Tata Motors: Hard times

The relocation of the manufacturing facility for Singur will cost Tata Motors time and money, which is really unfortunate. More than the immediate financial impact—-which should not be too significant—- the Street will remain anxious till the new plant is up and running.

Meanwhile, the smaller dilution of 33 per cent of Tata Motor’s equity, as a result of the Rs 4,174-crore rights issue, is good news though the Street has been aware of it. However, even a 33 per cent dilution is not small, given that the premium the issue will fetch, now is far lower than the Rs 450-500 expected earlier.

 

The company may have wanted to wait a while till the markets looked up to get a better premium for its stock. After all, the bridge loan of $3 billion that the company has taken to finance the acquisition of Jaguar and Land Rover (JLR), will cost it about 5.5 per cent in terms of interest, which is cheap in the current scenario.

Even if Tata Motors needed to roll over the debt in June next year, it should not have been too difficult to borrow at a reasonable cost, till the markets revived.

Meanwhile, analysts expect very mediocre numbers from JLR given the slowdown in the US, which accounts for about 40-45 per cent of sales. Volumes for Land Rover , which accounts for nearly 85-90 per cent of the combined operating profits, have been somewhat sluggish over the past few months.

Nevertheless, JLR has been seeing 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.

JLR’s books are virtually debt-free but some borrowings may have to be made. Besides, the Tatas may need to supplement the amount of $600 million that Ford put into the pension fund. Between January-May 2008, JLR’s pre-tax margin was 7.1 per cent , lower than the 10 per cent posted in the first quarter of CY08.

The loss of time and money resulting from the delay in the launch of the Nano, will hurt the company’s financials, Already, Tata Motors continues to see sluggish sales for M&HCVs in the home market and unless the new models in the passenger car do well—-the Indica Vista has just been launched—-India’s biggest automobile company could continue to disappoint the Street.

As of now, Tata Motors is expected to end FY09 with consolidated profits of Rs 2,100 crore on revenues of close to Rs 41,000 crore. The rights issue ratio for both the ordinary shares as also the shares with differential voting rights is 1:6 with the first category being priced at Rs 340 and the second category at Rs 305.

At the current price of Rs 430, a shareholder, who subscribes to both classes of shares, would end up with an average cost for the shares of Rs 403. At this price the Tata Motors stock trades at around just under 10 times estimated FY09 fully-diluted earnings (pre-JLR).

Assigning some value for JLR, the stock would be slightly cheaper. With the current business environment likely to remain challenging and a possible delay in the launch of the Nano, the stock is unlikely to go anywhere in a hurry.

At lower levels though, there is admittedly value from a long–term perspective.