Even as Ratan Tata, the chairman of Tata Motors Ltd, confirmed the company’s interest in Ford Motor Co.’s loss-making brands Jaguar and Land Rover , analysts say that any deal will have a significant negative impact on cash flow and profits at India’s largest truck maker.
“If they (Tata Motors) cannot shift the operations to India, then it’s not viable,” says Huzaifa A. Suratwala, senior analyst at Networth Stock Broking Ltd. “It will add to their balance sheet burden.”
More than 50% of Land Rover and Jaguar sales are in Europe. Neither brand is sold directly in India.
The British Midlands-based operations, which produced 268,593 vehicles in 2006, have at least 15,000 employees in five locations, according to various UK media reports that were not independently verified by Mint. The operations come with strong labour unions that could hurt the ability of any buyer to shift operations to lower-cost countries or factories.
Tata’s operations in India look lean in comparison. At its Pune factory alone, Tata Motors’ 1,700 or so workers produce about 225,000 cars a year.
On Friday, Tata told CNBC-TV18 television channel that the company was interested in the brands as Tata Motors wished to increase its global reach and scale.
“Strategically, it could be a positive for Tata,” said S. Ramnath, vice-president at SSKI Securities Ltd. “But it could have a negative impact on the company’s bottom line and cash flows in the near-term in view of their capex plans.”
Tata Motors has said that it plans to spend Rs12,000 crore to expand capacity by building new factories and developing new cars and trucks. Some analysts say the company, if it is successful, may have to fork out at least $2 billion (Rs8,240 crore) for the purchase of the two Ford brands that are up for sale and will likely get competitive bids from several parties, especially from potential private equity buyers.
In the fiscal year ended March, Tata Motors reported reserves of Rs6,485 crore.
A Tata Motors spokesperson declined to discuss details of the company’s interest in Jaguar and Land Rover.
Some analysts also see a mismatch between Tata’s brands and those being sold by Ford.
“They don’t have the experience in managing such brands,” says Vaishali Jajoo, analyst with Angel Broking Ltd. “Tata’s overall portfolio consists of low-cost products and I don’t know how they’ll leverage” the distribution network.
Both Land Rover and Jaguar haven’t been profitable for Ford, which is selling them to shore up its own troubled finances.
Ford bought Jaguar in 1989 for $2.5 billion and Land Rover in 2000 for $2.73 billion. After posting its largest ever loss of $12.7 billion in 2006, Ford has been forced to shift its focus and management resources away from these two niche makers of premium sedan cars, and sports and utility vehicles.
Jaguar and Land Rover have been making losses for the past five years and Ford assumed an impairment of $1.6 billion in 2005 and $1.3 billion in 2004 for these two companies, according to its annual report.
Meanwhile, the market for luxury cars and SUVs in India is currently limited to about 15,000 units a year, analysts said. Tata Motors only ventured into passenger cars in 1998 with the Indica, a compact car that is used extensively as private taxis and in car-rental fleets.
After the Indica, Tata Motors has introduced the Indigo sedan, essentially a three-box version of the Indica, and is now working on developing the word’s cheapest car for Rs1 lakh.
Until now, Tata Motors has appealed primarily to cost-conscious buyers rather than those looking for premium or luxury vehicles.