The Indian 4-wheeler industry is currently witnessing a steady recovery in sales. With lockdown restrictions being eased gradually, families across India are looking at the prospects of buying a car again. And the automobile companies are looking to seize this very opportunity with their amazing offers and discounts. And out of all these companies, analysts are reporting that Tata Motors is outperforming in domestic sales. But is this enough? Let us look at some of the new developments surrounding one of our favourite stocks, Tata Motors.
Brief Profile of Tata Motors
Tata Motors initially began as a truck manufacturer. They entered into the passenger vehicle segment in 1988. The initial growth of this company was only possible through the sheer determination and vision of the legend himself, Ratan Tata. Some of its very famous and widely sold cars in the ’90s such as Tata Indica, Tata Sumo, and later the Tata Nano were also built under his leadership.
The company also wanted to make its mark in the commercial vehicles industry and has been largely successful. Look around you, a reasonable number of trucks and buses on the road would be manufactured by Tata Motors.
One of the biggest deals by Tata Motors was the acquisition of United Kingdom-based Jaguar-Land Rover (JLR) for $2.3 billion (now about Rs 17,000 crores) from Ford, in 2008.
Recently, the company has launched several widely popular cars such as the Tiago, Tigor, Hexa, Harrier, and Altroz. It has been exporting these cars to more than 125 countries. With all these new cars in the market, we would expect the company to perform quite well, right? However, the results have been very underwhelming.
Fun Fact: Tata Indica was the first-ever car to be fully manufactured using India’s resources. The car was completely based on Indian technology and parts. Within two years since its inception, Indica occupied the number one spot in the Indian market.
Over the last few years, Tata Motors has been disappointing investors with poor financial performance. Even after the ambitious acquisition of JLR (who is bleeding money) and new car launches, Tata Motors has not been able to improve its sales growth. In fact, it is one of the biggest loss-making enterprises in the Tata Group of Companies. To understand these factors in-depth, let us look at some of the important figures:
As we can see, the sales data reported by Tata Motors over the past 3 years does not seem to be very promising. In fact, the Covid-19 pandemic has caused a major impact on its production and sales activities during the current financial year as well.
Chery Jaguar Land Rover is the company’s China operation and is a 50-50 partnership between JLR and Chinese state-owned automaker Chery. While the China operations are doing comparatively better, Jaguar Land Rover (JLR) has not been doing great over the last few years elsewhere. At the same time, they are carrying all the burden for Tata Motors, as JLR contributes 79% to the total revenue, as of FY20. The cars of both Jaguar and Land Rover have superior capabilities and are often used as official government cars in many countries. However, their legacy alone is unfortunately not able to sell more cars.
From the graph shown below, we can also understand how small the contribution of its Commercial Vehicles and Passenger Vehicles are. So Tata Harrier, Nexon, Altroz, and many other cars of Tata that you see on the road, contribute only a meagre 4% of Tata’s entire revenue! So no matter how many ever news articles you see about Tata Motors’ domestic sales improving, do not forget that it forms only a tiny fraction of the company’s revenue.
Jaguar Land Rover. The Loss-Making Enterprise
Jaguar-Land Rover has been the parasite that is actually killing Tata Motors from the inside. The subsidiary of Tata Motors was affected by the impact of falling diesel sales, due to global pollution scandals. The uncertainty of the United Kingdom exiting from the European Union (Brexit) had also led to higher costs, falling sales, and production halts. In May 2019 (FY ’19-’20), JLR had reported a loss of £3.6 billion (~Rs 34,424 crores)! So, the subsidiary that was meant to push Tata Motors to greater heights, has been causing more harm for them.
Since 2017, China has become the biggest market for JLR. As we discussed earlier, the operations there are backed by a Chinese Government-owned entity, Chery. However, even with this support, the sale of vehicles that had been reported from the country had declined by more than 44%, within 2 years. This has caused a lot of panic inside the company, and Tata Motors is finally opening its eyes, and trying to focus on improving JLR’s financial position.
The very deep losses of JLR have also affected their consolidated figures. Also, the full effects of the lockdown were seen only after the March results. So let us look at how they did between July and September this year.
Q2 Performance in FY21
Tata Motors reported its Q2 results on 27th October 2020. The consolidated net loss increased to Rs 307.3 crore in the quarter ended September, as compared with a net loss of Rs 187.70 crore in Q2 of the previous year (FY ‘19-’20). The revenue from operations declined by 18.19% year-on-year (YoY) to Rs 53,530 crore, from Rs 65,431.95 crore a year ago. Many experts have reported that the result has been far better than what was expected, even though the losses increased.
During the July-September quarter this year, the company has reported a growth in passenger vehicle sales by almost 162% YoY. Market share in the passenger vehicle segment has increased to 7.9%, but is still way behind Maruti Suzuki and Hyundai. The sales numbers for October have also increased 79% YoY but volumes are negligible compared to market leaders. The company themselves have attributed this growth to pent-up demand, wherein those people who did not buy cars during the lockdown (as they did not have to travel) are buying cars now. This cannot be considered as the organic growth of the company. Another important fact to be mentioned is that Tata Motors is the only carmaker to register a growth of 2.63% during April-September 2020. The car industry as a whole had fallen by 34% during the same period. This shows how the PV business is currently doing good.
Jaguar Land Rover has also made a strong recovery in Q2. It reported a 53.3% quarter-on-quarter (QoQ) growth in terms of sales. It has sold more than 1 lakh units during the quarter. The Chinese economy is doing well, and hence the company has also improved its sales in China. But the question remains- will they be able to maintain their recovery?
The Tata Group has been continuously aiming to improve its hold in the automobile sector in our country. We know that India’s passenger vehicle sector is dominated by Maruti Suzuki, which has more than 50% market share and is clearly the undisputed king. And even though Maruti Suzuki tries to portray itself as an Indian company, it is Tata and its subsidiaries who have been the Global Indian brand.
Earlier this year, the Board of Directors of Tata Motors had agreed to form a separate entity for its passenger vehicle (PV) business. Within one year, all the relevant assets, intellectual property, and employees would be transferred to this new entity. The production of electric cars will also become a priority for the company.
Following this, a major statement was made by Tata Motors on 25th October. The auto company announced that they are actively looking for a partner, for enhancing its passenger vehicle business. The collaboration will be aimed at reducing costs and improving business with new product launches. For this to become a reality, Tata Motors would require huge investments from outside the company.
“The whole purpose of subsidiarisation is to actively look for a partner because this is a reality for all of us that a collaboration can unleash a bigger potential in the next decade which is going to see significant investments in new technologies and regulations,” – Shailesh Chandra, Tata Motors President (Passenger Vehicles Business Unit).
From these new developments, we can see that Tata Motors is gearing up to redefine its position in the automobile industry. The company had announced the restructuring of its passenger vehicle segment almost 3 years ago. But now, concrete steps are being taken. It would take serious planning and execution to cover all losses that have been incurred. The passenger vehicle business would require a huge boost, but this can only be possible through adequate investments and huge collaborations. Through the proposed strategic partnership, Tata Motors would have to make sure that all resources are fully utilized. Also, do bear in mind that JLR is burning cash for the company. This is also the company that is supposed to provide the highest share of the revenue for Tata Motors.
We do know that the auto industry can be very competitive. It would be very interesting to see how Tata Motors is executing its plans, and trying to bring a positive change to their sales figures. Will they be able to move up on the leaderboard of top car sales in India? Even if they lead in Indian markets, will this make a difference when JLR is still making losses? Do not forget that Jaguar-Land Rover has always been a bad charm for the companies that owned it. Ford before Tata, and BMW before them. Coming to the conclusion, will Tata be better off cutting losses and selling Jaguar-Land Rover?