Will Tata float JLR? Or exit altogether?

Is the Tata Group considering floating Jaguar Land Rover (JLR), which accounted for a whopping 95 percent of the combined profit of Tata Motors in the past quarter? According to this blog post on the website of UK-based Birmingham Post, quite likely yes.

The author of the post, David Bailey, a professor at Coventry University Business School, bases his assessment on two reports that appeared in India last month- one by Reuters and another by The Economic Times.

Both stories suggested that Tata could benefit from listing the luxury car market; Bailey agrees. “A minority listing of the UK firm would let the Indian parent book a healthy return on its $2.3 billion purchase, and allow JLR to raise cheap capital overseas. There’s no need to keep this gem hidden,” the Reuters BreakingViews column noted. Group chairman Ratan Tata was reported to have considered a listing in 2011 until the initial public offering (IPO) market faltered, the column said.

So far, so good. But how likely is it that the Tatas could use an IPO to exit JLR completely?

Some critics think that’s very possible as well, according to Bailey. Until now, JLR has benefited immensely from former owner Ford’s huge investments in new models. Skeptics believe that the Tatas will be unwilling or unable to do the same.

As Bailey notes, “… Tata/JLR are indeed now effectively on their own after reaping the benefits of massive Ford investment in new model development, and that from here on in big money will be needed to develop new platforms and engines, including a much-needed entry-level BMW 3-series competitor for Jaguar.

“What’s right as well is that JLR as it is currently set up is too small - producing some 300,000 units at best this year against BMW at well over 1 million, and its exceptionally large margins on cars produced in the last quarter (at some 20%) may well not be sustainable over time. Over the medium term I’d argue a scale of 600,000+ at high margins is needed to get to a sustainable position in terms of cost recovery of investment in new models and engines.”

Nevertheless, the professor believes that Tata will continue to have a majority stake in JLR even if it is listed and looks for outside investment, as well as partners for engine and new model development, rather than exit the company altogether.

As the Reuters column points out, a flotation would bring Tata cash, which it could use to pay down some of its $4 billion debt. A listed JLR would also find credit cheaper if more debt were needed to fund investments.