Why A Jaguar Land Rover IPO Doesn’t Make Sense For A Tata Motors Shareholder
JLR IPO will leave Tata Motors’ shareholders with a higher exposure to the loss-making India business.
An initial public offer of Jaguar Land Rover could help Tata Motors Ltd. reduce debt and fund capacity expansion, but may also cost its investors.
Shares of Tata Motors Ltd. surged to a one-week high after Bloomberg reported that the Tata Group is considering an initial public offering of its subsidiary Jaguar Land Rover.
A spokesman for Tata Group, however told Bloomberg that “there are no plans to list JLR.” A representative for Tata Motors said “there is no truth in the information,” without elaborating.
An IPO for the marquee British carmaker would essentially leave Tata Motors’ shareholders with a higher exposure to the loss-making India business. At the same time, it would dilute their exposure to the lucrative British brand.
JLR forms nearly 85 percent of the sum-of-parts valuation of the Tata Motors stock, and if listed as a separate entity, Tata Motors will become its holding company.
JLR: Tata Motors’ Money Machine
JLR contributes most of Tata Motors' consolidated profits and offsets the losses incurred by the auto giant’s domestic India operations. For the year ended March, the luxury carmaker is expected to report a profit of £1.58 billion (approximately Rs 13,000 crore), according to CLSA’s estimates, or Rs 12,600 crore, as per Bloomberg’s calculations.
In contrast, CLSA values the India business of Tata Motors at 0.5 times expected price-to-book value, indicating weak earnings visibility.
Valuations, Brexit A Concern
Once JLR is listed, Tata Motors could see its valuations shaved off in the near term, Ashwin Patil, auto analyst at LKP Securities, told BloomergQuint over the phone, “Holding company discounts vary between 20-40 percent depending on the sector and the nature of investments. This could mean valuation downside in the short term for Tata Motors as it will become a holding company.”
On the other hand, an IPO could also lead to potential value unlocking for Tata Motors as, in the long term, the management could focus on the turning around the domestic business, he said.
Tata Motors is currently trading at a 40 percent premium to German peers like BMW and Daimler, according to CLSA. The stock is currently trading at 17 times its earnings for 2017-18, based on the estimates provided by the broking firm. The gross debt for FY18 could stand at around Rs 77,000 crore, and this coupled with Brexit could post a near-term challenge.