Although Tata Motors Ltd pulled through its large rights issue with the support of its promoters, its funding woes are far from over.
The $3 billion (nearly Rs15,000 crore) bridge loan it had taken to finance the acquisition of Jaguar-Land Rover (JLR) is due for repayment in less than seven months’ time, and the rights issue has helped the company raise less than 30% of its requirement.
At current exchange rates, the Rs4,150 crore rights issue has garnered only $830 million. When the company had taken the bridge loan in June, the rupee was at 42.40 to a US dollar and the rights issue of the same size in rupee terms would have helped the company garner nearly $1 billion.
Well, that’s the impact of not hedging the bridge loan in the currency derivatives market, points out IIFL, India Infoline’s institutional equities wing, in a recent research note.
Indian companies have left their foreign currency denominated debt (including convertibles) unhedged for some years now, on the assumption that the rupee will always appreciate against the dollar. The sharp depreciation of the rupee this year has come as a rude awakening.
The company had also planned to raise $600 million through the issue of equity and equity-linked instruments in the overseas market. This part of the funding was neutral to currency movements.
But given current market conditions and the sharp drop in Tata Motors’ valuations, an overseas equity issue now looks rather unlikely.
The company currently has a market capitalization of $1.49 billion, including the value of its shares with differential voting rights. An issue worth $600 million will dilute its equity by at least 40%. The rights issue itself had diluted equity by 33% and wasn’t taken kindly by the markets.
The company also planned to raise about Rs3,000 crore by selling stakes of group firms and subsidiary companies. When it announced this plan in mid-August, the rupee was at 43.50 to a dollar and the company would have been able to garner about $700 million from stake sales.
If one were to only account for the depreciation in the rupee since, the target would now have to be pruned to $600 million.
With stock prices having fallen drastically since then, it would be a tall task for the company to even meet that target.
But even assuming that it meets its target for stake sales, it would still have raised only about $1.43 billion including the rights issue. And while the refinancing deadline for the bridge loan is fast approaching, so is the repayment/refinancing on another set of loans the company has taken.
According to IIFL, a separate set of loans worth Rs6,140 crore are due for repayment in the next one year. This is likely to be refinanced at current higher interest rates, and would lead to a spurt in finance costs for the company.
Issuing fresh equity to the promoter group to bridge the funding gap also seems like an unviable option. As noted, with the current market capitalization being less than $1.5 billion, the resultant dilution will be huge.
Worse still, JLR would need a large, steady flow of capital to fund its research and development, which IIFL estimates at about $1 billion every year. Meanwhile, all this is happening at a time when the company’s domestic operations and cash flows are going through a severe downturn.
One way out of the funding mess, IIFL proposes, is to transfer JLR to another group company. After all, funding the acquisition has already severely dented Tata Motors’ market value and ability to raise more funds.
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