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Jaguar Land Rover IPO Seen as Jackpot as Valuation Soars

When Tata Motors Ltd. (TTMT) bought Jaguar and Land Rover in 2008 for $2.5 billion from Ford Motor Co. (F), investors greeted the announcement by selling its stock. Those who held on may be sitting on a jackpot.

The two British luxury car brands are worth $14 billion, according to the average estimate of three analysts surveyed by Bloomberg News, more than Fiat SpA (FI) or Suzuki Motor Corp. (7269) With a planned $12 billion in capital spending and product development over five years and a proposed partnership with Chery Automobile Co. to expand in China, conditions are right for an initial share sale, according to Fim Asset Management Ltd. and Kim Eng Securities Pvt.

After acquiring Jaguar and Land Rover from Ford, Tata Motors hired KPMG International and Roland Berger Strategy Consultants to help cut costs at the luxury unit. The company introduced new models including the new XJ sedan, the Evoque compact SUV and the XF sedan, according to a June 2009 presentation, and began targeting new emerging markets such as Russia and China.

“By listing Jaguar Land Rover, Tata Motors will allow investors who aren’t focused on India to invest in the company,” said Taina Erajuuri, a Helsinki-based money manager at FIM Asset Management that oversees about $1.2 billion including Tata Motors shares. “The new models planned for JLR require a large amount of investment, especially if the company wants to follow on the success of the Evoque.”

Record Sales

Tata Motors, the second-best performing automaker stock globally this year, extended its gains after Jaguar Land Rover recorded its highest ever monthly sales in March. That has helped make up for the slowdown in annual deliveries of Tata- branded passenger vehicles in India, where interest rates and fuel prices have dented consumer confidence.

The Indian automaker said in August that it will double its annual spending on product development and capital expenditure at Jaguar Land Rover to 1.5 billion pounds ($2.4 billion) over five years to fund an expansion that includes a pipeline of 40 new or upgraded vehicle models. That is more than the $2 billion in profit that Tata earned in the 2011 fiscal year.

The British luxury carmaker will also add 1,000 jobs and a third shift to boost production at its U.K. plant to meet surging demand for the Range Rover Evoque, named the North American truck of the year in January in Detroit.

Unlocking Value

“I think it will be a good thing if Tata Motors decides to list JLR,” said Jigar Shah, a Mumbai-based analyst with Kim Eng Securities, using the acronym for the two British brands that Tata combined after the purchase. “An IPO for JLR makes sense as it will unlock value for shareholders.”

Tata Motors expects to fund Jaguar Land Rover’s capital expenditure and product development needs through internal cash accruals, Debasis Ray, a company spokesman, said in an e-mail. “However, we will continue to consider opportunities for capital structure management as done in the past.”

In March, Tata Motors raised 500 million pounds in notes, adding to a 1 billion pound bond issue in May 2011. The company had cash and equivalents of $3.1 billion as of Sept. 30, 2011, according to data compiled by Bloomberg

The company’s stock has advanced more than 60 percent this year in Mumbai trading, the biggest percentage gainer on the 30- company benchmark Sensitive Index. The company is also the second-best performer this year on the MSCI AC World Automobiles & Components Index.

Product Pipeline

Jaguar, which announced that it would introduce a two-seat, all-new sports car in 2013 called the F-Type, is looking to expand its product portfolio as sales more than quadrupled in China, and doubled in Russia in the quarter ended Dec. 31, compared with a year earlier, Tata Motors said in a presentation on its website.

Jaguar and Land Rover sales in China and Russia boosted profitability as demand in emerging markets helped tide over slower growth in advanced economies. The Evoque, which the company began delivering in September, accounted for 30 percent of Land Rover’s 65,287 retail sales in the October-to-December quarter.

The two British brands weren’t always winners. When Tata announced the deal in March 2008, its largest acquisition ever, Jaguar’s sales had dropped 33 percent in the U.S. and Europe in the preceding two months, while Land Rover’s deliveries fell 13 percent and 7.7 percent respectively during the period.

Diluting Ownership

Jaguar was listed on the London Stock Exchange until 1990 after Ford bought the company. The U.S. carmaker sold Aston Martin in 2007, and Jaguar and Land Rover businesses a year later as losses in its main auto business drained cash.

Tata may prefer to fund the capital spending through a bond issue to avoid diluting ownership of its biggest profit center, according to Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management which oversees about $1.1 billion of emerging-market assets including Tata Motors.

“Two years ago, it would have made sense for Tata Motors to have sold a stake in JLR,” said Maier. “Today, there is still growth and liquidity is not a problem.”

Global sales at JLR gained 29 percent to 314,433 vehicles in the 12 months through March, the company said in a statement this week. That compares with the 3 percent annual increase in sales for Tata passenger vehicles.

China Growth

The company expects China to become the second-largest market for Land Rover, and the third-largest market for Jaguar in the year that ended March 31, it said in a presentation on its website.

JLR will spend 3.5 billion yuan ($555 million) for a 50 percent stake in a planned venture with Wuhu, China-based Chery Auto. The agreement, signed in December 2011, will build the U.K. luxury carmaker’s models in China to challenge Daimler AG (DAI), General Motors Co. (GM) and Volkswagen AG (VOW) in the world’s largest auto market. The government still has to approve the venture.

The company will introduce new versions of the XF and Range Rover Sport in the 2013 financial year, Bhaumik Bhatia, an analyst at Mumbai-based IDBI Capital, said in an April 9 note. There is currently a waiting period of about six weeks for JLR models, and two to three months for the Evoque, according to the report.

“Luxury car sales have picked up this year especially in emerging markets like China.” FIM Asset’s Erajuuri said. “Jaguar has been listed in the past before it was acquired by Ford in 1989 and so I think investors will invest in JLR.”

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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