Tata Motors faces litmus test: Falling sales, losses force JLR to cut jobs

Tata Motors may even look at selling a part of its stake in JLR if it gets a good valuation, according to sources

Tata Motors is facing a significant challenge of turning around its 100 per cent subsidiary Jaguar Land Rover (JLR), which is grappling with declining sales, lower margins, and the recent losses. The company is expected to lay off “thousands of workers” early next year, in its bid to cut costs by at least $3.2 billion in the next two years, according to British media reports.

JLR reported net losses during the first half (H1) of 2018-19 (FY19) - the first time in nearly a decade. The last time the luxury carmaker reported losses was in 2008-09, immediately after the 2008 Lehman Brothers crisis.

The company has reportedly roped in Boston Consulting Group to advise on the turnaround plan, as it targets $1.26 billion in cost reduction and a similar amount in investment reduction. It also plans to save another $632 million in other savings.

According to investment banking sources, the company may even look at selling a part of its stake in JLR if it gets a good valuation.

While the company declined to comment on “market rumours”, investors in Tata Motors shares are a nervous lot; they saw a 60 per cent decline in their wealth in 2018 (year-to-date).

Tata Motors shares closed at Rs174 on Tuesday in the Indian stock markets, compared to Rs 425 a share early this year.

The fall in its share prices was mainly due to sagging sales - JLR announced that its retail volume in November declined by 8 per cent on a year-on-year basis - affected by a 51 per cent decline in China retail. In the UK, the US, and Europe, its volumes showed a growth of 3 per cent, 18 per cent, and 6 per cent, respectively.

Analysts say JLR is key to Tata Motors’ financial performance, as the luxury car unit is nearly four times bigger than its India business, in terms of revenues and fixed investments. Thus, a poor show by the JLR division has a disproportionate impact on companies’ financial ratio and balance sheet.

For example, the company reported losses on consolidated basis during the first half of FY19 despite a financial turnaround in its domestic business after four years of consecutive losses.

Tata Motors’ India business reported net profit of around Rs13 billion during H1 of FY19, but it made a loss of Rs 28.7 billion on a consolidated basis due to losses at JLR.  

In 2017-18 (FY18), JLR accounted for nearly 80 per cent of the company’s consolidated fixed assets and revenues and nearly 90 per cent of its operating profits.

Analysts say Tata Motors has invested billions of dollars in expanding JLR’s global manufacturing footprint and developing new products to close the market share gap with its German rivals – Mercedes-Benz, Audi, and BMW, which dominate the global market for luxury cars.

JLR is currently a distant fourth in global luxury vehicle sales. Tata Motors’ consolidated investment in fixed assets (gross block) is up by nearly Rs 1.56 trillion (around $22 billion) in the last 10 years, with the bulk of it accounted for by the JLR division. The return on this investment is now at risk due to growth headwinds facing JLR.

“We currently factor in a 7 per cent decline in overall JLR volumes in FY19. Ramp-up for I-Pace, the launch of E-Pace in China, and seasonality should lead to a relatively better fourth quarter for JLR, in our view,” said a Nomura analyst in a report early this month.

Since its acquisition in 2008 for $2.3 billion, JLR proved to be a good investment for Tata Motors and a solid decision by former chairman Ratan Tata. But in the last two years, a slowdown in China and the trade war between the world’s two biggest countries – US and China - is affecting the sales of all luxury carmakers, including JLR. Analysts expect flat sales for all luxury carmakers in FY18, including JLR which may report a decline in sales.

The exit of the UK from the European Union is also expected to hit JLR. Post-Brexit, analysts expect a rise in manufacturing cost at the UK plants as bulk of the raw materials are imported from the rest of Europe, which will attract import duty. The UK is currently a part of the European Common Market.