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Tata Motors, the listed Indian auto major, plans a three-pronged strategy to bring down its debt-to-equity ratio, a source familiar with the development told dealReporter. Tata Motors will sell some investments, prune down its auto finance book and time a capital raise as it targets to reduce its debt-to-equity ratio from 1:1 as on 31 March to 0.75:1 or even lower to 0.5:1, he added.
The sale of Tata Motors’ listed non-core businesses is likely to be first on the agenda given the improvement in the stock market, said the source. He declined to identify any possible companies but stated that there is cross-holding of Tata Group companies which Tata Motors could look at an exit. Among the listed companies Tata Motors holds stakes in is Tata Steel, where it holds nearly 3%, Tata Chemicals (0.03%) and Automobile Corporation of Goa (nearly 38%).
Aside from monetising its investments in listed companies, Tata Motors could also look at a possible stake sale in its unlisted subsidiaries such as HV Axels, Tata Daewoo Commercial Vehicle Company, Tata Motors Finance, HV Transmissions, Telco Construction Equipment [Telcon] and Tata Technologies, an investment banker said.
Tata Motors was earlier in talks regarding a stake sale of Tata Technologies and Tata Elxsi, confirmed a banker earlier involved in the transaction. The deal was stuck due to valuations, he added.
The stake sale in subsidiaries is purely a part of the financial game plan for Tata Motors, said the second banker familiar with Tata Motors’ strategy. Stake sales would be minority in nature, the banker said, adding that it would have a cumulative impact for the company’s funding needs.
Tata Motors several years ago also looked at the option of listing its two subsidiaries, HV Axles and HV Transmissions, where it holds about an 85% stake, as previously reported by this news service. Media reports at the ti noted private equity interest in Tata Technologies, as well as the company’s plans to list its Korea-based subsidiary, Tata Daewoo.
Tata Motors’ officials declined to comment on its stake sale plans, stating that information would be made available later. Incidentally, Tata Technologies has a managed services contract with Jaguar Land Rover [JLR] until 2013 to assist in the IT migration process from Ford to Tata Motors, according to the company’s website.
Aside from monetising its investments in listed and unlisted companies, Tata Motors could look at an equity offering, the source said. He declined to specify the possible size or means of the fundraising, but ruled out the issuance of fresh convertible bonds given the poor appetite of the global market.
Last July, Tata Motors announced that shareholders had approved its plan to raise USD 1bn, according to a BSE filing.
Meanwhile, the source said that the company would continue raising working capital by the way of the fixed deposit scheme, which it started late last year. To date, the company has raised INR 20bn, he added. Under the companies [acceptance of deposits] rules of 1975, the maximum amount Tata Motors can raise is INR 27bn [USD 540m], as previously reported.
Tata Motors has a unique profile given the Tata name and the scale of its operations globally, said Manuel Guerena, senior analyst at Standard & Poor’s, commenting on the company’s ability to meet a capital raise.
In a recent investor call, Tata Motors’ Chief Finance Officer C Ramakrishnan said that Tata Motors’ recent INR 42bn domestic bond issuance to part finance the bridge loan was over-subscribed 1.6x. Likewise, the USD 1bn 18-month overseas loan saw a good response, over-subscribed 1.4x at a higher credit spread of Libor plus 500 basis points.
At the same time, Abdul Majwad at PricewaterhouseCoopers, who tracks Tata Motors, said: ”The effective borrowing cost has risen and there is a premium attached to it.” Tata Motors raised INR 42bn domestic bonds at varying maturity and rates of interest. However, these bonds will be redeemed at a premium considering that they carry a 2% coupon.
It could mean an additional debt outgo of INR 8bn ti INR 10bn, it was said.
Tata Motors’ shares were up marginally at INR 337.50 on Monday trading after the company declared its results on Friday evening after market hours.
Concern over debt profile continues to impact credit rating
Global credit rating agency, Standard & Poor’s continues to keep Tata Motors at ”B plus” on negative credit watch even thought the company has managed to repay and partly rollover the USD 3bn bridge loan. ”The main concern is the company’s debt profile/debt structure. While there has been significant refinancing of the debt, we are waiting for the company to give more details in terms of more numbers,” Guerena said.
Commenting on the company’s plans to prune down its debt, Guerena said that further deleveraging action will be good, but one needs to see the cash flow ability of the company in this environment. ”The OEM market is still far from certain, as we still want to reassess the outlook on Jaguar Land Rover in terms of sales and profitability as well as investment if needed,” he explained.
Conversion of Nano bookings into sales to fuel cash flows
How fast the company will be able to convert the Nano bookings into actual sales realisation will help cash flows, said Majwad. The auto industry is under going through difficult times, which makes it difficult to raise funds.
Majwad put greater emphasis on cash flows. Nano has to realise a sale of 100,000 in the next 18 months to two years, he added.
Further buy back of convertible bonds currently unlikely
Tata Motors is unlikely to be in a position today to further buyback its outstanding foreign currency convertible bonds [FCCBs], a CB banker, said given that the bonds are quoted near their par value. However, it has until 31 December to buy back the bonds as per Indian regulations.
”Given that the company’s share price is not likely to match the high conversion price of the convertible bonds, they will have to be redeemed,” the banker said. This further adds to the company’s debt profile.
Today, the asking price for the USD 490m Zero Coupon Convertible Alternative Reference Securities maturing in 2012, is around 84.84. The JPY 11.760bn (USD 124.3m) Zero Coupon Convertible Notes maturing in 2011 is quoted at about 97 cents to the dollar.
Subsequent to Tata Motors’ buying back a portion of its bonds of both tranches, about USD 473m bonds maturing in 2012 remain outstanding, and JPY 11.46bn of the Japanese yen-denominated bonds maturing in 2011 are outstanding.
Sellers are confident that Tata will be able to meet redemption pressure and hence the response to the buy back was minimal, the banker explained.
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