I have a UK carmaker, ran by Germans, which makes most of its money in China and at the moment it is 100% earned by Indians. Yes, you got it! I am talking about Tata Motors 100% stake in Jaguar Land Rover (JLR), of course.
I wonder however, if it’s the right time for the Jaguar Land Rover to finally float, if not all, at least part of its stake onto the London Stock Exchange (LSE).
You are now probably thinking, oh yes, easy done considering that Jaguar Land Rover has had an amazing success over the past few years, and its been a great performer for Tata Motors, pumping revenues whilst expanding into new markets. Why should they want to diverse?
Well, I think it’s because of the significant current levels of capital spending (CAPEX). What I mean by that is that Jaguar will have to effectively double its size in the next few years. Currently Jaguar is making on average between 400,000 – 500,000 cars a year; however over the next ten years, I think they should make many more – around 800,000 cars a year. This is a big commitment in terms of capacity and a major challenge. Increasing volume and production levels involves significantly higher costs.
Is interesting to know that Jaguar Land Rover is independently financed, independently run, and it produces operating cash flow of over £3bn a year, whilst about £2.7bn of that goes straight into investments. I think equity has a role here compared to Tata Motors for example issuing debt or even issuing equity itself in order to fund the business.
Let’s now assume that Tata motors is willing to give up or sell if you like some of it stake, what is the guarantee here that the UK investors would be willing to buy a slice of the UK current industry, giving that this is an industry that probably about ten years ago was dead and buried, and there hasn’t been a car maker listed on the London Stock Exchange (LSE) for over twenty five years?
There is a plausible answer to this question: As mentioned earlier, Jaguar Land Rover have experienced a significant improvement in sales and revenues as demand in different markets drastically increased over a short period of time. Jaguar Land Rover is currently worth around 90% or more of a Tata Motors’ share.
I believe that if you are a UK institutional fund manager, in order to invest in Tata Motors at the moment, you have to go through a complex valuation process in order to get your JLR exposure. Where as if you had JLR equity, you would have a pure play on UK car making on the wider UK economy, and you wouldn’t have to worry so much about Tata Motors’ exposure to the Indian Economy.
Considering this however, if Tata Motors are willing to sell and institutional investor are willing to take a stake, are we not then overlooking the fact that Jaguar Land Rover would be better off without minority shareholders, and its stronger with the nice strong stable parent?
Potentially Jaguar Land Rover could be better of without the minority shareholders, giving the revolution in front of it, and they may wish to avoid public exposure; however I think in terms of the share money needed to be injected into this business, especially in the entire auto industry, they should carefully consider the available options. I think equity has a pivotal role to play, but this is Tata Motors’ decision in the end. Giving the advantages and disadvantages of floating on the LSE, and accounting for the current arrangements and ownership structure between Tata Motors and JLR, should they pursue this strategic move or continue in the current form?