Case spotlight: The Effect of Jaguar Land Rover Asset Impairment on Tata Motors Ltd

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This case was featured in the May 2022 issue of Connect.

Who – the protagonists

Adi Parekh, senior accountant for Tata Motors Ltd. (TML), and his assistant, Jennifer James.

What?

TML is a market leader in commercial vehicles and among the top passenger vehicle manufacturers with nine million vehicles on Indian roads.

But it’s the British car brand Jaguar Land Rover (JLR), a fully owned subsidiary of TML, that has made the company a major player in the global automobile market.

In the financial year ending 2018-19, JLR accounted for 74% of TML’s revenue. TML sold nearly 244,000 JLR units globally which resulted in $1.7 billion of its annual $2.04 billion profits in 2018/19.

Jaguar HQ

Why?

Despite the impressive sales, the current financial situation was grave.

JLR had outpaced capital expenditure and cash flows were expected to be negative for the next couple of years.

The passenger vehicle business recorded big losses on account of huge capital expenditure programmes for product development to match pace with the new era of electrified technologies. These product development expenses capitalised as assets failed to procure the expected returns thereby necessitating impairment in the JLR segment.

If this was reported externally, market sentiment would be dampened and the future share price of the company affected.

When?

TML initially acquired Jaguar Cars Limited and Land Rover from Ford in 2008, before merging the subsidiaries on New Year’s Day in 2013.

For the first few years the JLR brand was not profitable. The financial crisis soon hit after the deal with Ford was closed, with demand for luxury cars tumbling in Europe and North America, its two biggest markets.

But a turnaround came between the financial years of 2010-11 and 2016-17, with TML staying invested in JLR, showing confidence in the knowhow and the advanced British technology. Moves such as cutting costs and 3,000 jobs at it British factories, and sourcing raw material from low-coast locations, paid off.

Where?

JLR had two major design and engineering sites, three vehicles manufacturing facilities, and an engine manufacturing centre in the UK. It also had plants in China, Slovakia, Austria, Brazil and India.

Key quote

“The impairment charge would certainly be contrary to market expectation and they (Adi and Jennifer) feared that High Net Worth Individuals would dump TML shares.”
Excerpt from the case.

What next?

Adi was full of nerves as he knew that an impairment charge would tarnish the company’s image.

During a late evening meeting with the accountants and the Director of Financial Accounting, impairment loss allocated was £1million, £1,396 million and £1,709 million against goodwill, tangible and intangible assets respectively.

Though these figures were agreed at in the meeting and finalised, to what extent were these figures justified? Couldn’t they present this non-cash charge in another way?

AUTHOR PERSPECTIVE 

Childhood inspiration

Parizad said: “The case connects to TELCO (Tata Engineering and Locomotive Company Ltd) in the steel city of Jamshedpur where I spent my childhood. Later TELCO was renamed Tata Motors Ltd. in 2003. Since childhood the Tata empire’s vision, mission and most importantly the spirit of philanthropy enticed me. Today I feel most privileged to write a case study on Tata Motors Ltd.

“This case helped me develop intellectually as I put forth intricate details related to the impairment charge in the context of the current sales revenue generated and its free cash flows.”

Map location

Fruitful discussion

She continued: “The class received the case very well. I was able to create suspense. Irrespective of the reality, an impairment charge could be avoided if sales forecast were more optimistic and free cash flows adequate. This generated a very fruitful discussion and provided room for discussing the context of the operations of Tata Motors Ltd.”

Understanding the context

Parizad added: “My top tip for writing a good case is to understand the context and other allied parameters well. The richness of the actual content developed depends to a great extent on allied parameters.”

Scholarship support

This case was developed with the support of a Case Writing Scholarship. Find out more here.

THE CASE 

The case

Who – the protagonists

Adi Parekh, senior accountant for Tata Motors Ltd. (TML), and his assistant, Jennifer James.

What?

TML is a market leader in commercial vehicles and among the top passenger vehicle manufacturers with nine million vehicles on Indian roads.

But it’s the British car brand Jaguar Land Rover (JLR), a fully owned subsidiary of TML, that has made the company a major player in the global automobile market.

In the financial year ending 2018-19, JLR accounted for 74% of TML’s revenue. TML sold nearly 244,000 JLR units globally which resulted in $1.7 billion of its annual $2.04 billion profits in 2018/19.

Jaguar HQ

Why?

Despite the impressive sales, the current financial situation was grave.

JLR had outpaced capital expenditure and cash flows were expected to be negative for the next couple of years.

The passenger vehicle business recorded big losses on account of huge capital expenditure programmes for product development to match pace with the new era of electrified technologies. These product development expenses capitalised as assets failed to procure the expected returns thereby necessitating impairment in the JLR segment.

If this was reported externally, market sentiment would be dampened and the future share price of the company affected.

When?

TML initially acquired Jaguar Cars Limited and Land Rover from Ford in 2008, before merging the subsidiaries on New Year’s Day in 2013.

For the first few years the JLR brand was not profitable. The financial crisis soon hit after the deal with Ford was closed, with demand for luxury cars tumbling in Europe and North America, its two biggest markets.

But a turnaround came between the financial years of 2010-11 and 2016-17, with TML staying invested in JLR, showing confidence in the knowhow and the advanced British technology. Moves such as cutting costs and 3,000 jobs at it British factories, and sourcing raw material from low-coast locations, paid off.

Where?

JLR had two major design and engineering sites, three vehicles manufacturing facilities, and an engine manufacturing centre in the UK. It also had plants in China, Slovakia, Austria, Brazil and India.

Key quote

“The impairment charge would certainly be contrary to market expectation and they (Adi and Jennifer) feared that High Net Worth Individuals would dump TML shares.”
Excerpt from the case.

What next?

Adi was full of nerves as he knew that an impairment charge would tarnish the company’s image.

During a late evening meeting with the accountants and the Director of Financial Accounting, impairment loss allocated was £1million, £1,396 million and £1,709 million against goodwill, tangible and intangible assets respectively.

Though these figures were agreed at in the meeting and finalised, to what extent were these figures justified? Couldn’t they present this non-cash charge in another way?

AUTHOR PERSPECTIVE 

Author perspective

Childhood inspiration

Parizad said: “The case connects to TELCO (Tata Engineering and Locomotive Company Ltd) in the steel city of Jamshedpur where I spent my childhood. Later TELCO was renamed Tata Motors Ltd. in 2003. Since childhood the Tata empire’s vision, mission and most importantly the spirit of philanthropy enticed me. Today I feel most privileged to write a case study on Tata Motors Ltd.

“This case helped me develop intellectually as I put forth intricate details related to the impairment charge in the context of the current sales revenue generated and its free cash flows.”

Map location

Fruitful discussion

She continued: “The class received the case very well. I was able to create suspense. Irrespective of the reality, an impairment charge could be avoided if sales forecast were more optimistic and free cash flows adequate. This generated a very fruitful discussion and provided room for discussing the context of the operations of Tata Motors Ltd.”

Understanding the context

Parizad added: “My top tip for writing a good case is to understand the context and other allied parameters well. The richness of the actual content developed depends to a great extent on allied parameters.”

Scholarship support

This case was developed with the support of a Case Writing Scholarship. Find out more here.

THE CASE 

Read the case

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