Jaguar Land Rover woes add to challenges for Tata Group

Signs of a turn-around at its marquee Jaguar Land Rover (JLR) unit may not be enough to ease the challenges facing India’s oldest and most-storied business empire.

The Tata Group bought the British luxury car-maker in 2008 for $2.3 billion, and its lately become a drag on the salt-to-software conglomerate, racking up losses in three quarters through December.

Although Jaguar posted a net income of 119 million pounds ($151 million) this week, debt at owner Tata Motors Ltd has grown to almost $14 billion, as it struggles to tide over a demand slump in China, the worlds biggest auto market.

JLRs mixed fortunes have hit Tata -- whose wider group debt load bloated to at least $40 billion, the largest among India’s conglomerates -- just as it seeks to revamp the sprawling business. Making matters worse, a steel deal in Europe that would have eased the groups liabilities unravelled this month. Tata Motors and Tata Steel Ltd had a combined debt of about $27 billion, accounting for more than half of the total dues owed by the groups top 18 units. Tata Steel Bsl Ltd and Tata Teleservices Maharashtra Ltd, which are in the process of restructuring, had $9 billion of debt at the end of March 31.

Tata will have to take harsh decisions to mitigate the risk of debt in the long term for the conglomerate, said Arun Kejriwal, a director at KRIS, a Mumbai-based investment advisory firm. For now, Tata Motors and Tata Steel are trouble spots.

The twin developments mark the biggest challenge facing the 151-year-old group that ventured overseas with acquisitions more than a decade ago. Debt has become a defining issue for some of India’s biggest companies as the government cracks down on bad loans following a decade of expansion.

Tata snapped up JLR from Ford Motor Co, and steel-maker Corus Group Plc in 2007 for $12.9 billion in one of the biggest purchases by an Indian company, shedding the groups once-staid image.

After years serving as a cash cow, JLR hit a bump in Europe amid concerns over a disruptive Brexit and the industry’s shift away from fossil-fuel vehicles. The diminishing cash flows have raised questions as to how long Tata will hang on to what was once its crown jewel. The steel business was slammed by the financial crisis in 2008 and a commodity crisis eight years later, prompting the group to look for ways to dispose of the assets.

Tata Motors is not looking to sell its luxury-car unit and expects a turnaround in China in the coming months, the automotive groups Chief Financial Officer (CFO) P.B. Balaji told reporters on May 20. The profit in the fourth quarter came after JLR announced 4,500 job cuts globally and a 2.5 billion-pound savings program. Shares of the parent rose 1.1 per cent Wednesday in Mumbai after tumbling seven per cent in the previous trading session, the most since May 15.

Quality Perceptions

Even in its home market in the United Kingdom (UK), the automaker struggles with the perception of poorly made cars. In the 2018 reliability ranking published by What Car, JLR had four of the five worst performers among the 25 large and luxury SUVs surveyed.

The headwinds faced by JLR will also test the mettle of Chairman Natarajan Chandrasekaran, a 30-year veteran insider brought in two years ago to revamp the $110-billion group and fix faltering units. Patriarch and long-time chairman Ratan Tata hand-picked him to succeed Cyrus Mistry, who was ousted in October 2016 from the top job following a board feud. The goal of the restructuring is to eventually whittle down the 100 operating companies to a more-manageable number under 10 verticals.

The bad news from JLR was compounded by Tata Steel’s decision to give up on a proposed joint venture with German rival, Thyssenkrupp AG, amid antitrust concerns. The deal would have helped transfer some of its debt to the joint venture, allowing the Mumbai-based company to sharpen its focus on ramping up its profitable Indian business. The group is still looking for a partner, possibly outside Europe, an executive said in an interview last week.

As part of his restructuring plan, Chandrasekaran achieved a breakthrough last week. Tata Global Beverages Ltd., which owns brands such as Tetley tea and Eight O’Clock coffee, announced plans to acquire the spice, salt and lentil brands of Tata Chemicals Ltd. The newly-enlarged food company will take on a new name, Tata Consumer Products Ltd, and will have sales of nearly Rs 9100 crore ($1.3 billion).

Tata Sons is simplifying businesses and such moves will unlock Tata Global Beverages’ valuations, said Chakri Lokapriya, chief investment officer at TCG Asset Management in Mumbai.

However, a fix for Tata Steels European business and its 2.2 billion euros ($2.5 billion) in debt is still on Chandrasekaran’s to-do list. For JLR, Tata is exploring strategic options, including a potential stake sale.

Recent channel checks in China indicated progress on ground has been slow, with dealers still incurring losses on JLR sales, Jefferies analyst Arya Sen wrote in a note on May 20.

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