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Rights issues to fund Tata’s Jaguar deal

Rights issues to fund Tata’s Jaguar deal
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First Published: Thu, May 29 2008. 01 17 AM IST
Updated: Thu, May 29 2008. 01 17 AM IST
Mumbai: India’s largest truck maker Tata Motors Ltd said it will raise as much as Rs7,200 crore through rights issues to repay debt it took for its planned purchase of British brands Jaguar and Land Rover, even as it admitted the outlook for the industry is bleak amid rising costs of raw materials such as steel. It also plans to raise up to a previously announced $600 million through issue of securities in overseas markets.
“It is going to be one of the toughest years for the auto industry in a long time,” said Ravi Kant, managing director, Tata Motors. “An unprecedented hike in input costs...and sudden contraction in vehicle financing is going to be a challenge.”
Tata Motors outbid rivals with a $2.3 billion offer to secure the rights to buy the two British brands from Ford Motor Co. in March after the US car maker put them on the block to raise money to shore up its own failing finances. Tata Motors took a $3 billion bridge loan arranged by banks and said at the time it would look to repay these loans by selling off some of its units and by raising debt.
Instead, it’s chosen the inexpensive route of a set of three rights issues to repay the money in a debt market that has turned expensive and difficult as a fallout of the US sub-prime crisis. Under a rights issue, investors have the option to buy shares for each share held, according to the ratio set by the firm. So, if an investor has 100 shares and the ratio is 1:1, he has the right to buy another 100 shares at a specified price which is usually a discount to the trading price to attract buyers. Tata Motors has not specified the ratio, but the rights issue approach is a way of raising money cheap, because a loan option would have raised the company’s interest burden.
The stop-gap $3 billion loan taken by Tata could cost an average rate of 110 basis points over the London interbank offer rate (Libor, a benchmark rate), a banker involved with the deal who didn’t wish to be named had previously told Mint. In a market where banks have taken massive writedowns because of bad debt, the cost of borrowing money has ballooned and even firms with strong creditworthiness have been slammed with interest costs that could be 100 basis points higher than they would be in a tame market.
“It will be easy for Tata Motors to raise that amount (through rights issues) given its track record,” said Prithvi Haldea, head of Prime Database, which analyses trends in public offers. “The overriding factor would be the discount at which they would be willing to offer the issues. Because of current market conditions and given the fact that markets may not go up for some time, they would probably be looking at a 15% (discount).”
Meanwhile, Tata Motors said its net profit for the year ended March 2008 dropped marginally to Rs2,167 crore from Rs2,169 crore a year ago, although sales were up 10% to Rs35,651 crore. During the year, Tata Motors earned Rs138.75 crore from the sale of its stake in two of its subsidiaries and Rs51.6 crore through a foreign exchange gain. Its subsidiary Telco Construction Equipment Co. Ltd acquired two Spanish firms at a cost of Rs248.61 crore in the year. The company did not share results for the March quarter.
Tata Motors’ overall vehicle sales at 528,129 units in fiscal 2008 were little changed from the previous year. Sales of commercial vehicles, which make up two-thirds of Tata’s overall sales, rose 5% to 313,371 units in fiscal 2008, its highest ever, on the back of new launches such as the Magic and Winger. Meanwhile, its passenger car business saw sales dip 5% in the year, largely because of declining consumer interest in Indica, its flagship model. A new version of this car is expected later this year.
India’s commercial vehicles market grew a mere 4% in terms of sales last year compared with a double digit rate of growth a year ago—a result of a credit squeeze and interest rates that are at a six-year high. Rising costs of raw materials such as steel, aluminium and crude oil have also squeezed profits of auto makers in the last two quarters.
Shares of Tata Motors closed at Rs634.75 each on Wednesday, up 1.3%.
Ravi Krishnan in New Delhi contributed to this story.
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First Published: Thu, May 29 2008. 01 17 AM IST
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