Tata Motors: Coping with the bumps ahead

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The share price of Tata Motors took a beating of around 2.77%, as it closed lower at Rs 373.30 on Monday. And, market experts reckon there could still be some more scope for correction. The Jaguar Land Rover (JLR) products, since they are in the luxury category, will start feeling the pressure from the slowdown in Europe and the US. Around 70% of its volumes are sourced from these markets.

While Jaguar volumes have increased, Land Rover has seen a sharp cut in volumes, and this trend is expected to continue, say experts. Revenues for JLR in the first half of 2008 were pegged at $8 billion and earnings before interest. Tax (prior to adjustments) stood at $700 million and there has been an improvement in operations, say analysts. The concern is about JLR’s ability to maintain margins when revenues are under pressure. Moreover, JLR’s pension fund, which was fully funded at the time of acquisition, (October 2007) is up for revaluation in April 2009. This could result in a need for a fresh infusion of funds by the company, say analysts. Then again there is the matter of rising R&D costs, as the emission norms change in Europe in 2012. Analysts expect the company to shell out around $1.5 billion over the next two years. Also, there are concerns on the domestic revenues of Tata Motors as well. Delays in product launches are one of the biggest matters of distress.

The company has charted out a Rs 10,000-crore expansion plan over the next three to four years and it is imperative that it launches more products, as most of them are dated, says Sahil Kedia of ENAM. Moreover, with interest rates tightening in India, off-take is expected to remain sluggish.

The management had mentioned that it would raise around $1.3 billion for repaying the bridge loan for the JLR acquisition by selling off some of its investments and stake in strategic subsidiaries and also through a global issuance. On Thursday, the company raised around Rs 487 crore by selling Tata Steel shares to Tata Sons. And will be selling other shares as well. With the given market condition, the management may miss on getting a better price. All eyes are therefore trained on the JLR operations contributing to the consolidated balance sheet.