THE takeover of two British iconic brands, Jaguar and Land Rover, by Tata Motors set off some crowing in the Indian financial press. Some of it went way over the top. The Economic Times, the largest business daily in the country, said:

"The world is ours, and we've dared to venture into places few have ventured into. The Tatas have shown what it takes."
So it was good that Ratan Tata, the head of the Tata group, was himself more restrained. In a statement, he ventured: "We have enormous respect for the two brands and will preserve and build on their heritage and competitiveness, keeping their identities intact."

Questions over the effect of the deal on the company's profitability are in order. Tata Motors' US$2.3 billion buyout of Jaguar Land Rover (JLR) from Ford Motors was a discount to the US$2.5 billion Ford had paid for Jaguar in 1989 and an additional US$2.7 billion for Land Rover in 2000. Tata has taken a US$3 billion bridge loan with Citi and JP Morgan as lead advisors and want to spend an additional US$700 million on the two companies initially.

Neither Jaguar nor Land Rover are in the pink of health. Jaguar has seen its sales fall from around 35,000 cars in September 2005 to just over 15,000 in February 2008. A lot of brand building will have to be done to reverse this trend.

While Land Rover is better placed than Jaguar and is returning a profit, it too needs to be pushed.

Though Tata Motors could gain some technology for its own cars, there is no direct synergy between the high priced Jaguar and Land Rover and the cars that Tata Motors makes. The challenge will be to maintain sales of the two cars during a global downturn. Moreover, with the meltdown in the financial markets, the cost of credit has gone up. Though bridge loans have been taken at 70 basis points over Libor for the next six months and 140 basis points above Libor for another nine months, these will have to be replaced by a mixture of debt and equity thereafter. The difficult market conditions are reflected in widening credit default spreads, which are now 570 basis points over Libor.

Tata Motors' share price has been moving down over the past six months since the deal was announced. Ian Gomes, global head of KPMG's emerging markets, told an Indian newspaper: "Market conditions are now extremely tough, especially in the key US market, and the Tatas will need to invest in a lot of brand building to make and keep JLR profitable." The Indian ratings agency Crisil, in a report earlier in March 2008, put Tata Motors on ratings watch, saying: "The transaction would have an adverse risk effect on Tata Motors' financial risk profile over the short to medium term."

Tata Motors was able to acquire the two plants manufacturing these two iconic cars at such a low price from Ford because Ford just couldn't turn them around. It's a long shot whether Tata Motors can do so. It has primarily been a truck manufacturer, bringing out its first passenger car just nine years back. Since then it has moved fast, entering into technology and marketing tie-ups with Fiat and moved into markets in Africa, South America and now Thailand with a pick up truck. It also purchased the truck business of Daewoo, the South Korean giant.

Tata Motors created an international sensation just a couple of months back when it unveiled its revolutionary low-cost car, the Nano. But there is no natural synergy in technology or markets between its existing models and its latest acquisitions. The managing director of Tata Motors, Ravi Kant, is not unduly perturbed. He maintained in an interview after the sale: "We have seen the proposed plans (for Jaguar and Land Rover) for the next five years and we have bought into these business plans. We believe in those plans. There are exciting times and both the brands are geared up for the future."

The Tata group has a way of proving sceptics wrong. It has moved aggressively into the international market to become India's largest and most prominent multinational. Its instincts seem to be right. Whether it was taking over Tetley of the UK in a 18.3 billion rupee deal in February 2000, or buying PT Bumi Resources of Indonesia for 48.4 billion rupees in April 2007, General Chem Tech Partners of the US in January 2008, Teleglobe of Canada for 10.8 billion rupees or the steel maker Corus of the UK for 538 billion rupees last April, the Tata group has touched a winner in every move.

Before the latest takeover, around 38 per cent of its sales revenue of US$29 billion was from overseas. This is bound to grow. But success in the past does not mean that everything that Tata touches will turn to gold.

The writer is a Mumbai-based journalist who contributes regularly to BT

This article was first published in The Business Times on Apr 1, 2008.