“People are free to air their own opinions, but I think time will prove who is right,” said Mr Ravi Kant, the then Managing Director of Tata Motors, in one of his many interviews following the clinching of the Jaguar Land Rover (JLR) deal in early 2008.

Despite the turbulent times that the European markets have been through since then, the JLR deal is beginning to pay off for Tata Motors.

When Tata Motors acquired JLR from Ford for about Rs 9,200 crore ($2.3 billion) in March 2008, many questioned the fit.

JLR's premium brands were positioned well above the company's Indian utility vehicle and passenger car offerings. Doubts were also raised as to what good these two brands would do in a nascent market like India.

Though JLR turned in a profit at the operating level in 2007, the Jaguar brand wasn't in great shape. The company was saddled with high costs and needed restructuring. It also required huge investments to keep it going, making the buyout quite challenging for Tata Motors.

However, Tata Motors stuck to its guns, citing long-term payoffs such as access to technology and western markets that the deal would bring .

Tough period

The year following the acquisition (2008-09) tested Tata Motors' mettle.

The burden of the $3-billion debt raised for the acquisition, a slowdown in the domestic auto industry and the onset of the global economic crisis made one wonder if the company had bitten more that what it could chew. From a consolidated net profit of Rs 2,168 crore in FY08, Tata Motors slipped into a loss of Rs 2,505 crore in 2008-09.

But the cloud had a silver lining. In 2008-09, amid the gloom, Tata Motors succeeded in cutting working capital needs by reducing inventory and receivables and extending supplier payment terms at JLR.

Cost reductions were also brought about by making engineering and capital spending more efficient. Fixed marketing and selling costs were pruned and labour costs trimmed by about 20 per cent. By March 2009, JLR obtained further financing from European Investment Bank.

Clearing debt

Back home, Tata Motors took steps towards repayment of the bridge loan obtained for the acquisition. In November 2008, it completed a rights issue of Rs 4,200 crore and sold stakes in group companies, swiftly paying down about $1.11 billion of the debt. In May 2009, the company raised Rs 4,200 crore through the issue of non-convertible debentures.

As the global economy recovered, things began to look up. In the October- December 2009 quarter, the JLR bottom-line showed profits. By March 2010, the company's consolidated profits had shot up to Rs 2,571 crore, with its debt to equity ratio (automotive business) down from a precarious 4 to a more moderate 2.05. Now, the debt to equity ratio stands at a comfortable 0.67.

At JLR, superior product mix from launches such as the new XJ and Range Rover vehicles, strong demand in developing markets and a favourable exchange rate environment aided the turn-around.

A few other factors have also helped the acquisition pay off.

One, Tata Motors has managed to keep the brand identity of JLR separate and undiluted; two, it has focused more on emerging markets such as Russia and China for volumes; three, it has moved a portion of the material and component sourcing and assembling of vehicles to low-cost countries like India and China.

That said, with a fresh round of global uncertainty and a moderation in volumes, the company's ride in the next few months may not be smooth.

Given the size of the acquisition, Tata Motors' fortunes would continue to sink or swim with JLR. But with the countless streamlining efforts, the ride could be less bumpy.

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