The Tata Group is known for its acquisition spree, both in India and overseas, to fulfill its ambitious plans through inorganic expansions at a faster click – be it Tata Tea’s one of the oldest acquisitions of UK-based blended tea-marketing giant, Tetley Tea, at $400 million as early as Feb 2000; or Tata Coffee’s buy-out of America’s best selling whole bean coffee brand Eight O’Clock Coffee at $220 million in June 2006.
Then again, they had Tata Teleservices take-over of Hughes Telecom in June 2002, Indian Hotels buy-out of Regent Hotel at Bandra, Mumbai, in Sept 2002 and Tata Motors acquisition of Korean-based Daewoo Commercial Vehicle Company at $100 million in March 2004.
In yet another significant step towards becoming a global player, Tata Motors acquired the businesses of two iconic British brands – Jaguar and Land Rover – from Ford Motors for a net consideration of $2.3 billion in June 2008, with the aim to spread its footprint globally and at the same time enter the high-end premier segment automobile market.
Having said above all, the biggest Indian acquisition was yet to come. In April 2007, the Tatas came up with the most ambitious acquisition led by an Indian company in the form of buy-out of Anglo-Dutch steel maker Corus Group at $12 billion by Tata Steel. This investment led a significant progression in Tata Steel’s globalization initiatives, together with its earlier acquisitions of NatSteel and Millennium Steel Company.
However, every coin has two sides to it – and, expectedly, some of these ambitious and leveraged buy-outs inevitably invited troubles for the Group companies, like Tata Motors and Tata Steel, during the sharp economic slowdown in American markets followed by Euro-zone crisis later.
The global recession had badly hit the demand for the premium brands Jaguar Land Rover (JLR), so much so that Tata’s takeover of JLR was in itself seen as a bailout for the Ford. In fact, the situation had worsened to such an extent that Tata’s had to seek financial assistance to the tune of 1 billion pound from the UK government for the then ailing JLR brands, in less than 9 months after acquiring the iconic brands.
Industry analysts had reached a consensus view that Tata Motors had, indeed, paid a premium for the renowned JLR brands; and that they might have to ensure massive and sustained cash injections to preserve, or rebuild, their up market reputations and recoup the loss-making operations triggered by dwindling sales of the vehicles.
To sum it up, JLR units posted a loss after tax of $504 million in the 10 months of the fiscal year to March 2009 as a brutal slowdown crippled car sales, primarily luxury and sport utility vehicles. The sales during the period for JLR slumped to 167,000 vehicles as against 246,000 vehicles sold in the same period the year before.
JLR Gets a Drive-in
But, that’s all history now. In less than 3 years on being acquired by Tatas, JLR has witnessed a dramatic turnaround and has emerged as a crowning jewel on the Tata’s cap. In the June 2010 quarter, JLR accounted for nearly 70% of the company’s net profit and over 60% of its revenues on the consolidated basis.
JLR benefited from its improved pricing power and resurgence of retail demand from the high-end customers with the recessionary clouds staving off for a while. This led to a sharp jump in the division’s net profit of Rs.1613 crore in the Q1 as against a net loss of Rs.467 crore a year ago. And, what’s more? Businesses from JLR are likely to remain robust in the forthcoming quarters as well.
Similar problems, but at a larger scale, were experienced post-Tata Steel’s acquisition of Corus too. Tata Steel posted a consolidated net loss of Rs. 2710 crore during the peak recessionary quarter in July-Sept 2009. Revenues witnessed a slump of 43% to Rs.25270 crore for the same period, on account of weak steel prices and lower production at the Corus unit.
Tata Steel which, until now, was laden with a high debt on its books – had to indulge in paring costs by rationalizing operations in Europe and restructuring interest payments. The global steel prices had fallen by 40% during the peak of the slowdown.
Corus – A Steely Performance
With the recent revival in the performance of Tata Steel’s Corus subsidiary, a feeling sinks-in as if a major turnaround was waiting to happen as soon as the recessionary clouds cleared from the skies. Tata Steel reported a consolidated profit of Rs.1825 crore in the June quarter against a loss of Rs.2209 crore in the same period last year, powered by improved performance of the European operations.
Finally, the Corus acquisition seems to have proved profitable after a period of painful consolidation and integration efforts by Tata Steel. The European demand has improved in sectors such as automotive, engineering and aerospace which led to significant improvement in revenue and capacity utilizations. Even the interest burden of Tata Steel has come down 32%, from Rs.882 crore in the previous year to Rs.597 crore of payout now.
The turnaround case for Tata Motors can also be gauged from the stock price movement of the automotive giant which had slumped to depressing low of Rs.150 at the peak of recession and is, now, close to touching its 52 week highs perched at Rs.1030 per share.
What a Turnaround, isn’t it?