MUMBAI (MarketWatch) -- It was not surprising to see Mr. Ratan Tata, chairman of India's 14-decade old Tata Group, steal headlines last week when he said the group is in the process of formalizing a successor to him.
His comment in an interview to The Wall Street Journal, that the successor could be an expatriate, drove emotions across the Indian community, for whom the brand Tata is a household name, and when the septuagenarian has been at the group's helm for 18 years now.
With businesses spanning steel, cars, chemicals, tea, hotels, information technology and more, the conglomerate pulls in annual revenue in excess of $70 billion -- with 65% of its sales coming from outside of India.
And Tata Group has been very much in the news (for reasons both good and bad) in the last two to three years, not just in India, but on the global scene. Developments included the group's minicar Nano -- touted as the world's cheapest car -- and its famed acquisitions of Anglo-Dutch steelmaker Corus, and the Jaguar-Land Rover, or JLR, luxury auto brands.
To brush up readers' memory, Tata Steel Ltd. /quotes/comstock/11i!tatifm (TATIFM 12.17, +0.15, +1.23%) in 2007 bought Corus for $12 billion to become the world's eighth-largest steelmaker by output, while Tata Motors Ltd. /quotes/comstock/13*!ttm/quotes/nls/ttm (TTM 13.85, +0.01, +0.07%) , another group company, paid $2.3 billion to buy Jaguar and Land Rover from Ford Motor Co. /quotes/comstock/13*!f/quotes/nls/f (F 8.81, 0.00, 0.00%) in 2008.
While the deals lent the Tata companies a stronger global footing, they preceded a financial crisis that sent the world's economy into turmoil, making many question the timing and the price paid for them.
Corus suffered, as lower prices since mid-2008 hurt steel makers globally, while weak demand in the key U.S. and Europe markets hurt the fortunes of luxury-car makers, to which JLR was no exception.
The ride since then has been pretty tumultuous, with Tata Steel and Tata Motors having to adopt stringent measures, including layoffs, to cut costs in an unfavorable pricing environment, manage production and sales volumes amid crimped demand, and cut down on the huge debt they raised to buy the foreign assets.
Therefore, as the two firms report their consolidated second-quarter results this week -- at a time when the world seems to be recovering from the crisis -- investors will be keen to see how much this restructuring has paid off and whether things have changed for good.
Analysts say that while losses at Corus and JLR may continue, the results are likely to reflect an improvement over the previous quarter.
Goldman Sachs expects Tata Steel to report a consolidated loss of 10.3 billion rupees ($222 million), against the 22.3 billion rupee consolidated loss reported in the April-June quarter.
The company, which reports Thursday, may see operating margins benefit from lower raw-material costs. Interest costs could also head southward after it paid off 19.45 billion rupees of high-cost debt and prepaid the 100 million pounds ($165 million) of debt in Corus in the July-September quarter.
It would be interesting to see the quantum of cost savings through the restructuring efforts. Corus saved 22 billion rupees in the previous quarter via these measures. But price realizations and a recovery in volumes at European operations will be the top items to watch for.
For Tata Motors, the performance of JLR will hold the key when India's largest auto maker by sales publishes consolidated numbers Friday. Falling sales at JLR pulled the company to its first consolidated annual loss in at least seven years in the 12 months ended in March.
The pain for JLR, like for Corus, continued in the first quarter (April-June) of the current fiscal year, forcing Tata Steel to report a consolidated net loss of 3.29 billion rupees, compared with a net profit of 7.20 billion rupees a year earlier.
However, there could be some relief on offer amid an improving British economy, the luxury carmaker's cost-rationalization exercises, efforts to stabilize volume growth, and recent fund-raising initiatives. Earlier this month, JLR struck a five-year distribution financing deal worth as much as 170 million pounds with GE Capital, a unit of General Electric Co. /quotes/comstock/13*!ge/quotes/nls/ge (GE 16.17, -0.01, -0.06%)
Investors will also look for a slide in interest costs for the quarter, with Tata Motors having paid back the $3 billion bridge loan taken for the JLR buy. The costs had surged 80% on year to 5.84 billion rupees in the first quarter.
The two companies reported encouraging second-quarter results for their Indian operations, helped by strong domestic demand. Tata Steel posted a net profit of 9.03 billion rupees, though down from 17.88 billion rupees a year earlier, but up from 7.9 billion rupees posted in the first quarter.
For Tata Motors -- which sells the Indica Vista hatchback, the Indigo Manza sedan, the Safari sports-utility vehicle and the Nano minicar -- domestic business exceeded expectations, as net profit more than doubled to 7.29 billion rupees in the second quarter on lower raw-material costs and increased sales.
Yet even with efforts to turn around the two overseas units underway, and despite it being still too early to determine whether it will be a sustained recovery, the shares of Tata Steel and Tata Motors continue to find takers in the Indian market.
These two Tata stocks have rallied in the run-up to these results. At their Friday closing prices of 551.60 rupees and 642.40 rupees, respectively, Tata Steel and Tata Motors have risen about 17% and 14% so far in November to be the top two percentage gainers on the Bombay Stock Exchange benchmark Sensex, which itself has gained 7.1% this month.
In fact, over the last 12 months, Tata Motors has nearly quadrupled in value to become the best-performing stock among the 30 Sensex components, while Tata Steel has surged about 244% -- outperforming the 91% return by the Sensex in the past year.
With such gains at least offering the semblance of recovery, a downside risk to the stocks cannot be ruled out if the numbers fail to reflect an improving pricing scenario and an uptick in demand.
Given that Mr. Tata's retirement is a good three years away, he would sure want to see Corus and JLR not only turn into sound profitable entities, but also pave the way for the multinational's future growth, before he hangs up his boots.
Just as he said in the interview to WSJ: "We have brands to nurture and hopefully bring back to their former glory."
Sourcemarketwatch.com
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