Tata Motors is in no rush to replace its CEO, who stepped down on September 9. It is not the only gap at India’s largest auto maker. Shares in the firm, which also owns Jaguar and Land Rover, trade at a big discount to peers. A new CEO might find value by integrating the business more fully.
Tata Motors’ market value has slumped 30 per cent over the past six months. Its enterprise value sits at a paltry 3.2 times the estimates for the 2012 Ebitda (earnings before interest, taxes, depreciation and amortization), based on data from InFinancials. The equivalent number for Askhok Leyland, an Indian competitor, is 6.3. JLR is, perhaps, better compared to BMW, which has a ratio of 7.6. The market values Tata Motors at around $10 billion. Yet, JLR alone would be worth around $13 billion if its value matched its peer group. The rest of Tata Motors may fetch $7 billion if it was put on a par with its other Indian automakers.
True, it is easy to miss important differences of detail when drawing parallels such as this. But, is Tata Motors really worth no more than half what peer comparisons suggest it could be? Concerns over JLR’s future sales in the UK and US, in the light of the current economic climate partly explain the share price discount. Given the level at which shares in the firm trade, a demerger can’t be ruled out. There were rumors earlier this year that JLR might be listed separately in London. The alternative is to work harder at finding real benefits of running the two units together. Costs shared in development of a new engine technology and in building markets in other emerging economies – especially China – are a start, but no more than that.
Tata acquired JLR in 2008. It deserves credit for returning the upmarket marques to profit. The £1.15 billion Tata paid Ford now looks like a bargain. But, instead of soft-peddling on replacing Forster and running the two units as parallel concerns, Tata ought to step up the search for a new CEO. And, fight harder for the synergy benefits that underpinned the logic of the JLR purchase in the first place.
