BREAKINGVIEWS: JLR flotation would make sense for Tata Motors

MUMBAI Wed Feb 15, 2012 5:09pm IST

New Land Rover Freelanders are seen outside the Halewood Jaguar and Land Rover factory in Liverpool, northern England, in this October 27, 2008 file photo. REUTERS/Phil Noble/Files

New Land Rover Freelanders are seen outside the Halewood Jaguar and Land Rover factory in Liverpool, northern England, in this October 27, 2008 file photo.

Credit: Reuters/Phil Noble/Files

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MUMBAI (Reuters Breakingviews) - Jaguar Land Rover contributed 95 percent of the combined profits of the Tata Motors group last quarter. A minority listing of the UK firm would let the Indian parent book a healthy return on its $2.3 billion purchase, and allow JLR to raise cheap capital overseas. There's no need to keep this gem hidden.

Tata Motors should be rightly proud of the success it has achieved in reviving JLRs fortunes. The firm delighted the market with better than expected results in the third quarter ending December 2011, sending its shares up almost 13 percent in two days.

The chief executive of Tata Motors stepped down in September last year. No replacement has yet been found. That suggests there's no rush to bring in a leader for the group as a whole, and that the two firms, the domestic business and JLR, can run happily as separate concerns. Rather than try to integrate and search for synergies, Tata could split JLR out completely and sell a minority its shares in an initial public offering.

A flotation would bring Tata cash, which it could use to pay down some of its $4 billion debt. And a listed JLR would find credit cheaper if more debt were needed to fund investments. Alternatively, it would presumably have more highly valued shares than its parent -- helpful if acquisition opportunities come along.

Tata's domestic motor operations would also stand to benefit from stripping out JLR. Management could focus on increasing market share in India. It currently trails the likes of Maruti Suzuki and faces stiff competition from foreign players keen to grab a slice of one of the world's fastest growing markets.

And even with a foreign stock market listing, JLR need not cut its Indian ties. It could still increase both sales and production there. Tata would remain the majority owner, after all. Corporate patriarch Ratan Tata was reported to have considered a listing in 2011 until the IPO market faltered. Stock market conditions remain a constraint, but as and when investor appetite returns, a listing for the British business makes sense.

CONTEXT NEWS

-- Tata Motors reported a stronger than expected 40.5 percent rise in quarterly profit as robust sales at Jaguar Land Rover made up for weakness in its home market, sending up its stock to its highest level in more than a year, Reuters reported on February 14. Tata Motors has a market capitalisation of $18.6 billion.

-- Tata Motors said consolidated net profit rose to $642 million in the three months to December 31 up from $457 million the previous year. Net profit in the company's India business dropped by more than half to $33 million, partly as a result of higher commodity costs and increased spending on marketing. Profit margins at JLR were 20.1 percent, compared with 6.7 percent in the domestic business. Tata, which also makes the ultra-cheap Nano, bought Jaguar Land Rover in 2008 from Ford for $2.3 billion.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Edward Hadas and David Evans)

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