Jaguar Land Rover is scouting for a new address with a little more space for valuations. It’s good to shop around, even though luxury carmakers don’t get the admiration on stock exchanges that their products attract on the streets. What’s questionable, though, is the timing.
Being parked inside the Mumbai garage of Tata Motors Ltd., its owner for the past nine years, is stifling for the marquee British brand. The Indian automaker’s domestic operations are all about trucks and an indigenous passenger-car line that, wisely, shares nothing with JLR.
With analysts reckoning that JLR accounts for 90 percent of Tata Motors’ fair-market value, it makes sense — as Gadfly has argued — to unlock that worth by listing the luxury carmaker outside India. That’s especially so if it helps reduce the salt-to-software group’s net debt of almost $26 billion.
Tata Sons Ltd., the holding company, is weighing London and New York, home to Tata Motors’ American depository receipts, Bloomberg News reported Tuesday. The company has denied any such plan.
A little hesitancy isn’t out of place. For all JLR’s operational superiority over Tata Motors’ domestic businesses, it’s not a cast-iron certainty that Natarajan Chandrasekaran, the new Tata Group boss, could command quite the valuation he’s looking for.
The bull case for a spin-out is represented by Ferrari NV. With an enterprise value that’s 16.1 times blended forward 12-month Ebitda, Ferrari’s premium is the highest for a carmaker in developed markets after the bubblicious Tesla Inc. Price JLR’s $2.25 billion of fiscal 2017 Ebitda the same way, and add on the 1.9 billion pounds ($2.4 billion) of net cash on its balance sheet, and you have a market capitalization of $39 billion. That’s almost twice the value of Tata Motors as a whole.
Is that a reasonable comparison, though? Ferrari is an odd beast, producing 8,000 cars a year, commanding Ebitda margins of 27 percent, and deriving one-quarter of revenue from merchandising, Formula 1 sponsorship, and selling engines to Maserati.
A less favorable point of reference would be Daimler AG and BMW AG, which like JLR are focused more on the top 1 percent of the income spectrum than the 0.01 percent. Their respective outputs of 3.1 million and 2.4 million cars a year, and margins of 19 percent and 12 percent, are closer to JLR’s 600,000 run rate and 12 percent margins.
Viewing JLR in that light dims the attractions of a spinoff. Besides, when it comes to cars, investors seem more inclined to pay for emerging-market growth than developed-country pricing.
Value JLR like BMW and you still end up with a $15 billion company, but that’s not a big improvement on the current state of affairs. On Daimler’s metrics, the price drops to $7.9 billion.
JLR and Tata’s domestic business are odd bedfellows that belong apart. But with the Indian portion in the middle of a high-stakes transformation plan and investors marking down luxury carmakers, Tata Motors has as much to lose as it could gain from separating JLR’s cash machine right now. Chandrasekaran and his incoming CFO, Saurabh Agrawal, will have their moment to move JLR onto the IPO starting grid.
For now, they’d do well to keep polishing its bumpers in Tata Group’s garage.