To meet the additional credit requirements in a market plagued by high interest rates and lowersales, the country?s largest auto company Tata Motors has infused an additional R750 crore into its wholly-owned finance arm Tata Motors Finance (TMF) by expanding the equity base from R2,000 crore to R2,750 crore. The move is significant since the additional funds would not only help the auto finance company meet the rising fund requirement but also enable TMF to lend R3,500 crore more in 2011-12. At present, TMF finances over 33% of all Tata Motors vehicles or nearly 20,000 vehicles per month. The decision to this effect was taken in a board meeting on March 23.
Experts said that the auto finance company would be able to lend five times or R3,750 crore of the additional funds of R750 crore infused by strengthening the company?s borrowing abilities. The additional funds would be infused into the company by the creation of 75 crore new shares at Rs 10 each. This would increase the total equity shares of the company from 125 crore to 200 crore shares. Apart from that TMF has an additional 7.5 crore of preferential shares at Rs 100 each. The board has also increased the borrowing limit of TMF from R12,000 crore to R18,000 crore. An email sent to Tata Motors did not elicit a response.
Since January this year, interest on auto loans have increased from around 10.5% to 12%. Banks like HDFC and Kotak Mahindra have increased auto loan rates. ?At a time when car loans are getting dearer, Tata Motors Finance would be able to borrow more and dole out loans faster than other banks,? an industry source privy to the discussions told FE. Market analysts said that the move is going to allow TMF to lend more to customers at the backdrop of a high interest rate regime. ?The Tatas can leverage at least five times the amount of R750 crore. This would allow the Tatas to give more car loans,? said assistant vice-president of Sharekhan Securities Deepak Jain. In 2010-11, TMF?s loan disbursements increased 18% to R7,908 crore from R6,697 crore. During the last fiscal, TMF?s market share stood at 10.1%. According to Jain, more than 33% of total Tata Motors vehicles are financed by TMF.
Another analyst said that since macroeconomic indicators looked negative owing to high fuel prices and interest rates, the Tatas? move could prompt other OEMs like Bajaj Auto and Ashok Leyland, which also have finance arms of their own, to follow suit. He said that since 70% of the total vehicles in the country are financed through loans, companies that already have their own finance arms would help mitigate lower sales temporarily. Since April 2010, the Reserve bank of India (RBI) has increased the benchmark lending rate by 2.25 percentage points. At present RBI’s lending rates are hovering between 9.25% and 10%.
Analyst with Prabhudas Lilladher Surjit Arora said that Tata Motors had taken a prudent step.
?Tatas are the largest commercial vehicle manufacturers in the country. Over 40% of the CVs are financed by TMF. Since interest rates are going up, the Tatas have taken a good step to come forward and ease the burden by infusing liquidity. This will help keep the sales momentum high,? he said.
According to Arora due to negative macroeconomic sentiments vehicle sales could be lower in the next 18-24 months. In May this year, Tata Motors’ passenger vehicles sales declined 9% to 19,401 units from 21,324 units.
The company’s CV sales, however, increased 8% to 37,368 units as compared to 31,475 units in May 2010.