Tata Motors: On a new growth trajectory

As the company uses innovative methods to reduce debt and sets itself on a higher growth trajectory, equity dilution can be expected.

As operations of subsidiaries move in line with expectations and the company gets a sales volume boost in the domestic market (it became the second-largest passenger car company in June), Tata Motors sets off on a new growth trajectory.

However, it needs to take care of the debt numbers on its balance sheet. According to a management note, the consolidated net debt-to-equity stands at 3.3:1, and has high cost components. The company had managed to lower its net debt-to-equity from around five times during the previous financial year to the current levels. Subsequently, the interest cost fell 58 per cent to around Rs 103 crore in FY10.

Earlier, the company had issued almost 30 million equity shares in the form of global depository receipts to raise around $375 million. It also raised a similar amount by issuing four per cent convertible notes maturing in 2014. It had also given bondholders, with zero per cent Japanese ¥11,760 million and one per cent $300 million convertible bonds, an option to convert their bonds into ordinary shares during March 23-29. These plans were great successes and the company could extinguish almost $345 million of debt, say analysts.

Going ahead, the company has outlined a Rs 10,000-crore plan for its growth strategy. It is seeking shareholders’ permission to raise Rs 4,700 crore though issue of securities, modalities for which are yet to be finalised. With this, the net worth of the company will improve, allowing it to raise further debt. The company will also be seeking an increase in the borrowing limits to Rs 30,000 crore from Rs 20,000 crore. This, however, might not be able to generate large funds, as it is already near the threshold.

Moreover, as the company gets into another expansionary mode, a 10 to 15 per cent equity dilution is expected in the next few years. However, the company will be in a position to generate better cash inflows from operations this time than the earlier troubled years.