Two don’t tango

EDITORIAL

JLR and Corus are two different narratives in Tata’s global story
Article Date: 
Feb 15 2013, 2113

The record standalone quarterly loss posted by Tata Motors for the penultimate quarter of financial year 2012-2013 is symptomatic of the severity and rapidity of the slowdown that corporate India is facing in demand for its goods and services. Had it not been for the Rs 2,484 crore net profit at Jaguar Land Rover for the October-December 2012 quarter, the company would have had a much more drastic fall than its 52.2 per cent fall in consolidated profits. In June 2008, when Tata Motors completed the acquisition of JLR from Ford Motor Company, Ratan Tata was pilloried for paying $2.3 billion for two brands and associated assets that had never made money. At that time JLR looked like an automaker with no control over its destiny, dependent on Ford even for supplies of engines and suffering from tepid response to its offerings. Sure enough the global economic recession plunged JLR deep into a loss and exposed Tata to ridicule that he had bought a trophy asset to fulfil his ego. Five years on, however, the cumulative net profits at JLR have proved that rather than hubris, the acquisition was borne out of a keen sense of the potential of these brands and how these could be realised over an economic cycle. Tata Motors is not only well on course to earn a healthy return on the capital it invested in this marquee acquisition, but could also look at an early payback on its invested capital. The global recession and the ensuing financial crisis forced Tata and his crack team led by Tata Motors vice chairman Ravi Kant and JLR CEO Ralf Speth to focus on cutting costs and boosting sales to rediscover JLRs reason for existence. The acquisition has also benefited Tata Motors market cap that now stands at Rs 82,328 crore ($15.26 billion). Sadly, the $12.1 billion acquisition of Corus by Tata Steel, which was considered more of a strategic fit than JLR, has turned out to be quite a lemon. The Indian parent reported a consolidated loss of Rs 763 crore for the quarter ending December 2012, up 26.6 per cent over the year ago period. Losses at its European steel making operations were the prime suspect. At the time of its acquisition in April 2007, Corus looked like a perfect fit. Instead, a housing crisis and ongoing recession in the UK and Europe has sapped steel demand so much that experts contend that the only way to bring prices back into equilibrium is to reduce steel making capacity to match much lower demand. But that may be easier said than done, as ArcelorMittal recently found out. The net result of this crisis has been that two CEOs, a massive cost cutting and an asset divestiture programme later, Tata Steel Europe has yet to become fit. This is a takeover whose effective cost per tonne of steelmaking acquired keeps rising with time as capacity gets reduced and profits look elusive. That may explain why the combined company’s market cap is languishing at Rs 36,512 crore or $6.77 billion, almost half of what Tata Steel paid to acquire Corus. Can Cyrus Mistry rescue the storied steelmaker?

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