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Tata takes on the World

ndia is a land of stark contrasts, and that’s reflected in the vehicles of Tata Motors, the country’s biggest auto maker. Tata makes trucks, buses and a lineup of cars ranging from the tiny $2,900 Nano to luxurious Jaguars and Land Rovers that can cost more than $100,000. But while the Jags and Rovers are cruising nicely at home and especially abroad, the Nano is stuck in first gear, and won’t be able to hit top speed without the injection of a lot more cash. And that, along with worries about the immediate outlook for truck sales and the potential for dilutive share-rights offerings, has been putting pressure on Tata’s stock this year.

Tata’s American depositary shares, which trade on the New York Stock Exchange, have been hammered. The ADSs, each of which represents one India-traded share, change hands around $22—25% below where they ended 2010 and 40% under their 52-week high. The shares could slide a bit more, but the decline has already made them enticing for long-term investors.

TATA, THE WORLD’S THIRD-LARGEST bus manufacturer and fourth-largest truck maker by units sold, is part of the tea-to-steel conglomerate Tata Group, various units of which are publicly traded, although the parent company is not. With its mix of commercial vehicles and high- and low-end cars, Tata Motors offers a play on both the developed and developing worlds.

During the global auto depression that followed the 2008 financial crisis, the Mumbai-based outfit bought Jaguar and Land Rover from Ford Motor (F), in a deal that now looks like a steal. For $2.3 billion, Tata got two well-known luxury marques into which the U.S. auto giant had poured billions of dollars over the previous decade. Now, Tata is reaping the benefits of Ford’s model-development and factory-improvement programs.

The combined Jaguar and Land Rover operations have quickly become the linchpin of Tata Motors’ global auto ambitions, and now account for 80% of its earnings, with commercial vehicles accounting for much of the rest. Much to everyone’s surprise, “JLR has helped transform Tata from an Indian auto firm to a global luxury-car maker,” says Ashvin Chotai, director of Intelligence Automotive Asia, a London consultancy.

In late April, Jaguar Land Rover, as the unit is now known, began showcasing its newest and smallest model, the $44,000 Range Rover Evoque, at motor shows around the world. The sport-utility vehicle, which will go on sale in some markets in September, is the first major model launched by the venerable British car group since it joined Tata.

The car’s relatively small size makes it ideal for the congested roads of China, whose auto boom is driving Tata. Demand for luxury cars there ballooned to more than 750,000 units last year, and could more than double by 2015, as more of the nation’s huge population becomes affluent. The “luxury-car market in China is red-hot, and profit margins of BMW (BMW.Germany) or Jaguar Land Rover are far higher in China than in any other market in the world,” says Michael Dunne, a veteran auto analyst with Dunne & Co. in Hong Kong. “In China, the propensity to spend on cars goes way beyond function. Affluent Chinese are buying cars principally to project their social status, not just as a mode of transport. Over 90% of the people buying luxury cars in China are paying cash.”

JLR’s global sales grew nicely last year on the back of 95% sales growth in China, now its second-largest market. China already makes up some 13% of JLR’s sales, and analysts expect it to be its biggest single market by the end of 2012. Sales in Russia and other emerging markets are also helping boost profitability. In China, the company has a backlog of 20,000 Range Rover orders.

By focusing more on emerging markets than on developed ones, Tata has shrewdly let Jaguar Land Rover capitalize on the comeback in global luxury-car sales over the past two years. As their new owner, Tata has also kept a very tight leash on costs, which has helped improve margins. JLR’s cash-flow margins—as measured by earnings before interest, taxes, depreciation and amortization (Ebitda)—rose four percentage points over the past year, to 15.8%. Tata Motors’ earnings are likely to advance 9% in the current fiscal year, which ends next March, to $3.45 per ADS ,from $3.17 last fiscal year. In fiscal 2013, a gain of at least 12% is likely, aided by JLR’s momentum, especially in China.

THE OVERALL CHINESE AUTO MARKET has climbed from 2.5 million units a year in 2002 to more than 17 million now, and some analysts had held it out as a template for India. But “though demand for automobiles will be fairly robust over the next five years, investors shouldn’t bet on India seeing a China-like steep growth curve,” warns Chotai. While there are favorable economic fundamentals, good demographics and ample financing, India’s motoring infrastructure is poor. And with car prices already low, India is unlikely to get the huge boost that China did a decade ago, when car prices there dramatically slid after the industry’s tax structure was simplified.

Little wonder, then, that Tata’s fledgling mass-market passenger-car division—which sells a variety of autos, but mostly subcompacts—is struggling.

Particularly disappointing has been its biggest home-market bet, the Nano. Aimed squarely at lower middle-class Indians who until now could afford only low-powered motorbikes, the Nano is selling fewer than 10,000 units a month. In May, sales plunged to just 6,515; in June, to 5,451. The breakeven point—above which Tata would start making money on the car—is estimated at 250,000 to 300,000 a year, or 20,833 to 25,000 a month.

At $2,900, the minicar is cheap, but maybe not cheap enough. (It originally was supposed to sell for $2,500.) “You can buy a low-end Maruti Suzuki for just 30% more than a Nano, and that’s a real car,” says Amit Mishra, an auto analyst with Macquarie Securities in Mumbai.

Chotai, the London-based consultant, says that the Nano really isn’t just a car, but rather, a part-philanthropic emerging-markets social experiment, and part audacious long-term gamble by Tata Chairman Ratan Tata (who declined to speak with Barron’s).


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