As JLR touches $20 bn, Credit Suisse says list China JV

Jaguar Land Rover’s value has risen to $20 billion now from $2.3 billion in 2008, when it was bought by Tata Motors, giving the latter over 25 per cent annual return, according to Credit Suisse. Tata Motors, which now gets 85 per cent of its value from JLR, should look at listing its Chinese joint venture abroad to raise funds.

JLR has emerged as a stronger company after the 2008 financial crisis, and now accounts for a major chunk of Tata Motors’ profits. But, the bank says, JLR has not made any significant progress on electric and hybrid vehicles and has a larger exposure to diesel vehicles.

Another area where JLR still lags is scale as its sales in FY17 were just 0.6 million units compared to 2.2 million units sold by Daimler MercedesBenz, and over two million cars sold by BMW. Audi’s car sales are 1.9 million units in 2016. “In the absence of any appropriate acquisition opportunity available, this will have to be largely an organic process and will likely be gradual at best,” Credit Suisse said.

The stability provided by Tatas' ownership, combined with a series of exciting new launches, helped JLR increase its luxury market share from 4.5 per cent in 2008 to six per cent in 2015. JLR margins, however, have been patchy, given the wide difference in margin profile between Jaguar and Land Rover products. JLR witnessed a significant margin dilution over FY15-17, as its product cycle shifted to lowermargin Jaguar products and a part of its highly profitable China business turned into a JV. “We reckon the valuation of the China JV can be improved by setting a benchmark for the same by listing it on the Hong Kong Stock Exchange like Brilliance,” the financial services company said in a note dated July 13 (Thursday).

At the same time, Tata Motors should focus on its finance subsidiary, which has not been run properly and has had large asset quality issues. “We believe if it is run properly, the subsidiary’s stock can easily trade at 30 per cent of its AUM (assets under management); more expensive stocks of other non-banking financial companies trade at 60 per cent to 80 per cent of their AUMs. These two initiatives, of listing Chinese JV and turning around financial services business, could provide ~50 each and hence a total ~100 per share upside for Tata Motors.”

Tata Motors closed at ~454 a share on Monday, with a market valuation of ~1,31,172 crore.

Credit Suisse said the return on equity (ROE) of Tata Motors has been declining. It has come down from 23 per cent in FY15 to about 15 per cent in FY17. Only four companies of the top-10 Tata companies have ROE in excess of 15 per cent.