FMG18A_8_Corporate Finance Policies at TATA Motors

8/9/2019 FMG18A_8_Corporate Finance Policies at TATA Motors

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CORPORATE FINANCE

POLICIES AT TATA MOTORS

Submitted to:-

Dr. Himanshu Joshi

Faculty (Finance)

FORE School of Management

Submitted by:-

Group VIII, FMG-18, Section A

Gaurav Sharma (91018)

Harsh Agarwal (91022)

Pragati Saraf (91040)

Saurabh Anand (91049)

Soumya Saxena (91055)

Sudhir Makkar (91057)


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ACKNOWLEDGEMENT

We would like to extend our deep sense of gratitude to Dr. Himanshu Joshi, Faculty

(Finance), FORE School of Management, for his able guidance without which this project

would not have been possible.

A special thanks to all our classmates who helped us in every possible way during the

execution of this project.

Thanking all,

Group VIII, FMG-18, Section A

Gaurav Sharma (91018)

Harsh Agarwal (91022)Pragati Saraf (91040)

Saurabh Anand (91049)

Soumya Saxena (91055)

Sudhir Makkar (91057)


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Table of Contents

INTRODUCTION ................................ ................................ ................................ ................................ . 9

MILESTONE ................................ ................................ ................................ ................................ ........ 9

DIVIDEND POLICY ................................ ................................ ................................ ............................ 11

WACC AND ROI ANALYSIS ................................ ................................ ................................ ................ 12

TATA-JLR DEAL ................................ ................................ ................................ ................................ . 12

GROWTH PROSPECTS ................................ ................................ ................................ ...................... 23

ANALYSIS OF CAPITAL STRUCTURE ................................ ................................ ................................ ... 23

CONCLUSION ................................ ................................ ................................ ................................ ... 23


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INTRODUCTION

Tata Motors Limited is India's largest automobile company, with consolidated revenues of

Rs.70,938.85 crores (USD 14 billion) in 2008 -09. It is the leader in commercial vehicles in

each segment, and among the top three in passenger vehicles with winning products in the

compact, midsize car and utility vehicle segments. The company is the world's fourth largest

truck manufacturer, and the world's second largest bus manufacturer.

The company's 23,000 employees are guided by the vision to be "best in the manner in

which we operate, best in the products we deliver and best in our value system and ethics."

Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of

India. Over 4 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The

company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune

(Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad

(Karnataka). Following a strategic alliance with Fiat in 2005, it has set up an industrial joint

venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both F iat and

Tata cars and Fiat power-trains. The company is establishing a new plant at Sanand

(Gujarat). The companys dealership, sales, services and spare parts network comprises over

3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India.

Tata Motors, the first company from India's engineering sector to be listed in the New York

Stock Exchange (September 2004), has also emerged as an international automobile

company. Through subsidiaries and associate companies, Tata Motors has operations i n the

UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business

comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the

Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The

rechristened Tata Daewoo Commercial Vehicles Company has launched several newproducts in the Korean market, while also exporting these products to several international

markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from

Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed

Spanish bus and coach manufacturer, and subsequently the remaining stake in 2009.

Hispanos presence is being expanded in other markets. In 2006, Tata Motors f ormed a joint


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venture with the Brazil-based Marcopolo, a global leader in body-building for buses and

coaches to manufacture fully-built buses and coaches for India and select international

markets. In 2006, Tata Motors entered into joint venture with Thon buri Automotive

Assembly Plant Company of Thailand to manufacture and market the company's pickup

vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun production of the

Xenon pickup truck, with the Xenon having been launched in Thailand in 2008.

Tata Motors is also expanding its international footprint, established through exports since

1961. The company's commercial and passenger vehicles are already being marketed in

several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South

America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine,

Russia and Senegal.


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MILESTONES

1945 y Tata Engineering and Locomotive Co. Ltd. was established to manufacture locomotives and

other engineering products.

1948 y Steam road roller introduced in collaboration with Marshall Sons (UK).

1954 y Collaboration with Daimler Benz AG, West Germany, for manufacture of medium commercial

vehicles. The first vehicle rolled out within 6 months of the contract.

1959 y Research and Development Centre set up at Jamshedpur.

1977 y First commercial vehicle manufactured in Pune.

1983 y Manufacture ofHeavy Commercial Vehicle commences.

1985 y First hydraulic excavator produced with Hitachi collaboration.

1986 y Production offirst light commercial vehicle, Tata 407, indigenously designed, followed by Tata

608.

1991 y Launch of the 1st indigenous passenger car Tata Sierra.

y One millionth vehicle rolled out.

1994 y Launch ofTata Sumo - the multi utility vehicle.

1995 y Mercedes Benz car E220 launched.

1996 y Tata Sumo deluxe launched.

1997 y Tata Sierra Turbo launched.

1998 y Tata Safari - India's first sports utility vehicle launched.

y 2 millionth vehicle rolled out.

yIndica, India's first fully indigenous passenger car launched.

2001 y Indica V2 launched - 2nd generation Indica.

y 100,000th Indica wheeled out.

y Launch of the Tata Safari EX


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2002 y 2,00,000th Indica rolled out.

y Launch of the Tata Sumo'+' Series

y Launch of the Tata Indigo.

y Tata Engineering signed a product agreement with MG Rover of the UK.

2003 y On 29th July, J. R. D. Tata's birth anniversary, Tata Engineering becomes Tata Motors Limited.

y 3 millionth vehicle produced.

y First CityRover rolled out

2004 y Tata Motors and Daewoo Commercial Vehicle Co. Ltd. sign investment agreement and

completes acquisition of Daewoo Commercial Vehicle Company

y Tata Daewoo Commercial Vehicle Co. Ltd. (TDCV) launches the heavy duty truck 'NOVUS' , in

Korea

y Sumo Victa launched

y Indigo Marina launched

y Tata Motors lists on the NYSE

2005 y Tata Motors rolls out the 500,000th Passenger Car from its Car Plant Facility in Pune

y The Tata Xover unveiled at the 75th Geneva Motor Show

y Branded buses and coaches - Starbus and Globus - launched

y Tata Ace, India's first mini truck launched

y The power packed Safari Dicor is launched

y Tata Motors launches Indica V2 Turbo Diesel.

y

One millionth passenger car produced and soldy Inauguration of new factory at Jamshedpur for Novus

y Launch ofTata Novus

y Launch of Novus range of medium trucks in Korea, by Tata Daewoo Commercial

Vehicle Co. (TDCV)

2006 y Tata Motors vehicle sales in India cross four million mark

y Indica V2 Xeta launched

y Passenger Vehicle sales in India cross one-million mark

y Tata Motors first plant for small car to come up in West Bengal

y Tata Motors and Fiat Group announce three additional cooperation agreements

2007 y Construction ofSmall Car plant at Singur, West Bengal, begins on January 21

y New 2007 Indica V2 range is launched


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y Tata Motors and Thonburi Automotive Assembly Plant Co. (Thonburi), announce formation of a

joint venture company in Thailand to manufacture, assemble and market pickup trucks.

y Roll out of 100,000th Ace

y Tata-Fiat plant at Ranjangaon inaugurated

y Launch of a new Upgraded range of its entry level utility vehicle offering, the Tata Spacio.

y Launch of Magic, a comfortable, safe, four-wheeler public transportation mode, developed on

the Ace platform

y Launch of Winger, Indias only maxi-van

y Fiat Group and Tata Motors announce establishment of Joint Venture in India

y Launch of the Sumo Victa Turbo DI, the new upgraded range of its entry-level utility vehicle, the

Sumo Spacio

y Tata Motors launches Indica V2 Turbo with dual airbags and ABS

y Launch of new Safari DICOR 2.2 VTT range, powered by a new 2.2 L Direct Injection Common

Rail (DICOR) engine.

y Rollout of the one millionth passenger car off the Indica platform.

2008 y Latest common rail diesel offering- the Indica V2 DICOR, launched.

y Indigo CS (Compact Sedan), worlds first sub four-metre sedan, launched.

y Launch of the new Sumo -- Sumo Grande, which combines the looks of an SUV with the

comforts of a family car.

y Tata Motors unveils its People's Car, Nano, at the ninth Auto Expo.

y Xenon, 1-tonne pick-up truck, launched in Thailand.

y Tata Motors signs definitive agreement with Ford Motor Company to purchase Jaguar and Land

Rover.

y Tata Motors completes acquisition of Jaguar Land Rover.

y Tata Motors introduces new Super Milo range of buses.

y Tata Motors is Official Vehicle Provider to Youth Baton Relay for The III Commonwealth Youth

Games Pune 2008.

y Indica Vista the second generation Indica, is launched.

y Tata Motors launches passenger cars and the new pick-up in D.R. Congo.

2009 y Tata Motors begins distribution of Prima World truck

y Tata Motors launches the next generation all-new Indigo MANZA

y FREELANDER 2 launched in India

y Tata Marcopolo Motors' Dharwad plant begins production.

y Tata Motors launches Nano - The People's Car

y Introduction of new world standard truck range.

y Launch of premium luxury vehicles - Jaguar XF, XFR and XKR and Land Rover Discovery 3,

Range Rover Sport and Range Rover from Jaguar and Land Rover in India.


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DIVIDEND POLICY

TATA MOTORS

TATA MOTORS

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009

DPS

EPS

Year Dividend Per

Share(DPS) in Rs.

Earnings Per Share

(EPS) in Rs.

Dividend Payout

Ratio (%) (DPS/EPS)

2003-04 8 24.68 32.41

2004-05 12.50 34.19 36.56

2005-06 13.00 39.94 32.54

2006-07 15.00 49.65 30.21

2007-08 15.00 52.63 28.51

2008-09 12.50 19.48 64.16


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As can be seen from the above tables and graph, Tata Motors has been paying out steady

dividends. The dividends have been increasing constantly with only a slight decrease in the

FY 2009. The decrease in dividend in FY 2009 can be attributed to many factors, one of them

being the decrease in net profit of the company in the current year. For the year ending March

2009, the net profit reported b y the company stands at Rs 1,001.26 Crore as against the net

profit of Rs 2028.92 Crore for the FY 08. Thus, the substantial decrease in net profits

explains the decline in the DPS.

Another reason behind the decline in DPS could be the Tata- JLR deal. Tata motors financed

this deal by raising debt thus increasing the debt component in its capital structure. The deal

also put pressure on the working capital requirements of the company. More funds had to be

made available to provide financial support to JLR, thus impairing the liquidity position of

the company.

The decrease in net profits is also the reason behind the sharp decline in the EPS for the

current year. For the FY 2009 EPS went down to Rs. 19.48 from Rs 52.63 in the FY 08.

Another reason behind the fall in EPS is the increase in the Equity Share Capital of the

company. In October 2008, the Company raised an aggregate of Rs.4139.33 crores through a

simultaneous but unlinked Rights Issue of Ordinary Shares and 'A' Ordinary Shares. Thus, the

Net Worth of the Shareholders increased from Rs. 7839.50 crore to Rs. 12230.15 Crore. Theincrease in the net worth coupled with the decline in the net profit resulted in the sharp fall in

the EPS.

Looking at the dividend paying pattern of the company for the last 6 years it can be said that

the company follows a stable dividend policy. The dividend has ranged from Rs 8 in 2003-04

to Rs 12.50 in 2008-09. The dividend payout ratio of the company has also been more or less

stable, ranging from 32.41% in 2003-04 to 28.51% in 2007-2008. However, in the FY 2008-

09 the payout ratio shot up to 64.16%. The sharp increase in the payout ratio in the currentyear is due to the simultaneous decrease in the DPS and EPS.

Tata Motors offers a respectable yield of 2.3%, which it has traditionally paid out once a year

in June, but the company's dividend history has a gap or two. Tata has paid an uninterrupted


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dividend in each fiscal year since 1956, with the exception of 2001 and 2002, when it paid

nothing in light of consecutive years of net losses.

At present, however, Tata appears to be generating more than enough earnings to cover

dividend payments. Taking into account its need for massive capital spending each year,however, Tata's ability to generate consistent free cash flow is questionable. Investors would

thus be wise to approach Tata's dividend payments as an "bonus" to potential earnings growth

and not as the main attraction.

To further analyze the dividend policy of Tata Motors we undertake a comparison of its

dividend policy with that of one its competitors, Maruti Suzuki.

MARUTI SUZUKI

Year Dividend Per

Share(DPS) in Rs.

Earnings Per Share

(EPS) in Rs.

Dividend Payout

Ratio (%) (DPS/EPS)

2003-04 1.50 18.60 8.06

2004-05 2 29.55 6.77

2005-06 3.50 41.16 8.50

2006-07 4.50 54.07 8.32

2007-08 5 59.91 8.34

2008-09 3.5 42.18 8.29


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MARUTI SUZUKI

DIVIDEND PAYOUT RATIO: TATA MOTORS vs. MARUTI SUZUKI

Most of the shareholders want that the company they have invested in churns out higher and

higher dividends year after year. A company with a higherpayout ratio is favored over the

one with a lower dividend payout ratio. But this fallacy has severe long term implications

which most short-term investoroverlook.

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009

DPS

EPS

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2004 2005 2006 2007 2008 2009

DPR (MS)

DPR (TML)


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Let's take examples of two companies in almost similar sector: Tata Motors and Maruti

Suzuki Motors, the former has a high dividend payout ratio compared to the latter. Did it

translate to higher returns for an individual investor?

Tata Motors has over the last six years paid 8 + 12.5 + 13 + 15 + 15 + 12.50 = INR 76 as

dividend while Maruti Suzuki has paid 1.5 + 2 + 3.5 + 4.5 + 5 + 3.5 = INR 20 as dividend.

Tata Motors had rights issue in May 2008 where one share of INR 300 was allotted for every

six held in the company. Thus the shareholders had to pump in INR 50 per share back into

the company. So out of INR 69.5 of dividend obtained from the company, INR 50 was paid

back leaving just INR 19.5, less than that of Suzuki's INR 20.

In terms ofcapital gains, Tata Motors have appreciated by -12% from 1 April 2004 till date

while Maruti Suzuki has appreciated by 185% in the same time frame. Maruti's share price

has gone up from around INR 500 to INR 1425 as of today while that of Tata Motors has

languished from INR 485 to INR 425.

Even in terms of balance sheet of both the companies, Suzuki stands out. Tata Motors

increased its debt from INR 1698 Crore in FY2004 to a whopping INR 34974 Crore (USD 7

billion - more than its standalone revenue a year back) in FY2009. Even excluding the debt

increased to acquire JLR, the debt position at the end of March 2008 was at INR 11585

Crore. Whereas, Maruti increased its debt from INR 312 Crore to INR 900 Crore at the end

of March 2008. The interest burden of Tata Motors has increased from INR 194 Crore in

FY2004 to INR 743 Crore in FY2008. Including JLR debt, the interest outgo is INR 1931

Crore in FY2009. Maruti's interest outgo has increased from INR 45 Crore in FY2004 to INR

56 Crore in FY2009.

If Tata Motors had been conservative in dividend policy and given out only INR 20 as

dividend over the last six years, they would have saved at least to the tune of INR 2150 Crore

which would have reduced their debt, reduced their interest outgo by at least INR 175 Crore

and made their balance sheet much stronger.


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WACC AND ROI ANALYSIS

WACC and ROI Calculations

Rs in Crs

Year 2009 2008 2007 2006 2005 2004

DPS(Rs) 12.5 15 15 13 12.5 8

Book Value(Rs.) 240.64 202.68 177.57 143.93 113.64 101.69

Payout(%) 64.16 29.7 31.85 34.6 38.66 36.44

Retention Ratio 0.3584 0.703 0.6815 0.654 0.6134 0.6356

PBT 1013.7 2576.47 2573.18 2053.38 1651.9 1292.34

Tax --- 139.01 476 363.35 363.82 96

PAT 1013.7 2437.46 2097.18 1690.0 1288.0 1196.3

Preference Dividend 0 0 0 19.94 0 0

Equity 514.05 385.54 385.41 382.87 361.79 353

Reserves 11716.1 7453.96 6484.34 5154.2 3749.6 3236.7

P & L Account(Dr Balance) 0 0 0 0 0 0

Equity Shareholder Fund 12230.15 7839.5 6869.75 5537.0 4111.3 3589.7

ROE 0.08 0.31 0.31 0.30 0.31 0.33

Growth Rate(%) 5.67 21.86 20.80 19.73 19.22 21.18

Cost of Equity(%) 10.92 29.26 29.25 28.76 30.22 29.05

Interest 810.90 425.61 368.51 293.49 217.81 202.48

Total Debt 13165.5 6280.52 4009.14 2936.8 2495.4 1259.7

Cost of Debt(%) 6.15 6.78 9.19 9.99 8.73 16.07

PBIT 1752.7 3002.08 2941.69 2346.8 1869.7 1494.8

Capital Employeed 24451.15 14094.51 10852.94 8447.52 6606.81 4849.54

ROI(%) 7.16 21.30 27.11 27.78 28.30 30.82


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WACC Over the Years

Year 2009

Source Amount Proportion(%) Cost(%)

Weighted

Cost(%)

Equity 514.05 3.75 10.92 0.41

Debt 13165.5 96.25 6.15 5.92

13769.55 100 6.33

Year 2008


Weighted

Cost(%)

Equity 385.54 6.14 29.26 1.8

Debt 6280.52 94.22 6.78 6.38

6666.06 100.36 8.18

Year 2007


Weighted

Cost(%)

Equity 385.41 9.61 29.25 2.81

Debt 4009.14 91.23 9.19 8.39

4394.55 100.84 11.2

Year 2006


Weighted

Cost(%)

Equity 382.87 13.04 28.76 3.75

Debt 2936.84 88.47 9.99 8.84

3319.71 101.5 12.59

Year 2005


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Weighted

Cost(%)

Equity 361.79 14.5 30.22 4.38

Debt 2495.42 87.34 8.73 7.62

2857.21 101.84 12

Year 2004


Weighted

Cost(%)

Equity 353 28.02 29.05 8.14

Debt 1259.77 78.11 16.07 12.55

1612.77 106.13 20.69

Comparison ofWACC and ROI

Year WACC(%) ROI(%) Difference

2004 20.69 30.82 10.13

2005 12 28.3 16.3

2006 12.59 27.78 15.19

2007 11.2 27.11 15.91

2008 8.18 21.3 13.12

2009 6.33 7.16 0.83


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Difference betweenWACC and ROI

Bar graph forWACC and ROI

As we can see from the above statistics the difference between the WACC and ROI has

decreased drastically in the financial year 2008-09. The major reason behind this is that the

company went for rights issue. In October 2008, the Company raised an aggregate of

Rs.4139.33 crores through a simultaneous but unlinked Rights Issue of Ordinary Shares and

'A' Ordinary Shares of 64,276,164 Ordinary Shares of Rs.10 each at a premium of Rs.330/-

0

2

4

6

8

10

12

14

16

18

Year 2004 2005 2006 2007 2008

Difference

0

5

10

15

20

25

30

35

Year 2004 2005 2006 2007 2008

WACC(%)

I(%)

Difference


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per share aggregating Rs.2185.39 crores in the ratio of one Ordinary Share for every six

Ordinary Shares; and 64,276,164 'A' Ordinary Shares of Rs.10 each at a premium of Rs.295/-

per 'A' Ordinary Share aggregating Rs.1960.42 crores in the ratio of one 'A' Ordinary Share

for every six Ordinary Shares.

The issues would raise the equity capital of the company by 30-35 per cent in 2008 to March

2009, and Tata Motors said the incremental dividend on the increased capital would represent

about 10 per cent of its net profit in 2007/08 (April-March). Shares in Tata Motors, which has

a market value of $5.7 billion, were in negative territory before the news broke in late trade,

when they jumped to a high 644 rupees before ending 1.3 per cent up at 634.75 rupees. The

shares have fallen 14.5 per cent in 2008 compared with a 18.5 per cent fall in the benchmark

index.

The Company was one of the first in India to issue differential voting shares. The 'A'

Ordinary Shareholders enjoy all rights and privileges that are enjoyed by Ordinary

Shareholders in law and under the Articles of Association, except as to dividend and voting,

viz. the right to receive dividend for any financial year at five percentage points more than

the aggregate rate of dividend declared on Ordinary Shares for that financial year and the

right to vote any resolution on a poll or by postal ballot, by one vote for every ten 'A'

Ordinary Shares held.


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TATA MOTORS-JLR DEAL

On June 2, 2008, the Company completed the acquisition of Jaguar Land Rover from Ford

Motor Company of U.S. (Ford) for a net consideration of US$ 2.3 billion (on a cash free, debt

free basis) in an all cash transaction out of the purchase consideration. Ford also contributed

about US$ 600 million to the Jaguar Land Rover pension plans. Jaguar and Land Rover are

global premium automotive businesses encompassing engineering, design, manufacture and

marketing of Jaguar luxury performance cars and Land Rover premium all-terrain vehicles.

The purchase consideration included the ownership by Jaguar and Land Rover of necessary

Intellectual Property Rights, 3 major manufacturing facilities, 2 advanced design andengineering centres in U.K., a worldwide network of 20 national sales companies and a

minimum assured capital allowance of approximately US$ 1.1 billion for future tax set-offs.

Jaguar Land Rover also tied up with Ford for supply of engines, stampings and other

components on a long term basis for its business as also for transition support in areas of auto

financing, IT, accounting and access to Ford's test facilities.

The Jaguar Land Rover acquisition was routed through the Companys 100% subsidiary,

Jaguar Land Rover Limited, U.K., which had availed a short term bridge loan facility of US$

3 billion from a syndication of banks and guaranteed by the Company. The Company prepaid

part of the said facility out of proceeds of a Rights Issue and certain divestments and the

balance outstanding as on March 31, 2009 was US$ 2.02 billion. For repayment of the said

amount, the Company in May 2009 raised resources through further divestments and issued

Secured Non-Convertible Credit Enhanced Rupee Debentures in four tranches, having tenors

upto 7 years, aggregating Rs.4,200 crores on a private placement basis. The balance facility

of US$ 1 billion was rolled over and guaranteed by the Company, by extending the final

maturity upto December 2010.

The rights issue in 2008 received lukewarm response from the public due to weak market

conditions and the promoters had to subscribe close to 85% of the rights issue. The remaining

portion was subscribed to by JM Financial (2.19%), who was also the lead managers to issue

and 12.77% by IFCI. The issue was intended to fund its JLR acquisition and their planned


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capex. According to the terms of the issue, the company planned to raise Rs 2,186 crore

through the issue of ordinary shares in the ratio of 1:6 priced at Rs 340 and Rs 1,960 crore

through the issue of Class 'A' shares having DVR in the ratio of 1:6 priced at Rs 305 a

discount of 10%.

Promoters of Tata Motors have offloaded close to 29% of their shares with differential voting

rights (DVR) during the quarter ended December 2009. The promoters holding in the DVR

shares has now slipped to 56.59% as on December 31, 2009, from the 79.66% levels held

during the September-ended quarter according to the latest shareholding pattern available

with the Bombay Stock Exchange. Trade analysts believe that the company could have well

raised around Rs 700 crore through this stake sale. The Tata Motor's DVR shares have

limited voting rights of one for every 10 shares held but are entitled to an additional 5%

dividend to the ordinary shares.

During October and December 2009, the shares of Tata Motors with DVR shares were

trading at a discount in the range of 25% to 35% compared to the price of the underlying

ordinary shares. With DVR shares available at a steep discount and an added advantage of

additional 5% dividend, long term domestic and overseas institutional investors found a good

opportunity to increase their stake in the company. Moreover, globally such DVR shares

usually trade at a discount of around 5% to 10% and with such a huge discount it was

expected that the discount would thin down and allow for gains.

And since Tata Motor promoters held around 79% of these shares there was low liquidity in

the share and such frequent sell outs are expected to increase liquidity. Since the beginning of

the year 2010, the DVR has fallen sharply by around 21% whereas the underlying ordinary

share price has fallen by 17%, thereby the discount has now increased to around 42%.

However, since its listing in October 2008 the DVR share price has appreciated by 30%.

Major purchasers of the DVR include Prudential India Equity Fund which has a stake of

5.47%, Swiss Finance Corporation with 2.79%, DSP Blackrock with 1.26%, Nomura India

Investment Fund of 1.09% and Dragon Peacock Investments picking up a stake of 1.54%.

In looking at Tata Motors (TTM), the first thing that jumps out is the poor condition of the

balance sheet. On 31 March 2009, the debt on the balance sheet was Rs 392.134 billion ($8.7

billion); that is an astounding Rs 763 per share ($17). After reducing cash and cash

equivalents, the net debt comes in at Rs 683 per share ($15). Shareholder equity was Rs


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59.406 billion ($1.3 billion) or Rs 116 per share ($2.6). The net debt to net debt plus equity

ratio is 86%. This is well over debt levels I consider prudent.

A tolerable net debt to net debt plus equity ratio is 30%. For a car maker, a slightly higher

than 30% is okay in some circumstances; they typically use a quasi financial services

business to drive sales growth through financing buyers. For instance Honda Motor Company

(HMC) has a ratio of 48%.

But in the case of Tata Motors the debt is not so high on vehicle finance; a significant part is

to finance the acquisition of JLR. A recent corporate presentation shows Tata Motors debt

incurred in respect of Vehicle Finance at Rs 76 billion (1.7 billion); which is only 21% of the

total net debt.

In this way we can say that the capital structure is weak; very weak. Such high debt levels

will limit access to capital and can lead to muted future growth prospects. There also remains

considerable confusion about what portion of the company truly belongs to shareholders the

threat of a highly dilutive capital raising event is ever present.

The good thing about a bad capital structure is that the risk is very visible and in times of

crisis the risk gets mispriced; Tata Motors traded down to Rs 124 ($2.76) during the bear

market and at those price levels the risks were mispriced. The question to ask is: What is Tata

Motors worth with its structural risks fully priced?

Public have a high level of confidence in the stand alone Indian operations being capable of

delivering long term earnings of Rs 39 per share ($0.87) before interest; this can be expected

to grow in line with Indias nominal GDP growth of 12%. This amount is adequate to service

debt; the interest is expected to be approximately Rs 25 per share ($0.56). The per share

numbers are based on share count after the recent capital raising exercise assuming full

conversion of convertible notes; see later in this post for additional details.

This provides a very low interest cover. In addition, it does not provide any real ability to

pay-down debt. For simplicity let us assume the debt is embedded in the long term capital

structure (i.e. it will be permanently carried); and we will go with an expectation of rising

long term interest rates.


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The consequence is an assumption that interest expense too shall increase at 12% per year. Rs

14 ($0.31), growing at 12% annually, for an investor with a 16% annual return expectation

and a notional payout in perpetuity expectation of 40% returns a value of Rs 235 ($5.22). To

this we need to add the valuation attributed to the long term contribution we can expect from

JLR. JLRs contribution is difficult to estimate; visibility on historic data is low and forward

expectations are difficult to form particularly when you consider the growth impetus which

will arise once the brands aggressively entry India.

In our view a very conservative long term earnings expectation from JLR, is Rs 16 per share

($0.36); this does not include the cost of the debt burden which has been included as what the

long term India earnings will generate. This Rs 16 ($0.36) growing at 6% annually for an

investor with a 10% annual return expectation and a notional payout in perpetuity of 40%

returns a value of Rs 255 ($5.67). This puts a value of Rs 490 ($10.89) for Tata Motors.

The Rs 16 ($0.36) JLR estimate does not include growth potential for India; in our view Rs

26 ($0.58) is not an unrealistic long term earnings expectation for JLR. This Rs 26 ($0.58)

growing at 6% annually for an investor with a 10% annual return expectation and a notional

payout in perpetuity of 40% returns a value of Rs 415 ($9.22). This puts a value of Rs 650

($14.44) for Tata Motors. With a strong capital structure, these targets would be considered

the upper end of a buy limit. The capital generated should at this stage of the cycle move

towards quality and away from risk.

Growth Prospects

Tata Motors deals in a wide variety of vehicles. Buses are a great growth area; Indian public

transport is an absolute mess and Tata buses help making it get better. Part of the Indian fiscal

stimulus is geared towards investment in this area. Tata trucks are also beneficiaries ofmassive growth opportunities; with GDP expected to grow at 12% nominal over the coming

years, logistics and the movement of goods will create incremental demand for road

transport.


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Tata passenger vehicles also operate in a growth area; at the bottom end of the market, the

Nano, recently added to the passenger vehicle portfolio, provides a wonderful growth

opportunity. At the top end of the market, bringing the JLR brand into India will open up a

significant premium vehicle market for the group. The middle end of the market has a decent

product portfolio, which can in my view benefit greatly from the introduction of acquired

technology and intellectual property to improve quality.

The mid end can also benefit from JLR brand rub off; but here, care is needed so as not to

taint the JLR brand with the non premium product portfolio. The problem is that to benefit

from this huge opportunity, Tata Motors must have access to finance; and with the terrible

capital structure, access to incremental finance is unlikely to be available.

Because of this, in line growth represents a long term growth rate of 12% for the group ex

JLR and 6% growth for JLR; these growth rates represent long term nominal GDP growth

expectations in India and overseas respectively.

Capital Structure

A significant chunk of the debt went towards the acquisition of JLR. On question which

arises repeatedly is whether that was a good buy. In our view it was a good long term

buy. Success does depend largely on execution; part of the acquisition benefits will come

from future JLR income streams (including bringing the brand to India), but that is a small

part of the story; the real success will come from brand positioning and from the acquired

technology and intellectual property being applied to Tata Motors wider business. At this

point in time, we do not believe Tata Motors has successfully leveraged the acquisition in any

manner.

Tata Motors is part of the Tata Group, which enjoys high investor confidence in India. The

access to debt is good even during periods of distress. The ability to refinance means that

Tata Motors can carry the high level of debt embedded in its capital structure.

Even through this crisis, Tata Motors has been able to refinance debt and improve its debt

maturity profile; there is no reason to expect this to change. This is very important; it means


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that a dilutive capital raising exercise will not be necessary during a period of distress when

shares are deeply under-valued. Any capital raised to pay down debt and improve the capital

structure will be an active management decision.

Improving the capital structure is something which is both highly desirable and

inevitable. Access to incremental finance will be required to drive growth and capture higher

market share and the management will ultimately recognize this; an effectively managed

company will face a compelling force which will draw it towards a responsible capital

structure consistent with good business practice.

A responsible capital structure will maintain a net debt to net debt to equity of no more than

30%. Incremental long term debt can then be accessed to drive the net debt to net debt to

equity to a 50% level; but this incremental debt should be productive and profitable debt

that is debt undertaken to drive sales growth through the financing of vehicle buyers in the

consumer and commercial segments.

Our view as expressed in the prior paragraph is supported by Tata Motors' recent and

successful capital raising exercise. Tata Motors raised $750 million; $375 through the

issuance of global depositary shares, which valued each share at $12.54 (approximately Rs

580), and an additional $375 million from 4% coupon convertible notes (due 2014) to be

converted at $13.48 (approximately Rs 625) per share. Share count at 31 March 2009 was

514 million; if all convertible notes are converted, the share base will rise to approximately

572 million this is dilutive but it is an important first step towards improving the capital

structure. After this transaction, we expect the net debt to net debt plus equity to improve

from 86% to 74% assuming the hybrid notes are treated as equity. This should be the first of

further capital raising exercises to be conducted as confidence improves and the share price

strengthens.


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CONCLUSION

Tata Motor is Indias largest car manufacturer and commands roughly 70 percent of the

domestic market for commercial autos and 20 percent of the market for passenger vehicles.

India is one of the few developing countries where a domestic car brand controls such a large

market share, but many foreign companies are eyeing the market as opportunities continue to

grow.

In the third quarter, Indias gross domestic product (GDP) grew 7.9 percent, up from the 5.8

percent in first quarter 2009. And according to the International Monetary Fund (IMF), the

Indian economy is expected to expand 6.4 percent in 2010.

The country is modernizing its infrastructure in earnest, focusing on extending and improving

roads. Tata Motors is well positioned to capitalize on the countrys economic growth and

infrastructure build-out.

Tatas success in its native land is a big contributor to overall revenue, accounting for 37

percent. Tata has been in the European market for a while but is committed to expanding its

footprint. In 2010, the company plans to roll out models in the UK, Norway and Denmark.

Its recent acquisition of the remaining 79 percent stake in Spain-based Hispano Carrocera, an

established bus manufacturer, will expand its presence in Spain and around the world,

including Morocco and other North African nations.

Amid the crippling economic crisis, Tata purchased Britains Jaguar Land Rover (JLR) from

Ford Motor Company. Acquiring JLR initially saddled Tata with some tough losses, but new

car designs have reinvigorated the business. And these well-known luxury brands provide

Tata with entre to new markets.

Tata Motors started 2010 with impressive sales numbers. Sales, including exports, grew 77

percent to 65,478 units and pushed cumulative sales up 24 percent in the period from April to

January. Domestic sales of commercial vehicles soared 107 percent, and sales of passenger

vehicles reached an all-time high. Meanwhile, exports more than doubled to 3,276 vehicles.


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Third-quarter results, though lower than expected, proved solid and improved markedly from

previous quarters. The automaker generated a net profit of $86 million, up from a net loss of

$48.4 million last year, and revenue soared 90 percent to $1.9 billion.

With the economy recovering and demand rebounding, the stock also bounced back.Government stimulus and lower interest rates fueled demand, but the withdrawal of

government funds, rising input costs and an increase in interest rates are concerns going

forward. Nonetheless, analysts are confident the auto industry will remain robust. With

increasing exposure to foreign markets and strong growth prospects in its own backyard, Tata

Motors is well positioned to profit.


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REFERENCES

1. Financial Management by I.M. Pandey

2. Financial Management by R.P. Rustagi

3. Annual Reports of TATA Motors Ltd.

4. Wikipedia

5. Capitaline Plus

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Perceptions, Decision, Vol. 21, No.s 1 & 2, January-June 1994, pp. 67-86.

7. Collins, M. Cary, Atul K. Saxena, and James W. Wansley (1996), "The Role of Insiders

and Dividend Policy: A Comparison of Regulated and Unregulated Firms," Journal of

Financial and Strategic Decisions, vol. 9, no. 2, Summer, pp. 1-9.

8. Crutchley, Claire, and Robert Hansen (1989), "A Test of the Agency Theory of

Managerial Ownership, Corporate Leverage, and Corporate Dividends", FinancialManagement, vol. 18, Winter, pp. 36-46.

9. Dakshinamurthy D. and Narasimha Rao (1978), Speed Adjustment (Dividend) Model:

Some Empirical Evidence from Indian Chemical Industry 1960-73, The Chartered

Accountant, December, pp. 457-460.

10.John, Kose, and Joseph Williams (1985), "Dividends, Dilution, and Taxes: A Signaling

Equilibrium," Journal of Finance, vol. 40, September, pp. 1053-1070.11.Kennedy, Peter (1985), A Guide to Econometrics, 2nd edition, Basil Blackwell Ltd.,

Oxford, UK,.

12.Kevin, S. (1992), Dividend Policy: an Analysis of Some Determinants, Finance India,

Vol. VI, No. 2, June, pp. 253-259.

FMG18A_8_Corporate Finance Policies at TATA Motors

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