Tata group--scaling that mountain of debt

He was referring to the global cash crunch that was hindering the refinancing of a $3 billion bridge loan Tata Motors Ltd had taken in March 2008 to buy the iconic Jaguar and Land Rover brands from Ford Motor Co., and squeezing funding for the operations of Corus Group Plc.

Highlighting efficiency: Ratan Tata at the Nano car launch. In a letter to the CEOs of group companies, he asked for belt-tightening across firms. Abhijit Bhatlekar / Mint

Tata Steel Ltd bought Corus for Rs53,850 crore in early 2007 and Tata Motors, India’s largest automobile company, took over Jaguar and Land Rover for Rs13,950 crore the following year. The two purchases account for at least two-thirds of the Rs90,372 crore the group has spent so far in acquisitions.

The group won global recognition with these purchases but it also took on a mountain of debt in the process.

“We expect the total debt of the Tata group as of the end of FY2009E (estimate for fiscal 2009) at over Rs1 trillion, of which Rs117 billion (Rs11,700 crore) is due through March 2010," Jairam Nathan of Kotak Securities Ltd wrote in a March research report.

“Additionally, total capital expenditure for the group is Rs216 billion in financial year 2010, with a bulk of this coming from Tata Steel and Tata Power. Net of the projected capital expenditure, we estimate free cash flow generation at the group level would be marginal at Rs10 billion," he added.

It was Tata Tea Ltd that first stoked the group’s appetite for overseas acquisitions. The firm bought UK’s Tetley tea brand in 2000 for Rs1,831 crore. The next acquisition came four years later, when Tata Motors took a controlling stake in South Korea’s Daewoo Commercial Vehicle Co.

Despite the Rs1 trillion debt, Kotak’s Nathan says the group’s funding challenges are “manageable".

Tata Motors’ finance team and investment bankers have managed to piece together an intricate transaction that will enable them to repay part of the bridge loan.

Debentures worth Rs5,000 crore were issued in four portions with tenors ranging 23-83 months, and allowing for a bullet repayment—in which the entire loan can be repaid at the time of maturity—along with a redemption premium amount. Negotiations are now on to roll over the balance $1 billion debt.

Tata Motors repaid $1 billion of the bridge loan using the proceeds of shares sold to existing shareholders last year.

News emerging from Corus is, however, grim. The company had announced that its Teesside Cast Products, or TCP, plant faced the risk of closure, as a consortium of four buyers had terminated a 10-year agreement to buy 78% of the plant’s production.

“While it may not have a major impact on profits (plant sales were at cash cost), this is a setback as it will be more difficult to cover fixed costs and is likely to involve a shutdown cost," say Pradeep Mahtani and Thomas P. Wrigglesworth, analysts at Citigroup Global Markets, in a report.

The Corus acquisition helped Tata Steel become the world’s sixth largest steel maker but the worries mount.

“Tata Steel has closed service centres in UK, plans to sell aluminium smelters in Europe, and also an 80% stake in Teesside Cast Products in order to restructure Corus operations," the Citigroup analysts wrote. “The TCP stake sale was expected to raise $480 million but is unlikely to go through as the buyers have cited financial difficulties. Tata Steel has to repay $795 million in FY10 (fiscal 2010) and $1.3 billion in FY11. While cash as of December 2008 was $1.1 billion, planned FY10 capex is $1.2 billion."

Analysts say that if push comes to shove, Tata Sons, the main holding company, has the financial flexibility to support group companies in extreme cases such as a “significantdrying up of the debt capital markets or deterioration in the domestic and or the globaldemand environment", according to Kotak’s Nathan.

“We believe the Tata group of companies would generate Rs100 billion in free cash flows in FY2010E, against Rs117 billion in debt coming due for repayment/refinance," he added in the report.

In another balance sheet analysis of the Tata group last January, Bijal Shah of IIFL Research wrote about the group spending nearly $19 billion in the past few years. “The sudden deterioration in the global economic environment and credit markets has understandably created an unforeseen strain on group financials."

During these changed times, the group’s businesses have become more circumspect. In an email to the chief executives of Tata group companies in late 2008, Ratan Tata wrote: “We have found ourselves in a situation where the plans we had of converting short-term debt to equity, and raising equity to handle these transactions, were all in peril."

Shah, in his 15-page analysis of the group, zeroes in on the nub of the problem, identifying why the group is at risk. “With 62% of its revenues earned outside India, the group is no doubt highly geared to the global economy; and therein lies the unknown risk."

While its UK operations have hit a speed breaker, closer home Tata Motors’ capacity build-up is moving as per plan.

The launch of the Tata Nano, dubbed the world’s cheapest car, grabbed newspaper headlines globally. And the success of its so-called world truck, with a launch slated for later this month, will ultimately decide the firm’s fate in the short term. The two projects are expected to burn a lot of cash in the short run.

The new launches, including a bus plant at Dharwad in Karnataka, came at a cost. “There has also been pressure on the working capital front, which increased by Rs18,000 crore between April and December of 2008," wrote Srinivas Rao, Amyn Pirani and Anup Kulkarni, research analysts at Deutsche Bank.

The way out for the group may be to divest some investments. Tata Motors has assets it can use to unlock value. Its incremental borrowing capacity is at close to Rs11,500 crore, and the company can additionally raise Rs2,000-2,500 crore through stake sales in subsidiaries including Tata Daewoo Commercial Vehicle Co. Ltd, Tata Construction and Projects Ltd, and Tata Technologies Ltd to repay a part of the loan, says the Kotak report.

In an interview with Mint earlier this year, Ishaat Hussain, a member on the board of Tata Sons, referred to how the group prepared itself by borrowing money much before it was required. He also said that the group is now focusing on its funding requirement for 2010.

Getting the funds is just one part of the business needs.

In his letter to the group’s CEOs, Tata had asked for belt-tightening across companies. His five-point charter was to improve operational efficiency, aggressively implement an internal cost framework, drastically reduce operating expenditure, defer non-essential capital expenditure and capacity expansion, and put on hold any plans for acquisitions unless considered strategically critical.

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