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| Shobhana Subramanian: Is the wheel turning full circle? | |
| TAKE TWO | | Shobhana Subramanian / New Delhi November 21, 2008, 0:22 IST | |
A gallon of gas or a share of GM? That’s a headline prompted by the fall of the GM stock to less than five dollars. Back home you could almost ask a similar question: two litres of petrol or a share of Tata Motors? This week the stock of India’s biggest automobile company crashed to a six- year low of Rs 130. Not that the rest of the market has come through with flying colours, but the Tata Motors counter has been hammered out of shape — losing more than 80 per cent since the start of 2008 compared with a fall of about 60 per cent for the Sensex. The firm’s market capitalisation today, at around Rs 6,700 crore, is back to where it was in November 2002.
That was about eight months after the company slipped into the red in the year to March 2001, with a shocking loss of Rs 500.34 crore. There was little the truck and car maker could do — the prolonged economic downturn had resulted in a huge fall in demand, driving the commercial vehicle (CV) business into a slump. It was a sitting duck in a weak market exacerbated by higher diesel prices and a big increase in sales tax. Moreover, it was investing in the car business and rightly so. Things were so bad, the management said in the annual report for the year, that it was the most difficult year in the company’s history.
Well, 2000-01 could soon lose that status to either 2008-09 or 2009-10. But this time around, some of it, or maybe even a large part of it, would have been the management’s own doing. That’s a pity because after recovering from the lows of 2000-2001,Tata Motors seemed to be cruising along nicely. The CV cycle finally turned and the Ace—a one-tonne light commercial vehicle—which made its debut in May 2005, turned out to a huge winner. Within 22 months of the launch, the 100,000th Ace had been rolled out. The Indica and Indigo may not have been the best cars in the market but there were enough takers. The deal with MG Rover to sell cars in the UK and European markets didn’t go very far, but it didn’t really matter too much — the home market was large enough to keep the engines humming. In fact, when Tata Motors inked an agreement with Fiat in July 2006, it seemed that it had finally found a way to keep up with the competition — after all, it was going to have access to the same Fiat engine that is fitted in Suzuki’s cars. What’s more, when the Nano was unveiled in January this year, there wasn’t a soul who wasn’t bowled over by the cute little car. It was truly a defining moment for both Tata Motors and for India.
Those days now seem so far away. In March this year, Tata Motors acquired the Jaguar and Land Rover (JLR) brands from Ford. And that probably was the turning point, the beginning of its troubles. Even during the many months when the deal was being negotiated—and it was a time- consuming affair, taking more than nine months—there was hardly anyone who saw a reason for the deal, any synergies between the two players. It was never clear why the Tatas wanted to buy luxury brands when they had never been in that space. And at a price tag of $2.3 billion, anyone could see that it was a horribly expensive acquisition, given that business was in the red and that additional spends would be needed to keep the wheels moving. Even without the global financial crisis, it was not going to be easy to turn JLR around. Now it’s going to be even more expensive and take much, much longer. Not only has Tata Motors sold its equity cheap, it’s now going to pay huge amounts to borrow. And who knows when consumers in Europe and the US are going to start spending again? Already in the June quarter, sales were down 11 per cent and JLR is believed to be losing money. When is the business going to finally make money? It’s all very well to say the business will do well in the long run—maybe it will—but should shareholders be asked to wait it out? Without JLR, Tata Motors would have weathered the slowdown far more easily, it wouldn’t have been so hard-up for cash and could have focussed on the rollout of the Nano. CV cycles are not new to the firm, this would been just one more and not too difficult to handle. Profits for the stand-alone company, says Citigroup, could now be closer to Rs 600 crore next year, about a third of the profits of around Rs 1,800 crore reported in the year to March 2007. But with JLR now part of the company, it’s going to be a rough ride.
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