What lies ahead for Tata Motors?

Tata Motors has been a big loser among frontline auto manufacturers, with the stock crashing by over 50 per cent since February 20. Concerns about the impact of the Covid-19 outbreak on the Jaguar Land Rover (JLR) business as well as on the already slogging domestic auto sales have kept investors on tenterhooks.

mid this, the company announced on March 27 its decision to hive off its domestic passenger vehicle (PV) business into a separate subsidiary.

JLR in troubled waters

The Covid-19 outbreak has put spokes in the nascent recovery in China for JLR and raised questions over the global demand for its vehicles in the near to medium term. After booking post-tax losses of £3,321 million in 2018-19, JLR returned to profitability in the September 2019 quarter and showed improvements in the three months ended December 2019 as well.

Although other geographies such as the US, the UK and Europe witnessed poor growth in retail sales, steps taken by the company in China, such as resetting inventory levels, redrawing its engagement with retailers and simplifying its incentive programmes, paid off.

China brings in about 20 per cent of JLR’s total retail volumes. Besides, ‘Project Charge’, directed at achieving cost savings of £2.5 billion by 2019-20, helped improve profitability for the JLR business. JLR exceeded this target by achieving £2.9 billion of savings even by the December 2019 quarter.

However, Covid-19 has cut short the good streak. Global sales volumes for the quarter ended March 2020 has dropped 31 per cent year-on-year. JLR has temporarily halted production at all its facilities outside China.

PV spin-off

On the domestic front, the auto industry has been in dire straits, with the general economic slowdown as well as the BS-VI changeover impacting offtake. Covid-19 has compounded this problem. For 2019-20, domestic PV sales volumes for the industry as a whole dropped by 18 per cent over 2018-19, while commercial vehicle (CV) sales fell by 29 per cent.

As of 2019-20, Tata Motors is the market leader in CVs with a 42 per cent overall market share (by volumes). But the same cannot be said of its PV business. The company has just 5 per cent volume market share in PVs (including cars, utility vehicles and vans), having never been able to beat competition from the likes of Maruti Suzuki or Hyundai. The 5 per cent share now is less than half the 12.4 per cent share it had a decade ago.

Even as the company’s fortunes have swung in tune with the performance of JLR over the last few years, it is noteworthy that the company has had its share of troubles on the domestic front.

Tata Motors clocked losses in three out of the past five years (2014-15, 2016-17 and 2017-18) in its standalone domestic business consisting of PVs and CVs. In hindsight, these were not extremely bad years for domestic auto sales in comparison with 2019-20 which has seen a shrinkage in sales volumes in every segment.

Aided by a turnaround programme put in place in 2018, as well as new vehicle launches, the domestic business did turn profitable in 2018-19. But then, it was the CV business that raked in the money. EBITDA margins for the CV business stood at 11 per cent in 2018-19, the same level as 2017-18. But for the PV business, the EBITDA margin was just 0.1 per cent (although up from -11.4 per cent the previous year). The PV business brings in 20-25 per cent of the domestic revenues.

This trend has continued into the first three quarters of 2019-20 as well, where the EBITDA margins for the PV business slipped into the negative territory for the September and December 2019 quarters. Considering the extraordinary circumstances necessitating the closure of production and sales in the March 2020 quarter, it can only get worse.

Sharper focus

Into fiscal 2020-21, the threat of a prolonged slowdown in vehicle sales looms large. And PVs — already on a slippery wicket — may need a sharper focus, more so with new players such as Kia Motors and MG Motor in the fray.

Besides, the catching on of shared mobility, the government mandate on adoption of electric vehicles (EV) and concepts such as autonomous and connected vehicles are challenging existing business models of PV manufacturers.

The changing dynamics and the limited scope for commonality with CVs on these aspects might have prompted the company to steer PVs into a separate business.

On this front, it is to be noted that the company carved out a separate vertical for EVs in mid-2018; this vertical will now become part of the PV subsidiary.

This apart, a separate PV business might also make it easier to find strategic alliance partners to move forward, much like the Suzuki-Toyota or the Mahindra & Mahindra-Ford partnerships.

Shared facilities, platforms and access to technology will be the benefits.

True, Tata Motors has JLR under its fold to help it walk through the future. But JLR is a different animal, operating in the luxury space.

Synergies with the predominantly small-car and cost-conscious Indian market is limited.

Tata Motors had earlier tried to tie up with PSA Peugeot Citroen and Volkswagen, but these alliances did not fructify.

Turning the spotlight on the domestic PV business also implies that Tata Motors could be preparing for a future independent of JLR.

COMMENT NOW