India Inc’s billion-dollar buyouts turn the corner

ICONIC BUYS CORUS, JLR, NOVELIS RETURN TO PROFITABILITY

THREE iconic global acquisitions of India Inc, which had turned in combined losses of over $3 billion in FY09, are now on their way to a turnaround—raising hopes that payback for the $74.9 billion India has invested in 955 global buyouts since 2005 is round the corner.
    Corus, Novelis and Jaguar-Land Rover (JLR) were acquired by Tata Steel, Hindalco and Tata Motors, respectively. Each is at a different point in its turnaround and all three are expected to show further improvements in profitability when results for the first quarter of FY11 are announced a few weeks from now.
    Canadian aluminium can maker Novelis, a Hindalco acquisition that had recorded a $1.9-billion loss in FY09, was the first off the block with a $195-million net profit in the quarter ended September 2009. It went on to post a $405-million profit in FY10. Tata Motor's Jaguar-Land Rover (JLR), which had posted a £306-million loss in the nine months to March 2009, made its first profit of £57 million in December 2009. JLR had reportedly recorded combined losses of an estimated $10 billion over a 19-year period under former owner Ford Motor. And Corus, now renamed Tata Steel Europe, reported an earnings before interest, depreciation, taxes and amortisation (Ebidta) of $513 million during the second half of FY10, as opposed to a loss of $814 million in the first.
    With this, India Inc will breathe a collective sigh of relief. Only a year ago, it seemed that India's global buyout binge was going awry. At one point, Ratan Tata, the flagbearer of India Inc's global push, even admitted that the group's two acquisitions may have been done at an inopportune time.
    The story goes back to a furious 15-month period starting 2007, when India Inc stunned the world by putting over $20 billion on the table for these three big acquisitions.
TURNAROUND STORY
NOVELIS: Bought by Hindalco for $6 billion in February 2007
FY09: $1.9 billion loss Q2 of 2009: $195 million net profit FY10: $405 million profit
JAGUAR-LAND ROVER:
Acquired by Tata Motors for $2.3 billion in June 2008 July-March 2009: Loss of £306 million December 2009: Profit of £57 million
CORUS: Bought by Tata Steel for $12 billion in Jan 2007
First half of FY10: Loss of $814 million Second half of FY10: Ebidta of $513 million How the cookie crumbled
THIS triggered a global rush—local companies went on to acquire 422 international enterprises worth over $44.7 billion in 2007 and 2008, according to data provided by Venture Intelligence. For a while, it seemed India Inc was ready to conquer the world. And then, the cookie crumbled.
    The world slipped into a recession and Wall Street tripped on a minefield of its own making. Demand slackened. Corporate profitability went into a tailspin globally. Suddenly, the three iconic buyouts became dead weight.
    Both groups plunged into turnaround exercises, cuttings costs, shutting plants, laying off staff where required, and restructuring operations in a desperate attempt to stay afloat. There was an urgency behind all this—a mountain of borrowings that were taken to fund these buyouts became a huge load on the parent company's balance sheets.
    Over the last three quarters, there are some remarkable similarities in the way the turnaround has played out in these companies. All three have seen a sharp drop in revenues. Tata Steel Europe was the worst hit, with sales of $14.96 billion in FY10, down from $24.4 billion in FY09. And yet, all three have clawed back cutting costs and improving profit margins despite the lower economies of scale.
    JLR is revving up as a result of new car launches and a successful entry into China. Novelis finally shed the baggage of illadvised contracts that forced it to sell cans to customers at prices lower than its raw material costs. It also reduced raw material costs by recycling a million tonnes of scrap. Tata Steel Europe reduced employee costs, and shipped ore from its mines in the US to feed the European steel plants. It cut costs by Rs 2,300 crore in FY10 and is looking to slash another $250 million this year.
    Of the three, Novelis has made more progress on the path to profitability. JLR is also making profits at a net level, but its product categories are still vulnerable to the economic environment, particularly in Europe and the US. The turnaround at Tata Steel Europe, though, is still in its early stages.
    The JLR turnaround was driven by some tough measures: it cut production by almost 100,000 units since the acquisition, dropped unsuccessful models and focused on a smaller portfolio of models like the Jaguar XF. This helped it pare inventory from 162 days' sales in December 2008 to 79 days in March 2010, saving precious working capital.
    "The fortunes of JLR have certainly improved and the operations are benefiting from the combined impact of restructuring and cost reduction measures, a revival from the depressed levels of 2009 in the US market plus a healthy growth in China," said Ashvin Chotai, MD, Intelligence Automotive Asia, a consulting firm.
    China has been a success story. JLR hardly sold anything in the middle kingdom at the time of the Tata acquisition. But sales in the country went up to 12,630 units in 2009 and in the first months of this year, it has already crossed 10,300 units. The company is looking to sell 20,000 Land Rovers and 5,000 Jaguars in China this financial year. This would mean that this new market will account for 12-13% of JLR's estimated worldwide production of 200,000 units this year.
    Still, JLR lags behind other competitors like BMW (it hopes to sell 120,000 BMW, Mini, and Rolls-Royce vehicles) and Mercedes-Benz (sales target of 100,000 units). Unlike JLR, which imports cars into China, these rivals make their cars locally. JLR will also start assembling cars in China soon and is setting up a national sales company, two people familiar with the development said.
    Worldwide, JLR sales have grown 70% since early 2010, but are still well below peak figures seen earlier. JLR is hoping that new launches like the new Jaguar XJ, unveiled in late 2009, and the 2010 Land Rover, particularly Discovery 4 (LR4 in the US) and Range Rover Sport 2010 will help it move to the next gear.
    The Novelis turnaround started on the back of unexpected strong sales in Asia and South America. "In Asia, we are doing well in India and China. So is South America, which is a big market for us," Novelis vice-chairman and Hindalco managing director Debu Bhattacharya told ET.
    The return to profitability was also possible once the company decided to focus on a small base of customers who needed high-value products like flat rolled products (used in cars, aircraft etc) and were able to offer better margins and faster payment. It also took the tough decision to close down units, said Mr Bhattacharya. In March 2009, Novelis shut the Rogerstone unit in the UK that pared 440 jobs.
    But the big improvement happened only when the unfavourable can supply contracts were wound up. "We tried to complete the supply contract (unfavourably locked in by the previous management) and each year pared our exposure," said Mr Bhattacharya.
    Tata Steel's efforts to revive Corus followed a three-pronged approach: cut costs by focusing on intermediate steel products, reduce production in sync with demand, and slash manpower.
    Earlier, Corus was primarily making long steel, a final product in the steelmaking process, used in the construction sector. Post-acquisition, it decided to add flat more products to its portfolio. Flats, used by consumer product companies, sell at a premium of about 30% over base-grade steel. (Both longs and flats are made from slabs, an intermediary product.) This enabled it to win new customer segments like automotive and consumer products.
    "Making intermediates or slabs has another advantage—they can be converted into making either flat products or long steel," says Chintan Mehta, a research analyst with Mumbai-based Sunidhi Finance. This gives it more flexibility in adapting to demand patterns.
    It has also temporarily shutdown the Teesside plant, which accounts for fifth of its output, a bold decision made despite political opposition. The workforce cuts have been relentless. Since 2009, Corus has cut more than 5,000 jobs, mainly from the UK. The steel company also has units in the Netherlands.
    Having cut costs, the company is now hoping to do better as demand improves. Capacity utilisation has already increased to 81% in the second half of last year, compared to 64% in the first. This is expected to increase to 84%, according to a presentation the company made to analysts.
    Tata Steel Europe still makes a loss at the net level, and the management is noncommittal about a likely timeframe for a complete turnaround. Only when that happens will the success of India Inc's big three global acquisitions be complete.