Annus Horribilis?

“The celebration will really come when we have seeded the market with a really acceptable product and we have revolutionised the manner in which people can travel.”

—Ratan Tata, January 9, 2008 in an interview to Business Today

“You cannot run a plant with police protection, you cannot run a plant when bombs are being thrown, you cannot run a plant when workers are being intimidated.”

—Ratan Tata, October 3, 2008, to the media in Kolkata while announcing Tata Motors’ withdrawal from Singur

2008 was supposed to be the biggest year for Tata Motors since the company’s inception at the end of World War II in 1945. Chairman Ratan Tata’s vision for creating a global empire encompassing the entire gamut of motorised vehicles was coming true.

On January 10, the day the company launched the Rs 1-lakh Nano, he was the toast of the global media. The unveiling of the car at New Delhi’s Pragati Maidan was thronged by thousands of mediapersons, and by October, the Nanos were supposed to be leaving the Singur factory in their thousands.

In addition, just as the Nano was about to be unveiled, Tata Motors was entering the final stages of negotiations with Ford Motor Company to take over Jaguar and Land Rover, two storied British brands. After the 2007 acquisition of Corus by Tata Steel, Ratan Tata had become the poster boy for “reverse colonialism”. But it all went awry.

Not ok Tata What has gone wrong? Demand for Tata Motors’ bread and butter medium and heavy commercial vehicles is slipping, down 9.5 per cent during April-October 2008. Passenger vehicle sales, too, have dipped sharply in November. Why? The core reason is the slipping economy and the reluctance of banks to extend credit to small transporters. Even for those with access to credit, high interest rate is acting as a deterrent. How is the company countering this? Their arm, Tata Motors Finance is financing a greater proportion of sales. Is that all? Not quite. The credit crunch has also directly impacted Tata Motors because they have been forced to raise money through public fixed deposits to fund ongoing operations. And what about Jaguar and Land Rover? The weakening economy and high fuel prices earlier in 2008 led to a collapse of Land Rover sales. The new XF sedan has boosted Jaguar’s sales. Tata Motors claims that Jaguar is making money. And the Nano? The company claims that the Nano is on-track and the first cars will roll out in late-January or early-February 2009.

Tata Motors’ very reach, or over-reach, as some might argue, has led to things getting pearshaped. Tata Motors net profit for the half year ended September was down 32.3 per cent to Rs 673 crore over the same period in 2007-08. This was despite revenues actually increasing 10 per cent to Rs 14,007 crore (net of excise). The bottom line has gone down thanks to an unprecedented drop in sales of medium and heavy commercial vehicles, which remain the company’s bread and butter.

“In 2008, possibly for the first time in the auto industry, key markets across the world have together gone into a downturn,” says a Tata Motors spokesperson. “The downward cycle in India is due to a severe lack of financing. Banks are refusing to entertain requests from small customers or first-time owners. On the other hand, customers whose requests banks are ready to consider, are getting dissuaded by high interest rates. This is particularly so for buyers of commercial vehicles.”

Tata Motors has faced a downturn before. In 1997-98, commercial vehicle sales collapsed from 2,21,676 units to 1,43,814 units and further down to 1,29,822 units in 1998-99. The industry and Tata Motors could break the hoodoo only in 2003-04.

The company acknowledges that behind the platitudes of Ratan Tata wanting to make a passenger car, there was a very real reason of derisking the company. The Indica hatchback and the Indigo sedan were a result of this. The same goal also led the company to focus more on Light Commercial Vehicles; the success of the Ace has been one bright spot for the company over the past two years. Besides, the company realised that it needed to increase its geographic base, which started with the acquisition of bankrupt Daweoo Motors’ commercial vehicles unit, now Tata-Daewoo Commercial Vehicles.

“Tata Motors has a comprehensive strategy for sustainable, profitable long-term business growth, and is executing the building blocks. These building blocks allow us to post strong growth, as we have seen in the last decade, and we are also better positioned to mitigate the fallout of a downturn,” the company spokesperson adds. In addition, the company is also trying to get Tata Motors Finance to finance more of its vehicles: the company financed 34 per cent of all vehicles in 2007-08, up from 31 per cent in 2006-07, and the number might climb sharply this year.

But analysts are still worried. The 9.5 per cent de-growth in sales of heavy commercial vehicles is adding to the pessimism. The company has had to shut production at its Jamshedpur, Lucknow and Pune facilities for short periods, which has worried several analysts. “It is also necessary to ensure that production matches demand so as to avoid unnecessary build-up of inventory. For this, we have taken limited-period closures at our commercial vehicles manufacturing facilities.

But, for such steps, our overall objective of sustainable, profitable growth will get jeopardised,” the company claims. But what has really worried analysts— which is why most scrip reports on Tata Motors are negative— is the huge debt burden that is crushing the company. Tata Motors bought Jaguar and Land Rover for $2.3 billion (Rs 10,810 crore) finalising the deal in June this year, and needed more funds to repay the one-year bridge loans that it took to finance the buy. In the half-yearly presentation to investors, the company admitted that the Rs 4,200-crore rights issue, while fully subscribed, was rescued by the underwriters and the promoter company.

The company has also been forced to sell part of its stake in Tata Steel for Rs 485 crore back to group holding company Tata Sons to raise additional funds. And recent advertisements in financial dailies have indicated that the company is starting a fixed deposit scheme, that as per guidelines, can raise up to Rs 2,700 crore, which will be used to finance ongoing requirements.

But the company is not unduly perturbed. According to them, the new Indica Vista is a smash-hit and currently has a six-week waiting period. And while sales of Land Rover are down, sales of Jaguar have actually improved over the past few months aided by the introduction of the new Jaguar XF. In 2009, the company hopes to start rollout of the Nano early in the year and even plans to launch the Jaguar brand in India later in the year. The slowdown between 1997-2001 impacted Tata Motors because they were not diversified; the 2008 attack has hit them hard precisely because of the opposite reason.