Tata Motors' record Q3 loss brings back focus on group's foreign buys

Tata Motors and Tata Steel together now account for less than 10 per cent of the group companies’ market capitalisation

In 2007, Tata Steel acquired Corus (renamed Tata Steel Europe) for around $13 billion. The group followed it up by spending another $2.3 billion to acquire luxury car maker Jaguar Land Rover (JLR) in 2008 under Tata Motors. 

These top-dollar overseas acquisitions were a bold move by the Tata group to globalise its operations and reduce dependence on the Indian market. Other group companies such as Tata Global Beverages, Indian Hotels, Tata Communications, and Tata Chemicals also spent large sums acquiring assets abroad, but they were relatively small bets.

The acquisitions did transform the Tata group into a global conglomerate, but are yet to add to the group's financial heft. Both Tata Steel and Tata Motors have taken massive impairment hits for their two purchases. 

Overseas operations accounted for nearly two-thirds of the group companies’ combined revenues of Rs 6.5 trillion in FY18. However, Tata Consultancy Services (TCS) remains the cash cow for the group, accounting for 70 per cent of the group's market capitalisation and over 90 per cent of holding company Tata Sons’ dividend income from all group companies.

Tata Motors’ JLR unit reported a net loss of nearly Rs 32,500 crore during the first nine months of FY19, while Tata Steel's overseas ventures, including its European business, lost Rs 1,239 crore during the period. Tata Steel Europe has now reported losses in eight of the last 11 financial years.

In rupee terms, the two companies have taken Rs 3.6 trillion in incremental investment or capex since 2007, but have added only Rs 46,500 crore to the group companies’ combined market capitalisation during the period. This has translated into significant value erosion for the shareholders of the two firms including Tata Sons.

Tata Motors and Tata Steel together now account for less than 10 per cent of the group companies’ market capitalisation even as they accounted for nearly two-thirds of all the group’s assets and revenues during the half ended September 2018.

Analysts attribute the poor showing on a sharp rise in the two companies’ indebtedness after their big-ticket acquisitions and less than commensurate rise in their profitability. 

Tata Motors is the largest group company, accounting for 45 per cent of group revenues and 35 per cent assets in FY18. It was followed by Tata Steel with 21 per cent and 29 per cent of the group’s revenues and assets, respectively. Analysts say the poor show by Tata Motors and Tata Steel remains a constraint on group finances but the Tatas have staying power thanks to the strong show by TCS. “The group will survive the financial losses at two of its biggest companies but its financial cost will echo through the group for years given the sum involved,” a market analyst said on condition of anonymity.

A Tata group spokesperson said that the overseas acquisitions of Tata Steel and Tata Motors had been value accretive and blamed their recent woes to global economic turmoil beyond their control. “Both Tata Steel and Tata Motors have consistently contributed to increase in group market cap over the years. The market cap for Tata Motors and Tata Steel have increased by 3.7x and 2.5x respectively between FY07 and FY18.” Moreover, Tata Steel and Tata Motors have contributed over 40 per cent to increase in market cap of the group excluding TCS between FY07 and FY18. “Recently, the market cap of Tata Motors has declined due to significant challenges being faced by the global auto industry,” the spokesperson added. According to analysts, JLR contributed over £17 billion to Tata Motors’ market cap at its peak. Currently JLR’s valuation has gone down due to significant industry challenges, but its valuation remains significantly higher than its purchase price.

Corus, acquired by Tata Steel in 2007, delivered strong performance in the first two years following acquisition. Its earnings before interest, depreciation and tax (Ebitda) in the year following the acquisition rose to £1 billion from £687 million in the year prior to the acquisition. 
Corus delivered an Ebitda of £843 mn in FY09 as well. “However, the black swan event of the global financial crisis in mid-2008 structurally impacted the underlying demand conditions in Europe (and globally), thereby causing extreme financial hardship to Corus. The proposed combination of Tata Steel Europe with Thyssenkrupp Steel Europe will create long term value for the stakeholders,” the Tata group said.  

While the stock market gave up on Tata Steel’s overseas operations, investors have been surprised by Tata Motors’ unexpectedly large loss in the December 2018 quarter. JLR took an impairment loss of £3.1 billion (Rs 28,500 crore) as it cut the carrying value of the assets on its books. On the liability side it resulted in nearly £3 billion reduction in its equity hitting Tata Motors’ book value at the consolidated level. The write-off was triggered by a sharp slowdown in its China, the company’s largest growth market in recent years. Tata Steel too has taken impairment loss of over Rs 17,500 crore in the past. 

The stock has lost 18 per cent on the bourses after the announcement. Analysts expect more write-down as JLR had invested heavily in product development and technologies in the last few years, anticipating strong growth in global luxury vehicle market.  On the brighter side, impairment is a non-cash loss and is not likely to impact the company’s cash flows or funding. Post-impairment the management expects £300 million worth of annual savings on depreciation cost, boosting its bottom line. “JLR has been hit badly by a demand contraction in China and a general slowdown in global automotive demand after seven years of a good run. While poor demand growth is hurting all global automakers, JLR has taken a bigger hit as it invested aggressively in new products including borrowings,” said Dhananjay Sinha, head - institutional equity, at Emkay Global Financial Services.  In all, JLR has invested nearly Rs 1.63 trillion (£18 billion) since FY10 in new product development and building new production facilities.  However, Sinha is positive on JLR. “Tata Motors has more than recovered its initial investment in JLR. The division accounted for nearly 90 per cent of its consolidated profits till few quarters back that allowed it to survive losses in its domestic business,” he added. Analysts also say that JLR provided new products and technologies to Tata Motors, which it is now using in the domestic market. The newly launched sports utility vehicle Tata Harrier is based on the Land Rover Discovery platform. 

However, Tata Steel’s Corus acquisition has been a different story altogether. The company never came close to recovering its investment in Tata Steel Europe and has cumulatively lost around Rs 12,000 crore in its overseas operations since FY07. In comparison, its domestic operations remained profitable all through and in a way funded losses of European operations. 

“The strategic rationale for Corus was never very robust given that steel is a commodity business and most of the demand growth has been in emerging markets while it has stagnated in Europe,” said G Chokkalingam, founder & MD, Equinomics Research & Advisory Services. The street is now pinning hopes on a balance sheet deleveraging post demerger of Tata Steel Europe and sale of its South East Asian operations. Tata Steel had a consolidated debt of around Rs 1.15 trillion at end of September 2018 against net worth or shareholders’ equity of around Rs 64,000 crore.  Tata Steel Europe will be demerged into a 50:50 joint venture with Thyssenkrupp that is likely to reduce Tata Steel consolidated debt by around Rs 20,000 crore. Another $500 million is expected from divestment of company’s South East Asian operations. The new theme at Tata Steel is to regain its leadership of the domestic steel that it lost in the years it was trying to build a global steel business. The street approves the move but the homecoming has cost Tata Steel shareholders a fortune in terms of opportunity loss in the last 12 years.