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 T H E C O M P1A N Y A D D R E S S ]
 TABLE OF CONTENT

Content Page number

1. Introduction 3
4
2. Research methodology

3. Analysis 5-14

4. Conclusion 15

Bibliography 16

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INTRODUCTION:

Tata Motors Limited is India’s 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 1996-
97. 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.

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 CHAPTER 2

RESEARCH METHODOLOGY

Research is completely based on secondary data.

Information source:
Information is mainly sourced from internet.

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 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 government’s 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 didn’t 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

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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.

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Table 3.1 Tata motors cost cutting (Passenger cars and commercial vehicles)

SAVINGS
FISCAL REMARK
Rs. crores
2000-01 296
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

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 company’s 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.

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Following table shows the growth achieved by the company from 2001 to 2005.

PARAMETER 2001 2002 2003 2004 2005

(%) (%) (%) (%) (%)

Sales Growth -7.9 9.8 21.3 45.9 32.5

PAT Growth -802.7 -89.3 N.A 170 52.7

ROE -15.4 -2.2 11.6 22.6 30.1

ROCE -0.1 6.4 20.2 30.8 28.3

Market Cap
Growth -52 94.1 54.1 248.1 -13.6
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 2000-
2001, 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.

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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.

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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 division’s 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 unit’s 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 didn’t 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 organization’s 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 unit’s 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

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$107 million profit-due in large part to execution of the cost cutting component of the division’s new
strategy and revenue of Tata motors has grown 40% in the years 2003-2004-atleast double what
commercial vehicle business unit’s 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 wasn’t 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

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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 world’s cheapest car, Nano, a project that was
fraught within its own melodramatic ups and downs.

HARD TIMES

At JLR, the product wasn’t 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 didn’t 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 firm’s
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. That’s 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 2007 2008 2009 2010 2011

PAT 1913.46 2028.92 1001.26 2240.08 1811.82

ROE 28 25.98 8.09 15.15 9.06

ROCE 25.82 18.96 6.41 10.37 10.19

EPS 49.65 52.63 19.48 39.26 28.55

DPS 15 15 6 15 20
SALES
TURNOVER 27535.24 27535.24 25660.79 35593.05 47807.42

SHARE PERFORMANCE

Chart 3.2 showing share performances

Two years and few months since then, JLR’s 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. www.capitalline.com
2. www.economictimes.com
3. www.moneycontrol.com
4. www.nseindia.com
5. www.tatamotors.com

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