WHEN TATA MOTORS acquired British luxury carmaker Jaguar Land Rover (JLR) from Ford for $2.3 billion a decade and a half ago, analysts were sceptical. It was the year of the global financial crisis and demand for luxury cars had taken a beating. But against all odds, the Tata Group company went from ₹2,500 crore loss in FY09 to ₹13,986 crore in profits in FY15.

The euphoria, however, was short-lived. The homegrown automaker recorded the biggest-ever quarterly loss (₹26,961 crore) by an Indian company in Q3 FY19. The losses continued through the pandemic as disruptions in the global supply chain led to a semiconductor crisis, causing a decline in volumes. The huge leverage on its books didn't help JLR either. As the chip shortage abated in the second half of 2023, volumes picked up and the company swung back to profits again.

JLR halved its break-even volume threshold to 300,000 units in FY23, from 600,000 in FY19, thanks to its focus on high-margin SUVs. Profitable cars, including Range Rover, Range Rover Sport and Defender, contributed 77% to the 168,000 order book at the end of Q2 FY24.

Now, with the auto industry gearing up for electrification, Ratan Tata's big bet seems to have paid off, so much so that Tata Motors' upcoming "Born Electric" premium e-SUV range Avinya will be based on JLR's EMA (Electrified Modular Architecture) platform. It not only accelerates Tata Motors' entry into the high-end Gen 3 EV segment but also cuts development costs.

"JLR buyout has turned out to be a favourable outcome for Tata Motors," says Harshvardhan Sharma, head, auto retail practice, Nomura Consulting. "With Tata Passenger Electric Mobility and JLR working together, Tata Motors will have a huge moat as the industry moves towards software-defined vehicles — where cars are going to be gadgets on the move," says Sharma.

Tata Motors holds the pole position in the domestic EV segment with over 70% market share. EVs constitute 13-15% of its overall passenger vehicle sales. The carmaker aims to drive up its EV portfolio to 50% by 2030.

Even though Tata Motors' positioning is going to be different from JLR, the EMA deal unleashes a big opportunity to access new-age features, which will be necessary in the coming years, says Shailesh Chandra, MD, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility. "The two companies have the opportunity to derive synergies on costs. We will be localising certain parts that will give us the cost advantage. It also gives an opportunity to JLR to tap some of those cost benefits. When it comes to high-tech components, JLR negotiating with suppliers also benefits us. We see multiple benefits of working together," Chandra said in an analyst call after the company announced its Q2 earnings.

The PV business has already turned a corner, with its market share growing to 13.4% in the first half of FY24, from 5% three years ago. To meet this demand, the company plans to operationalise the plant that it bought from Ford in Sanand, Gujarat by March 2024. The new plant will add another 30,000 units to Tata Motors' current capacity of 55,000 units per month.

In the first half of this fiscal, the company generated free cash flow of ₹6,400 crore, bringing down its net automotive debt to ₹38,700 crore. Net auto debt in the domestic business stood at ₹7,600 crore at the end of Q2FY24. "We have two strong quarters coming up. Q4 is our strongest quarter. Then we have Tata Technologies IPO. The India business will go net cash by March-end," says P.B. Balaji, group CFO, Tata Motors.

After acquiring JLR in 2008, Tata Motors' debt piled up to ₹21,900 crore. "Today, as JLR moves to achieving a net debt to zero by fiscal 2025, it's a great testament to how inorganic growth can be leveraged well especially for conglomerates," says Nomura's Sharma. JLR aims to slash its net debt to less than £1 billion by the end of FY24 and become net cash positive by FY25.

The unique advantage of being part of the Tata Group gives JLR access to a lot of frugal resource base. "Tata Motors with Tata Elxsi and TCS in its war-chest, the possibilities are infinite when it comes to tech development," says Sharma.

The Tata Group has hiked JLR's margin guidance from 6% to 8% for FY24. The luxury carmaker targets 10% EBIT margin by FY26. "The 10% margin will be delivered through revenue growth, quality of sales, new platforms and continued focus in maintaining lower break-evens," Balaji tells Fortune India.

According to Basudeb Banerjee, analyst at ICICI Securities, JLR will be a steady ship going forward. "It won't grow massively, but it will be steady, unless some major geopolitical issue comes and impacts," says Banerjee.

He, however, cautions that the current scale of profitability at Tata Motors is a matter of two-three quarters more. "Post that, weakness in India business because of the truck market starting to turn weak may pose a risk. Rising EV volumes will only hurt profitability. We don't expect the current level of profits to sustain beyond FY25," says Banerjee.

In Q2, Tata Motors lost about ₹100 crore due to investments in its domestic EV business. Balaji, however, expects profitability of the EV business to improve in Q3 and Q4 as battery prices come off further and new contracts are put in place. "The EBITDA margin of the EV business will be similar to the ICE business. Currently, we are in a significant investment phase as far as creating products are concerned. EBITDA, which was -9.7% last quarter, has now improved to -5%," says Balaji.

In the CV business, Tata Motors cornered a 41.7% market share in FY23. The automaker's strategy of lower discounts aided by soft commodity prices has yielded higher realisations. It already announced a price hike in October on likely commodity headwinds in Q3FY24. "We remain optimistic for the next year as far as CV profitability is concerned. We do not see stress in demand at this point in time," says Balaji. The truckmaker, however, had a bumpy ride in small CVs this year. "Our intention is to correct it," says Balaji.

Shovik Banerjee, partner at Kearney, says medium & heavy commercial vehicles will continue to see strong growth, driven by the infrastructure push from the government in construction. The vehicle scrappage policy will also boost sales of cleaner and safer vehicles, he adds.

To catch up with its peers, JLR is spending £15 billion over the next five years to transition to EVs. The luxury carmaker plans to launch six Land Rover BEVs by 2026. The Jaguar brand will become all-electric by 2025 with prices starting from £100,000.

But this mammoth transition is not going to be easy. Kearney's Shovik believes the timing to introduce a particular EV in a segment is critical as uncertainty around market share and sales can impact overall profitability. "Product mix changes are always challenging in terms of both capex investment in R&D and manufacturing," he says.

JLR is ready in case there is a slower adoption of BEVs in its key portfolio like Range Rover Sport and Defender. "We have the ICE portfolio available with us to decide whichever way the market goes," says Balaji.

The Tata Group is developing an end-to-end EV ecosystem. Through Tata UniEVerse, group companies have synchronised their efforts to accelerate the adoption of EVs in India. It is also investing ₹42,537 crore for a 40-GW battery cell gigafactory in the U.K.

To overcome supply chain disruptions in the future, Tata Motors is redesigning vehicles to reduce dependency on semiconductors. The automaker has also forged direct alliances with chipmakers to ensure a steady supply.

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