In today’s Finshots, we dive into the JLR roller coaster that seems to finally be on track.

The Story

Tata Motors is now the most valuable car maker in India!

Yup, the company has snatched the crown from Maruti Suzuki after a nearly 20% jump in its stock price over the past month.

Now we won’t debate if the stock market is being silly. After all, Maruti does have over a 40% market share in passenger vehicles while Tata Motors has just 15%. But rather, we will try and break down why there is excitement over Tata Motors today.

If you ask most people for an answer, they’ll claim that it’s because of Tata’s fabulous fleet of new models — Punch, Nexon, Harrier and the like. Or maybe they’ll tell you that it’s because no one does electric vehicles (EVs) like Tata.

And that’s all true.

But what if we told you that there’s another reason? A British reason. We’re talking about Jaguar Land Rover.

Yup, the JLR division accounts for nearly 70% of Tata Motors’ revenues. And their cars are finally making the cash register at Tata go ka-ching!

We say finally because this wasn’t always the case. In fact, if you dive into the news archives, you’ll find a common headline since 2018 — a call asking Tata Motors to get rid of the British ‘loss-making subsidiary’.

So how did JLR finally turn things around, you ask?

Well, let’s take it from the top.

In 2008, a financial crisis struck the world. A recession was looming large and companies were struggling. In the UK, JLR was on its last legs. That’s when Tata Motors saw an opportunity. They’d done the groundwork in America and the UK and found that the dealers of JLR’s cars believed in the brand despite a few bad years.

And that was a sign for Tata to go ahead with the acquisition. They cobbled up money through loans and struck a deal to buy the iconic brand. For a whopping $2.3 billion in cash.

You can imagine that investors weren’t very pleased because almost immediately, Tata Motors went from a profit to a loss.

But Tata was determined to bring back the glory days at JLR.

So they began selling their non-core investments to drum up cash. They sold more equity shares to raise money that could be used for JLR’s comeback. They hired top executives from BMW to steer the wheel. And Tata also slashed the workforce at JLR over the next 2 years — from 27,000 staff to around 16,000.

Those were some classic business moves.

And when the market picked up post the recession, JLR was ready to capitalise on it. The next few years were bonkers for the company. The sales and cash flows soared. And as one automobile journalism outlet put it, “[Their] Annual profits were the envy of the industry.” Profit margins jumped into the double digits too.

Looks like Tata’s call to buy out the beleaguered entity was proving correct, eh?

Okay. If things were looking so good, where did it go wrong again, you ask?

Well, most people will point to a perfect storm of external problems that began in 2016.

First, there was the Volkswagen emission scandal. The German carmaker said it had lied about how much pollution their diesel cars really caused. And suddenly, the European Union (EU) decided to get strict with the rules. It introduced higher taxes for diesel variants. And since JLR sold almost diesel cars exclusively, it was a big blow to the company.

Then came Brexit! You know, when the UK decided that it didn’t want to be part of the EU anymore.

And since JLR was a British company which imported a lot of components from the region, new tariffs and trade barriers meant it would be a problem. Also, JLR owed a lot of money to these suppliers. And when the Pound crashed, it meant that they suddenly had to shell out more money than they anticipated.

But what most people don’t talk about are the internal follies of JLR.

For instance, during the good times, the management decided to expand quickly. They pumped in another billion Dollars to develop more cars and set up more factories. One of which was in China. It was a ploy to reduce the high import duties through local manufacturing. But, it chose the joint venture route which proved foolhardy — no one monitored product quality. And customer complaints soared. Soon enough, Chinese customers didn’t want a JLR car anymore and sales dropped precipitously in its key market.

Another problem was that JLR used too many ‘platforms’ for their cars. Think of a platform as a basic engineering base for a car. While its rivals had started using one platform to develop many cars, JLR stuck to the tradition of using multiple platforms. That added to costs and didn’t help the company innovate either.

And as per some analysts, JLR’s biggest mistake was to create their own range of engines too. They ditched the old ones from Ford and set out on a new path. Naturally, you’d imagine they spent a lot of money on this endeavour too.

So yeah, these internal issues added up. And JLR began haemorrhaging money again.

Something drastic had to be done. And it looks like JLR finally followed the counsel of automotive experts who had been screaming — Trim the fat!

See, JLR’s ‘One Metric That Matters’ was sales. All the expansion they embarked on was because they wanted to sell 1 million cars annually!

But they realised that it was a bad one.

So, management scrapped it and went in the opposite direction. JLR would build and sell fewer cars. But they would sell the cars at higher prices.

But you can’t just raise prices willy-nilly, no?

So JLR decided to simply double down on the cars that actually made it more money — the Range Rover and its Sport version, and Defender. These were the ones catering to the luxury market. And we know that despite all the economic strife in the world, the rich have continued splurging like there’s no tomorrow.

Alongside this, they also decided to put every other series such as the cheaper Range Rover Evoque and the Discovery Sport series on the back burner.

The Average Selling Price (ASP) probably became their ‘One Metric That Matters’. It has jumped from around £50,000 to £72,000.

The end result?

Even though JLR is selling fewer cars — only 400,000 units a year now compared to its peak of 600,000 units in FY18 — its revenues are more robust and profit margins are higher.

And that folks is how a simple business insight of trimming the fat is helping get JLR back on track.

But only time will tell if this is enough to help Tata Motors keep its spot as the most valuable automobile company in India’s stock market.

Until then…

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PS: This is not a stock recommendation. It’s simply some business insights.

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