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Morningstar | Tata's Jaguar and Land Rover Brands Hit Bumpy Road but Heading Toward Recovery

Tata Motors premium Jaguar and Land Rover brands have fallen on hard times due to increased spending for electrified powertrains and autonomous technologies plus a substantial decline in China demand. However, since fiscal 2009, when Tata acquired the luxury automaker, JLR’s revenue has risen at a CAGR of 14%, with global volume growing 8%. Over the same period, JLR's EBITDA margin has averaged 12.1% but was 8.2% for fiscal 2019, owing to cyclical trough demand in China as well as increased spending on research and development. This drove Tata to a respectable 12.9% average return on invested capital in since fiscal 2010, meaningfully surpassing our 9.4% cost of capital estimate.Over the past 10 years, competitors have entered the Indian commercial vehicle market and Tata's share of commercial trucks has retreated to 45% from a peak of 64% in 2010. This was driven by Tata taking longer to introduce new models versus its peers, deregulation of diesel prices compromising its diesel range, new competitors entering a rapidly growing market (6% CAGR since 2008).In our view, Tata is positioned to gain from the continued growth in Indian automotive sales and the expansion of luxury markets in emerging economies, especially China. Still, the imperative remains for Tata to keep investing in new models across brands and vehicle platforms. The Tata brand also needs to improve on its ability to execute vehicles at world-class quality levels. While improving, some JLR products still suffer from perceived poor quality. Growing industry overcapacity and domestic competition, along with capital-intensive operations and the industry's cyclicality, pose serious challenges to Tata's ability to consistently earn returns above its cost of capital.