Tata Motors’ board on Wednesday approved the terms of the Rs 7,500 crore-rights issue that will entitle existing shareholders six ordinary shares and ‘A’ ordinary shares (differential voting rights or DVR) for every 109 held at a steep discount.
The fund raising exercise will add 5.5% equity to total number of shares outstanding as on December quarter. The company is offering fresh 15.06 crore ordinary shares at a price of R450 apiece, a discount of roughly 17% to current market price. Over 2.65 crore DVR shares are on offer at R271 per share, 14% discount to current rate.
Shares of Tata Motors advanced 1.56% or R8.30 to settle at R541 per share. The DVR-shares gained 1.05% or R3.3 to end at 316.10 apiece.
Sources familiar with the development told FE that a ‘significant part’ will be utilised to reduce debt burden.
While the company has not made the details public, analysts estimate R4,000 crore being utilised for debt reduction including the buyback of non-convertible debentures (NCDs). The company will buy back R1,250 crore of NCDs of May 2009 having March 31, 2016 as maturity date as part of its debt restructuring programme to ensure a healthy debt. The exercise will relieve the company of R400 crore in interest costs in the near-term.
As a result, analysts foresee the company’s debt-to-equity ratio to improve to 1.1–1.2 times. Debt-to-equity ratio stands at 1.5 times as on quarter ending December 2014. Tata Motors’ total debt stands at R18,048 crore as of September quarter, Bloomberg data showed. December quarter data was not publicly available.
“We believe the domestic CV cycle has bottomed out and hence build in a 17% CAGR in CV volumes for Tata Motors over FY15e-FY17e, as well as a 22% and 31% revenue and PAT, respectively, CAGR for the company over this period,” said Religare Institutional Research’s analysts Mihir Jhaveri and Prateek Kumar in their note.
The remaining R3,000 crore is estimated to be utilised on capital expansion of domestic business. Analysts expect the company to invest in the research and development of new products especially in the passenger vehicle segment in order to trump formidable competitors like Maruti Suzuki, Honda and Hyundai.
Amit Kaushik, principal analyst, IHS automotive says most of the money will be spent in research and development of new products. “At present Tata motors’ focus is on the domestic market. The competition is intense here and to beat its competitors they need invest in R&D”, added Amit Kaushik.
JLR provided 150 million pounds as dividend to the domestic business of Tata Motors in each of the last two years but this year it will not be able to provide the capital.
Tata Motors plans to launch at least two new cars each year till 2020 to regain market share, and will also invest towards strengthening the marketing and distribution set-ups for new launches like the Zest, which has been doing well, the company said about six months ago.
Tata Motors, in January, had announced plans to raise R7,500 crore by way of rights issue – the third largest in Indian markets. SBI conducted the biggest rights issue in February 2008 when it raised R16,736.30 crore. Tata Steel’s R9,134.59 crore rights issue in November 2007 was the second largest.