its overall investment corpus of 13.5 billion pounds over the next three years. "The focus is on passenger vehicles to win sustainably, to fill product gaps, while tapping white spaces and market opportunities that will emerge in the coming future," says Mayank Pareek, President, PV unit. "We want to outgrow the market in multiples. We currently cover 70 per cent of the market. By 2020, we will add 10 12 brands that will enable us to cover 90 per cent of the market." "I believe we will see more change in the next five years than in the past 50, but we are certainly up for it and shaping our destiny by continuing our over proportional investment in line with our Autonomous, Connected, Electric and Shared strategy," says Speth. These big ticket investments carry risks as nobody knows when the demand for electric vehicles will take off. While that apprehension applies to every car maker, JLR's main rivals, the three German brands Mercedes Benz, BMW and Audi are considered better equipped thanks to deeper pockets and stronger balance sheets. "BMW has done the most in the electric vehicle space with their I series in the luxury car market. They are in the same bracket as Tesla, Renault Nissan and GM as far as outright sales and number of products on offer is concerned," says Anup Bandivadekar, Program Director, International Council on Clean Transportation. "It would be a stretch to say Ratan Tata's legacy hangs on this. JLR has done well for 10 years, so the merits of the acquisition have been established," says Ashim Sharma, Partner and Group Head, Nomura Research Institute. "It is unfortunate that a company that has done so well for so long is facing challenges that are not of its own making. At the group level it is important for Tata Motors to stay strong on its feet. That will not reduce the dependence on TCS but at least ensure there is no addition to that."
