ALLIANCE UNIVERSITY- SCHOOL OF BUSINESS

A REPORT ON TURNAROUND STRATEGY OF TATA MOTORS

STRATEGIC CORPORATE FINANCE

SUBMITTED BY: MOHAMMED KHURSHID GAURI 10SBCM0311 SCF GROUP B

[TYPE

1 THE COMPANY ADDRESS]

TABLE OF CONTENT

Content 1. Introduction 2. Research methodology 3. Analysis 4. Conclusion Bibliography

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INTRODUCTION:
Tata Motors Limited is Indias largest automobile company, with consolidated revenues of Rs.1, 23,133 crores (USD 27 billion) in 2010-11. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The Company is the world's fourth largest truck manufacturer, and the world's third largest bus manufacturer. Tata Motors, the first Company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, and subsequently the remaining stake in 2009. Hispano's presence is being expanded in other markets. In 2006, Tata Motors formed a joint venture with the Brazil-based Marco polo, a global leader in body-building for buses and coaches to manufacture fully-built buses and coaches for India and select international markets. In 2006, Tata Motors entered into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the Company's pickup vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having been launched in Thailand in 2008. MARKET SCENARIO: The slowdown in the Indian economy, especially in the index of industrial production that directly affects the automotives industry also had an effect on Tata motors, especially its commercial vehicles business. The commercial vehicle business thus declined overall by 15% in the term of the market size. This business is also characterized by a cyclical nature globally. Tata commercial vehicle business including the medium and heavy vehicles segment received the severest blow with a decline of 23%. The impact was lesser on the light commercial vehicles business i.e. 1 %. Trucks that contributed to almost 66 % of the company business saw market shrinkage of almost 50% since 199697. The demand for the buses remained flat but sales were lower by 7% and the company lost its market share by 5% in this segment. In spite of 8% contraction in demand, the company achieved 8% market share in the passenger car segment. The sales tax rationalization initiated by the government and the increase in the transportation and freight costs were also contributes towards the business performance the company.

CHAPTER 2 RESEARCH METHODOLOGY Research is completely based on secondary data. Information source: Information is mainly sourced from internet.

CHAPTER 3

ANALYSIS
REASONS BEHIND TURNAROUND FIRST EVER LOSS: A RUDE SHOCK The changing market as well as the needs of the customers forced Tata motors to revisit its corporate strategy. The top management of the company was astute enough to realize the repercussions of continuing with existing business and strategy. The real reason behind the turnaround of commercial vehicle unit was that with the governments ambitious road development and infrastructure building plans, the entire transportation industry would see uplift. Tata motors have always been a financially sound company. Right from its inception the company had always been in profits excepting a few initial years, but in did not incur a loss. Also, the company declared a dividend ever since the year 1955-56. From the years 1995-96 however, there have been signs of the beginning of a downturn, and early sign of disturbance could seen in the financial statistics. This was during the period when Indica project had reached the design and conceptual stage and huge investment were already being made. The commercial vehicle business also started showing the beginning of a downslide. In spite of such a commendable legacy of innovation, self-reliance, capacity to develop original products to address specific market requirement In-house and having a strong financial performance. The company incurred a loss of Rs. 500.34 crores on a turnover of 8164.22 crores in the year2001.the loss amount to 6 % of the turnover. This loss was not because of any specific reason for the particular year. But in 2000, things didnt go well for Tata motors. That fiscal year, Commercial vehicle business unit logged the first loss in its 50-plus years-to the tune of Rs. 500 Crore. The company also started losing on its goodwill. A constant decline in the EPS, accompanied with no dividends for the years 2000-01, 2001-02, caused concern amongst the shareholders, which affected the share price and market capitalization of the company

TURNAROUND STRATEGIES: FINANCIAL RESTRUCTURING AT TATA MOTORS Reformation of international business was in the second phase of the turnaround strategy. In the first phase of strategies, major focus was Massive cost cutting, Improvement in working capital management Fund raising and deployment within the company

The period of the late nineties and early 2000 not only saw a decline in profits and revenue of the company but also stagnation in growth, where huge asset base become a drag. The fixed and raw material costs were getting out of the control and depreciation and amortization charge were increasing, depleting the bottom line. A massive cost reduction and working capital management was thus launched to combat these problems. To cut costs on raw material and avail of cash discounts, the company started paying the suppliers upfront in contrast to the earlier lag of 90-100 days. Receivables were also brought down from 75-90 days to 10 days because the company began selling the product on cash rather than on credit. The overheads costs were also reduced. In the year 2000, a material cost reduction of 295 crores was achieved whereas a reduction of Rs. 636.61 crores was achieved on the working capital side and the inventory turnover time was reduced to 150 days. Focus was on higher returns on capital employed and asset rationalization. The company divested its heavy transmission, axle and machine tools into building facilities into the stand alone enterprises in order to develop its commercial vehicles and international business. In the year 2000 the company took several steps to structure its borrowing and raise funds. It reduced the interest costs, which were to the tune of Rs. 4000 crores on a turnover of Rs. 7000 crores in the year 2001. Today the company has achieved a overall cost reduction of 65% in raw material, 20-25% in interest costs and rest on fixed costs. The management has taken a bold step during those times, by writing off Rs. 1200 of bad debt in the share premium account. This proves to very prominent step in turnaround of Tata motors writing off shareholder money for unproductive and non-performing assets. Similar kind of step has been taken during the cost cutting phase when the company announced a Rs. 1000 crore right issue at Rs.65 per share. The company brought back its Yankee bonds of an aggregate of Us 38 million dollars and commercial papers of Rs. 1900.

Table 3.1 Tata motors cost cutting (Passenger cars and commercial vehicles) SAVINGS Rs. crores 296 Includes Rs. 75-76 Cr. Interest saving. Rs 32.-35 Cr , reduction in Manufacturing and other 2001-02 332 overheads Includes: 65% material costs, 10 % manufacturing and Other overhead cost, 2002-03 150-200 20-25 % interest saving

FISCAL 2000-01

REMARK

INVESTMENT PATTERN AFTER TURNAROUND Instead on investing in capacities and process building they like to do it earlier. Tata motors now spent more on market research and introduction of new and competitive products. The company achieved its first phase of turnaround in just two years around the year 2003 by coming into a net profit of Rs. 300 crores from a Rs. 500 Cr. Loss. Its Economic Value Added turned positive and net margin Entered double digits. Also, the second version of its passenger car Indica met success and a company that was in debt become a cash rich, zero- debt company. During the cost reduction phase, apart from other measures efforts were taken to reduce the breakeven point for the company. For consumer vehicle industry, the breakeven is generally arrived at 2/3rd of its capacity utilization, which was brought down to 1/3 rd, so that even if the market goes down by 60-65 % the company does not incur loss. PERFORMANCE HIGHLIGHTS BEFORE AND AFTER TURNAROUND A look at the financial statement of the years 2003-04 and 2004-05 would be an enough indicator of the companys resilience that showed extraordinary performance. This also shows how commitment, conviction, vision and team work can achieve the nearly impossible targets within time, if planned enacted thoroughly.

Following table shows the growth achieved by the company from 2001 to 2005. PARAMETER 2001 (%) Sales Growth PAT Growth ROE ROCE Market Cap Growth TABLE 3.2 After not declaring a dividend for two years, the company again announced a dividend in the year 2003 and a special interim dividend of Rs. 2.50 per Rs. 10 share. The Tata motors commercial vehicles division also received the prestigious JRDQV award for the year 2005. During the year 20002001, the company was facing major financial stress the main reason behind that was slowdown of the automobile industry as a whole as well company has initially invested thousand of crore in R&D. In the same year, company has launched the Indica car but due to the slowdown of industry it was not able to generate the enough sales. That is the main Reason that return on Investment as well as the Return on capital employed was comes out to be negative. But in the year 2001-2002 industry has shown progress which has directly affected the sales of Tata motors. From Negative ales growth the company has reached to positive sales growth. Even Profit After tax has shown tremendous growth. -52 94.1 54.1 248.1 -13.6 -7.9 -802.7 -15.4 -0.1 2002 (%) 9.8 2003 (%) 21.3 2004 (%) 45.9 170 22.6 30.8 2005 (%) 32.5 52.7 30.1 28.3

-89.3 N.A -2.2 6.4 11.6 20.2

SHARE PERFORMANCE: The share of the company has been fluctuating since the 2000. But it has fallen rigorously in the mid 2001 mainly because of the slowdown of the automobile industry as well as introduction of new product (Indica) which was welcomed by masses during that time. The charts showing below clearly explain the fluctuating nature of the share prices of Tata motors. The share price of Tata motors was all time lowest during 2000-2001.

Chart 3.1 showing share performances during and after turnaround Soon after that Tata motors has undergone a turnaround which has lead to increase in the net profits as well as increase in the share price. During the fiscal year 2001-2002 right issue has been given by the Tata motors as well as company has started giving the dividend since 2002.

MARKETING AND OPERATION STRATEGIES: By the mid 2000s, the Tata group crystallized the strategy for the turnaround in three distinct phases. The strategy encompassed is the balance score card framework, divided the objective into four perspectives i.e. finance, customers, business processes and learning and growth. Out of the three of the turnaround strategies decided by the management, the first phase focussed on immediate turnaround through cost reduction initiatives. Next was domestic and international growth through new product and sales and service and finally, long term growth from increase business in LCVs, new products and new geographies. BALANCE SCORECARD APPROACH The balance score approach worked in line with the demand of the new economy that asked the corporate to become more customers-oriented. The BSC approach asked the company to identify its key processes that need attention and in those and in those, identify and develop quantifiable measures to assess the regular performance giving actual data of the particular output. 9

In order to come out from the series of financial losses, the top management had adopted the balance scorecard approach. The plan called for serious cost cutting across unit operations and more effective strategic planning and execution. The balance scorecard approach has build on company use of safety, quality, delivery, cost, morale; same kind of methodology has been used by the Chrysler. In order to achieve the god sales returns, the top management has assembled a high- level steering committee comprising cross functional heads and other keys officers, such as the regional sales manager. The committee then appointed a core score card team of five individuals to work with the steering committee to build and deploy the corporate strategy map and scorecard. Both the teams have to meet for monthly reviews where they discuss their progress, prioritized objectives for strategic business units, and allocated resources to the most vital objectives and initiatives. Another step taken by the top management in securing the horizontal alignment, senior leaders has been assigned new cross functional responsibilities. Tata motors plants has been spread throughout India, so one plant manager has been assigned with the objective of driving cost reduction across Commercial vehicles business unit, another has been assigned for implementing quality improvement strategies across the organisation. The divisions approach to cascading the scorecard to secure vertical alignment has proved just as through as its horizontal alignment efforts. Once the corporate balance scorecard was finalized, the scorecard team shared it with the heads of Commercial vehicles business units strategic business units, helping them to develop their own strategy maps and scorecards, and populate them with appropriate objectives and initiatives. Each cascaded score card is linked to the level scorecard through strategic objectives. But the steering committee and scorecard team didnt mandate objectives to Strategic business unit leaders. Instead of doing this, they challenged each reporting organization to define strategies that would best enable it to support commercial vehicles business unit targets. This technique yielded several important benefits. It encouraged second-tier managers to clearly visualize the larger organizations desired future direction and align their own strategies and supporting initiatives behind it. It also fostered the sense of ownership and accountability among these leaders. The lower level managers understood that they had latitude in determining how to achieve results, rather than receiving mandates from top executives. And it resulted in cascaded high- level strategy in unique ways. Tata motors in order to eradicate the series of losses have started working on one main objective i.e. Enhance product and service quality level. This corporate level objective shows up in the company Jamshedpur manufacturing plant strategy map in two process objectives. Quality and Consistency and Ensure new products adhere to cost, time, and quality targets. In the sales and marketing map, the supporting objective is Install sales process to all dealership. In addition, commercial vehicle business units executives realized that although cascaded maps should be based on higher level maps and contain the same perspective. Local tailoring was essential. Though CVBU has just a few years of scorecards work under its belt, its efforts seemed to be generating positive results. For example, in just two years, its $108.62 million loss turned into a 10

$107 million profit-due in large part to execution of the cost cutting component of the divisions new strategy and revenue of Tata motors has grown 40% in the years 2003-2004-atleast double what commercial vehicle business units nearest competitor has achieved. DELIVERING CUSTOMER DELIGHT To begin with the customer centric strategy, the company hired management gurus from the Harvard business school who helped the Tata motors commercial vehicles business unit to carry out a customer survey asking for a wish list of small improvement and their preferences. This customer survery proved very helpful to Tata motors in identifying the needs and wants of the customers. To results the customer survey, the group responded with the new EX series of commercial vehicles that depicted improved engineering, better fuel efficiency and better performance.

INTERNATIONAL BUSINESS Moving from export to in-country business requires rigorous business acumen to financially structure the business also along with creating synergies in production and other processes. The financial wizard of the company added his turnaround touch to the entire restructuring of financial business process at Tata motors along with taking several other proactive steps towards international mergers and acquisition. Two major deals that added substantially to the strength and image of the group worldwide were: The acquisition of Daewoo commercial vehicle company Another major deal was the acquiring of the stakes in Hispano Carrocera, a Spanish bus manufacturing facility.

SECOND SHOCK: TATA JAGUAR AND LAND ROVER (JLR) ACUISITION After 2005 the company situation was fairly well. The shareholders were getting good return on their investment. The company was able to maximize the value of the firm as well shareholder wealth was also being maximised. Tata has acquired the two UK ionic brands i.e. Land Rover and Jaguar in the fiscal year 2008. After the acquisition Tata motors has gone into the financial stress. Tata motors have incurred the loss of $ 383 million. Total revenues were 7.07 billion. However the period following the Tata motors takeover, the company has posted a profit of $58 million on Revenues of $1.34 billion. But soon after the deals get over Tata motors start getting into the losses. When the $ 2.3 billion deal took place, it was quickly apparent that Tata Motors have picked a worse time to make an acquisition. The collapse of the mortgage market in the US had set off the financial Crises and anyone who had cash wasnt in the mood to lend it. Soon after the acquisition the in 2008, Tata motors found itself with a debt of Rs. 21,900 crore, an uncomfortable position for a company that has been virtually debt 11

free. Meanwhile , at the other end of the spectrum, through 2008 and the early part of 2009, Tata motors was involved in developing and launching the worlds cheapest car, Nano, a project that was fraught within its own melodramatic ups and downs. HARD TIMES At JLR, the product wasnt moving and Bombay house was beginning to feel stretched, UK government contemplating a bailout of JLR, Tata motors Market value Plunged to Rs 6503.2 crore, with the stock hitting rock bottom Rs. 126.45. The market capitalization was less than what it had paid to Ford from JLR. REASONS BEHIND THE LOSSES The global slowdown put the company under tremendous pressure because the management of JLR had just separated from one big organization and was attaching itself to another not-so-big group and they were not yet kind of experienced living independently. Banks has stopped giving any fresh loans .in the fiscal year 2009, Tata motors posted its first loss in at least seven years after sales at the luxury units plunged amid the global slump. The consolidated net loss was Rs. 2500 crore in the years ended 31st march compared to the profit of Rs. 2200 crore in the year earlier. The JLR unit made a pre-tax loss of Rs.1800 crore as unemployment and the financial crises damped sales in the US and Europe. JLR didnt have the cash management system of its own so Tata group has to appoint one consultancy firm which includes more to the cost THE TURNAROUND First strategy was to manage the liquidity. A team of young managers was put in charge, in an approach similar to the one followed in the 2003 restructuring at Tata Motors, with reviews on a daily basis. Tata Motors also embarked on a plan to divest stakes in group companies to raise cash. In September 2008, it sold a 1.3% holding in Tata Steel Ltd to holding company Tata Sons Ltd for a total Rs.485 crore. In November 2008, the board approved an Rs.4, 147 crore rights offer. All proceeds were channelled into Tata Motors to make JLR profitable. Crucially, Tata Motors was able to keep product development plans going, which has paid off with the global economy reviving and customers returning to JLR showrooms. However, the extent of the turnaround can be gauged when margins are compared with corresponding quarter of previous year. Margins rose by a whopping 1,370 basis points or 13.7% from 2.9% in 30 September 2009-10, reflecting the changed dynamics of the company as sales rose sharply on the back of new product launches and improved market sentiments. About half the firms turnover is dollar-linked while one-fifth is linked to the euro. The rupee has strengthened against both currencies this year. Since January, the pound has strengthened 4.9% against the dollar and 7.7% against the euro.

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With JLR accounting for more than half of Tata Motors business, the company posted a 100-fold jump in profit in the three months to 30 September. The debt-to-equity ratio is down to 1.6 times at the consolidated level from 4.5 times at the end of 31 December 2009. Thats high but comfortable given surging volumes. There were five key issues that persuaded Tata Motors to go ahead. While Jaguar had a mixed reputation, both were still great brands. Ford had pumped in a great deal of cash to improve quality and it was just a matter of time before this made a difference. Second, JLR had very good automobile plants. Third was the steadfastness of the dealers despite losses over the past four-five years.

PERFORMANCE AFTER TURNAROUND After the initial loss in the fiscal year 2009 the company has turnaround. The profit before tax and profit after tax for 2010-11 was Rs. 2197 crores and Rs. 1812 crores respectively as compared to Rs. 2830 crores and 2240 crores in the fiscal year. After the turnaround JLR has shown significant improvement both in volume and revenue, better product mix favourable exchange rates and higher margin. The Tata group has recorder its highest ever considered profit before Rs.10437 crores (Rs. 3523 Crores in 2009-10) and the consolidated profit for the year Of Rs. 9274 crore (Rs. 2571 crores in 2009-10). With a turnaround in the business and continuing strong profitability in 2010-2011, the net debt at JLR reduced to GB 233 million. Tata motors Debt/equity ratio was reduced 1.17 in 2011 significantly lower than as compared to 4.28 as in 2010. Earnings per share were significantly lowered in the year 2009 because of the JLR deal. But it has increased to 49.65

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Table 3.3 showing performance of various parameters PARAMETER PAT ROE ROCE EPS DPS SALES TURNOVER 27535.24 27535.24 25660.79 35593.05 47807.42 2007 1913.46 28 25.82 49.65 15 2008 2028.92 25.98 18.96 52.63 15 2009 1001.26 8.09 6.41 19.48 6 2010 2240.08 15.15 10.37 39.26 15 2011 1811.82 9.06 10.19 28.55 20

SHARE PERFORMANCE

Chart 3.2 showing share performances Two years and few months since then, JLRs contribution has helped Tata motors post Steep rise in the profits. The chart clearly indicates that there has been decline in the share prices after the JLR acquisition has taken place. The share price as plunged to the lowest level. Soon after the initiative taken by the management there has been increase in the share price. Dividend has been regularly issued by the Tata motors to its Shareholder.

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CHAPTER 4

CONCLUSION
Conclusion:

There has been a frequent ups and down in the company either because of the industry slowdown or global meltdown (global recession). But Tata motors with its unique financial, marketing and production strategies as come out from the financial stress and become one of the most profitable ventures for the Tata group. The JLR is current giving the highest revenue as compared to all other segment including the commercial vehicle as well as the passenger segment. Share price of Tata motors is touching all time high and all other product including the Tata Nano are generating the profits for the company.

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Bibliography
References 1. 2. 3. 4. 5. www.capitalline.com www.economictimes.com
www.moneycontrol.com www.nseindia.com www.tatamotors.com

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