Tata Motors: Losing speed

With the US economy in a downturn, it could be a while before the JLR business turns around.

With the automobile market in the US going through a downturn, it’s not surprising that the Jaguar and Land Rover (JLR) business that Tata Motors acquired recently isn’t in great shape. For the first half of 2008, JLR has posted losses of $383 million on sales of $7.07 billion, a disclosure that saw the Tata Motors stock fall 5 per cent on Tuesday.

JLR’s earnings before interest and tax and pre-adjustments were $625 million. Given that the slowdown in the US economy is likely to continue for a while, Land Rover sales are unlikely to gather momentum in that market, which accounts for about 40 per cent of sales.

Land Rover contributes a fairly large part of the combined operating profits of JLR, which has been showing an improvement in its operating performance over the past couple of years with Ebit margins (pre-special items) improving from a negative four per cent in CY05 to 4.3 per cent in CY07.

Meanwhile, Tata Motors is raising Rs 4,147 crore through a rights issue to repay a part of the bridge loan of $3 billion that it took to acquire JLR. At the current price of Rs 395, a shareholder, who subscribes to both classes of shares --- ordinary and differential voting shares --- would end up with an average cost for the shares of Rs 377. For those who want to own only the differential shares, which attract a dividend that is 5 per cent higher than that on ordinary shares, the average cost will be Rs 382.

As of now, the company is expected to end FY09 with consolidated profits of Rs 2,100 crore on revenues of close to Rs 41,000 crore. While the stock has been a big underperformer, most of the negative news appears to have been factored into the price.

However, it is still not cheap and at Rs 377, trades at an estimated 14-15 times on estimated FY09 earnings, which could fall in the current year because of the dilution in the equity to the extent of 33 per cent. India’s biggest automobile company could continue to disappoint the Street for some more time, especially with the domestic economy losing momentum and the launch of the Nano likely to be delayed.