Former TCS Chief N Chandrasekaran's unconventional approach transforms Tata Motors from a debt-ridden, traditional automaker to a dividend-paying trendsetter.
15 Sep 2024 | 16248 Views | By Autocar Professional Bureau
In 2017, Tata Motors faced a crossroads. Burdened with mounting losses and a bloated balance sheet, India's largest automaker needed a fresh perspective. Enter N Chandrasekaran, a veteran of the IT industry with no automotive experience. The appointment of this former TCS boss — which raised eyebrows in Bombay House ...
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In 2017, Tata Motors faced a crossroads. Burdened with mounting losses and a bloated balance sheet, India's largest automaker needed a fresh perspective. Enter N Chandrasekaran, a veteran of the IT industry with no automotive experience. The appointment of this former TCS boss — which raised eyebrows in Bombay House at the time — has turned out to be a corporate masterstroke that has paid rich dividends for the company and its investors.
Nowhere has this change in leadership been more evident than in Tata Motors' financial performance. The company ended FY24 with a consolidated revenue of Rs 4.37 lakh crore, equal to the total revenue of India's passenger car industry, and far higher than the previous record of Rs 3.02 lakh crore set in FY19.
Tata Motors, whose cumulative losses during FY19-FY22 amounted to Rs 65,789 crore, also reported a net profit of Rs 31,807 crore for FY24. Shareholders were rewarded with a dividend of Rs 6 per share, the highest payout in the automaker’s history.
Little surprise that the company's market capitalisation exceeded Rs 4 lakh crore (USD 50 billion), making it the 10th most valuable carmaker in the world.
The Outsider
When N. Chandrasekaran took charge of Tata Motors as Non-executive Director and Chairman in January 2017,many were skeptical about the prospects of a turnaround, given the legacy issues, accumulated losses and bloated balance sheet. Moreover, Chandrasekaran's background in the IT industry (notably at TCS) provided him with no prior experience in manufacturing. However, the skills he honed in the IT sector, where companies are typically debt-free, proved invaluable. His focus on debt reduction — a challenge he was unfamiliar with — became a central element of his strategy. At the peak of the Covid-19 lockdown in August 2020, Chandrasekaran announced that Tata Motors would become debt-free within three years. The company had net automotive debt of Rs 67,800 crore in early 2021. Many considered this goal unrealistic, believing that making Tata Motors debt-free in such a short time was a far-fetched dream.
However, Chandrasekaran has proven the skeptics wrong. The net automotive debt of Tata Motors has dropped to Rs 16,000 crore in FY24 and the company is on track to turn into a net cash company by the end of the current fiscal year. Of the total outstanding debt, approximately Rs 8,700 crore is external debt, with the remainder being lease liabilities. Notably, the domestic business became debt-free by the end of FY24, with the remaining debt largely related to JLR.
A key factor in this debt reduction has been the significant improvement in cash flow from the core automotive business and the value unlocked from the sale of Tata Technologies. Tata Technologies' initial public offering was a massive success, with subscription levels far exceeding the number of shares offered. This marked a complete turnaround for Tata Technologies, which had nearly been sold at a distress valuation in the past. The IPO's success provided Tata Motors with a substantial cash inflow.
The primary driver of debt reduction has been the improved cash flow generation across Tata Motors' various segments, including Jaguar Land Rover (JLR), the domestic passenger vehicle business, and the domestic commercial business. The free cash flow — cash after deducting operational and capital spending — reached Rs 26,900 crore in FY24, one of the highest ever. Tata Motors had negative free cash flow in five out of the eight previous fiscal years.
The company's improvement in free cash flow has been driven by a carefully calibrated strategy of focusing on high value generating investments. Capital spending rose to a record Rs 42,100 crore in FY24, and a total of Rs 1.5 lakh crore was spent on capital expenditure between FY19 and FY23. On the operational front, the company has used a combination of increasing volumes and prices, cost efficiencies, and continued investment.
Tata Motors' operating profit margin increased to 8.2% in FY24, the highest in nine years, with improved margins across all verticals. This resulted in the company’s return on capital employed (RoCE), which compares the profit generated by the company with the money invested in it, rose to a decadal high of 18.7% in FY24. Tata Motors previously delivered more than 20% RoCE between FY11 and FY15.
Jaguar Land Rover
A big contributor to the turnaround was the company’s UK subsidiary, Jaguar Land Rover, which accounts for around three-fourths of the company’s revenue. JLR’s volume saw a year-over-year decline for four consecutive years between FY19 and FY22, ranging from 6-27%, but cost controls and a conscious shift to higher margin products have helped offset the impact of declining volume.
The company’s turnaround strategy is based on transitioning from a premium carmaker to a luxury brand. The management is focusing on key brands (Range Rover, Defender, Discovery, and Jaguar) and value growth rather than volume growth. Thanks to this, the average realisation per JLR car has improved 40% to GBP 69,109 in FY24 from GBP 49,390 in FY20, a 40% increase. There has been a shift to higher-margin Land Rover models, with Land Rover's share of JLR's total volume rising to 88% in FY24, up from 70% in FY19.
This share is expected to increase further to 92-93% in the current fiscal year, with Land Rover sales volume projected between 360,000 and 365,000 units, compared to 351,742 units in the previous fiscal year. This brand-centric approach is expected to help JLR navigate competition. The company plans to launch three new electric vehicles (EVs) over the next 12 months. The company has set a long-term vision of achieving GBP 38 billion in revenue with a 15% EBIT margin and maintaining a strong balance sheet.
On the costs front, JLR has been focused on lowering its cash flow breakeven level to just 300,000 units/year through its Reimagine 2.0 programme from 660,000 units. Thanks to such efforts, JLR achieved an EBIT margin of 8.5% in FY24, the highest in eight years, despite volumes being 30% lower than peak levels.
The EBIT margin for the last quarter of FY24 was 9.2%, and the actual EBIT margin exceeded the company's guidance of 6%. Revenue too rose to GBP 29 billion in FY24, about GBP 1 billion higher than expected. JLR is now aiming for revenue of GBP 30 billion and an EBIT margin of over 10% by FY26.
Passenger Vehicles
A few years ago, analysts ascribed negative value to the domestic passenger car division, and there were rumors that it might be sold due to accumulated losses. However, not only has the division turned around, but Tata Motors has also acquired Ford's Gujarat facility to boost its passenger car production capacity in India.
It has emerged as the dark horse, benefiting from Chandrasekaran's strategic focus on the EV space at a time when competitors have approached the segment with caution. Rising SUV penetration has also positively impacted earnings. Tata Motors’ PV sales comprise 65% petrol, 18% diesel, 15% CNG, and the remainder from EVs.
In the EV space, Tata Motors' volume grew to 73,844 units in FY24 from just 2,500 in FY21, earning it nearly three-fourths of the market by volume. Total PV volume increased to 573,000 units from 131,197 units in FY20, transforming the company from a fringe player to a significant market participant and raising its market share rose 14% from 5%. The PV business has reported positive net profit in the last two fiscal years with an operating profit margin of 6.5%.
With expanded CNG product offerings and the introduction of 10 new EV models by FY26, the company’s market share in CNG and EVs is likely to be sustained. While volume growth may slow from peak levels, it is expected to be supported by a strong pipeline of new EVs and ICE facelifts. Given the slowing industry demand, a volume growth of 5-6% is anticipated for the current and next fiscal years.
Commercial Vehicles
In the domestic commercial vehicle segment, the company has pursued profitable growth even at the expense of losing market share. The truck business' operating profit margin stood at 10.8%, narrowing th gap with competitor Ashok Leyland. The company aims to improve realisation and retail market share, showing sequential improvement with increased market share in small commercial vehicles and pickups (SCVPU) after a low point in the third quarter of FY24. The management is focusing on improving unit economics and enhancing the front-end to drive market share. The goal is to gain further market share in the SCVPU segment and continue delivering strong EBITDA margins. In FY24, revenue reached a record high of Rs 78,800 crore on volumes of 405,000, with operating profit (EBITDA) hitting USD 1 billion.
Looking Ahead
N Chandrasekaran's strategic direction has led to a significant turnaround across the company's verticals. Tata Motors' lean and efficient model, calibrated capital spending approach, innovative strategies to identify market opportunities, and focus on a richer product mix will help the company sustain its earnings growth and mitigate the impact of business downturns.
This feature was first published in Autocar Professional's September 1, 2024 issue.