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Business News/ Companies / China Land Rover boom cuts Tata Motors bond risk
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China Land Rover boom cuts Tata Motors bond risk

Tata Motors's JLR unit in China soared 61% last quarter, helping the Indian company tide over a demand slump at home

Tata motors is now stepping up efforts to turn around its local business, unveiling its first new car model in five years this month with the compact sedan Zest. Photo: PTIPremium
Tata motors is now stepping up efforts to turn around its local business, unveiling its first new car model in five years this month with the compact sedan Zest. Photo: PTI

Mumbai: India’s top auto maker can thank China’s appetite for a British off-road vehicle brand for the biggest drop in bond risk in the global industry.

Credit-default swaps insuring the debt of Tata Motors Ltd. for five years slumped 80 basis points this year to 365, as a demand surge in the world’s second-largest economy fuelled the biggest profit jump since 2010. Similar contracts for Fiat SpA fell 41 basis points, according to data provider CMA.

Sales at Tata Motors’s Jaguar and Land Rover (JLR) unit in China, the world’s largest car market, soared 61% last quarter, helping the Indian company tide over a demand slump at home.

The risk the car maker will renege on debt in the coming 12 months has slumped to 0.09%, from 2.5% five years ago, according to Bloomberg’s default risk model based on factors including share performance and debt metrics.

“The profitability just keeps surprising positively," Max Warburton, auto analyst at Sanford C. Bernstein in Singapore, said in an interview on 21 August. “JLR is generating a huge amount of cash and the business looks in great health."

The credit market’s increased confidence in Tata Motors marks a turnaround from a deterioration after the sudden death of former managing director Karl Slym in January.

Slym, who joined the Indian company from General Motors Co., died after falling from the 22nd floor of the Shangri-La hotel in Bangkok, in a case that Thai police has said, pointed to suicide. The auto maker’s default swaps reached an 18-month high in February.

Improving finances

“Tata Motors group’s strong financial performance, despite the downturn in domestic business, buoyed by its luxury brands Jaguar and Land Rover may have positively influenced its credit default swaps," Tata Motors’ Mumbai-based spokeswoman Minari Shah said in an e-mail.

“The movement of the gauge may also be guided by several external factors apart from company specific factors," she said.

The company’s net income more than tripled from a year earlier to 54 billion ($892 million) in the April-June period, beating the 37.9 billion median of 34 analysts’ estimates compiled by Bloomberg.

Deutsche Bank AG and Credit Suisse Group AG raised their share-price targets for the maker of the Nano, the world’s cheapest car, after the earnings announcement on 11 August. Tata Motors bought JLR from Ford Motor Co. in 2008 for more than $2 billion.

Domestic sales

Cash and equivalents at the Mumbai-based company increased to 387 billion from 109.5 billion at the end of the financial year through March 2011, according to data compiled by Bloomberg.

Its net debt, or liabilities minus cash, as a proportion of earnings before interest, taxes, depreciation and amortization was 0.67 as of 31 March, the lowest at least since 2002.

While sales have risen at the Jaguar Land Rover unit, Tata Motors has been grappling with weak demand at home amid India’s economic slowdown. Domestic passenger-vehicle deliveries fell 37% last quarter, according to the Society of Indian Automobile Manufacturers. Truck sales dropped 25%.

The company is now stepping up efforts to turn around its local business, unveiling its first new car model in five years this month. The compact sedan, called the Zest, was developed to revive profitability at the Indian business as it lost market share to Maruti Suzuki India Ltd and the local unit of Seoul- based Hyundai Motor Co.

Turning Point

“We’re quite positive on Tata Motors for the next few years," Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets, said in a phone interview on 21 August.

Land Rover is still seeing huge demand and we think that in the domestic business, the commercial vehicle business, things will turn around in the coming few years.

Indian Prime Minister Narendra Modi has pledged to revive Asia’s third-largest economy after his landslide election victory in May. Growth declined to below 5% in the last two fiscal years from 9.6% in 2006-2007.

Tata Motors issued 10-year rupee bonds this month at 9.81%, according to data compiled by Bloomberg.

The yield on benchmark AAA rated five-year local-currency corporate bonds in India declined 27 basis points, or 0.27 percentage point, this year to 9.36 %, while that on 10-year government notes dropped 31 basis points to 8.52%. The rupee gained 2.2% in 2014 to 60.4725 per dollar.

“JLR is a prestige car maker that continues to go from strength to strength," Alan Greene, a Singapore-based analyst at Moody’s Investors Service, said in an 22 August telephone interview. Meanwhile, Tata is back to launching new car models in the domestic market. People are thinking this could finally be the turning point. Bloomberg

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Published: 25 Aug 2014, 12:55 PM IST
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