Tata Motors: The wheel turns full circle

Tata Motors last posted a loss of Rs 500 crore in the year to 2001, hurt by weak demand. It could do little at that time as diesel prices and sales tax rates stayed high. This time around though, India’s biggest automobile firm has been hit by a badly –timed and expensive acquisition. The consolidated loss posted by Tata Motors for 2008-09 of Rs 2,505 crore is higher than expected and it’s not much of a consolation that there’s a cash profit of Rs 1,100 crore because it’s the huge debt that’s weighing down the company.

It will take a while for the net debt to equity, which is currently close to two times for Tata Motors and the borrowings raised for the Jaguar and Land Rover (JLR) acquisition taken together, to come down to more comfortable levels.

Of course, with 2000 people laid off at JLR, some sent off on sabbatical and chances of further cuts in the work force, costs can be managed. So the losses at JLR of 306 million pounds (roughly Rs 2,200 crore) could come off in the current year.

The question is how long it will take for sales to pick up and for the JLR business to be back in black. That depends on how soon the Americans and Europeans want to start spending on cars again --- JLR sells more than half its cars in these continents and sales in other parts of the world can’t really pull it out of the trough.

The Jaguar has done reasonably well with volumes having fallen only marginally in the 10 months to March 2009. On the other hand, the Land Rover range is still in a bit of a spot with volumes having dropped nearly 40 per cent in the same time. It would seem now that the business is going to bleed for a while. The good news is that Tata Motors has managed to cobble together the money to keep the business going — it’s now expecting another 800 million pounds (around Rs 6,000 crore at today's exchnage rate) to come through after funding the $3 billion that it had borrowed to buy JLR, though a third of that was rolled over at a fairly high cost. While business in the home market is looking up, JLR needs to see some sort of revival.

Last November, the Tata Motors stock had slipped to a six-year low of Rs 126. Since January this year, it has gained 97 per cent, outperforming the Sensex by a wide margin, partly because the markets rallied and partly because demand in the home market has been looking up. It probably can’t get worse from these levels, but there’s not much to cheer investors right now.