There could still be value in the Nano model

When India’s Tata Motors bought Jaguar and Land Rover from Ford in 2008, many investors thought then-Chairman Ratan Tata was making a big mistake.

Ford was selling the units for less than half what it paid to acquire them, just as early tremors of the credit crisis began sapping luxury demand. The day before the deal was announced on January 3, 2008, West Texas Intermediate crude reached $100 a barrel for the first time, suggesting a tough environment for gas-guzzling sports cars and four-wheel drives.

Tata’s Nano, a super-cheap “one lakh rupee” ($1,500) minicar pitched at India’s emerging middle-class, was seen as the best prospect, and Jaguar Land Rover looked like an expensive distraction. Moody’s and S&P both downgraded Tata Motors, and the stock fell almost 30 per cent in the six months it took to complete the transaction.

How have those prognostications turned out?

Wrong on almost every count. Jaguar Land Rover now accounts for more than half of Tata Motors’ unit sales, overtaking the trucks and passenger cars produced by Tata Motors India in the past two quarters.

Helped by a weakening rupee, Jaguar Land Rover’s British pound denominated sales have risen more than fivefold since the takeover to Rs2.24 trillion ($33.3 billion) in the year through March, according to data compiled by Bloomberg. Tata Motors India’s are up a relatively modest 74 per cent.

Jaguar Land Rover is also more profitable, even after one-time costs of £224 million ($329 million) during the fourth quarter related to Takata’s airbags recall and damage from the 2015 Tianjin chemicals explosions. Operating margins averaged 11 per cent over the past five years, versus 1 per cent in the domestic business.

How’s the much-hyped Tata Nano doing? Not so well. With sales rarely rising above 2,000 units a month, the Gujarat-based factory that was set up to build it is only running at about 10 per cent capacity. Like the netbook computers that were launched around the same time and likewise failed to change the world, its entry-level pricing couldn’t quite compensate for quality that was also a bit bargain basement.

Tata Motors India is now focusing its attentions on the stronger mid- and high-cost vehicle segments, and has revamped the Nano with a Rs199,000 starting price. Spare capacity in the Gujarat plant will be used to make its new Tiago, which costs Rs320,000 and upwards.

What should Ratan Tata’s successor Cyrus Mistry do about this situation? One option sure to delight investors would be selling the legacy Tata business to focus entirely on Jaguar Land Rover.

The problem there is finding a buyer for an unprofitable arm that’s also more indebted than its upmarket stablemate.

A better idea would be to make the best of a bad job and work at applying lessons learnt from the British business. As Nissan has shown since its 1999 alliance with Renault, troubled carmakers are often only a few blockbusting designs away from success.

Many investors nowadays regard Tata Motors India as an irredeemable basket case that’s lurched from one crisis to another for decades. They thought the same thing of Jaguar Land Rover eight years ago.