The fiscal 2010 results of Tata Motors Ltd indicated a sharp turnaround in performance, not only in its domestic operations, but, more importantly, that of its overseas acquisition—JaguarLand Rover. Consolidated earnings before interest, tax, depreciation and amortization (Ebitda) nearly quadrupled from Rs2,197 crore in FY09 to Rs8,614 crore.
But Tata Motors’ profit and loss (P&L) statement portrays an incomplete picture, since the firm capitalizes a large part of its product development expenses. A better approach is to look at the company’s balance sheet and cash flow statement, which are available in its recently released annual report.
Tata Motors’ net worth, adjusted for revaluation reserves, rose from Rs5,830 crore to Rs8,021 crore, which is a comforting sign, especially since it has a debt of Rs27,500 crore (adjusted for vehicle financing loan book). A large part of this rise was on account of equity fund-raising through a global depository receipts issue and conversion of convertible bonds into equity.
Note that around 38% of Tata Motors’ assets are in the form of intangible assets, up from around 28.5% a year ago. Intangible assets such as goodwill, capitalized product development expenses and trademarks and brands amounted to Rs17,372 crore. Adjusted for this, the company’s tangible net worth stands at a negative Rs9,351 crore.
Graphic: Naveen Kumar Saini/Mint
This is considerably higher than year-ago levels, when its tangible net worth stood at a negative Rs6,227 crore. Tangible net worth represents the physical worth of a company. A negative figure implies that if a company were to be liquidated, the value of its physical assets would be insufficient to pay back creditors. Of course, this is based on the assumption that the intangible assets wouldn’t fetch much.
While the net carrying value of most intangible assets reduced compared with FY09, that of capitalized product development expenses more than doubled to Rs9,838 crore last year from Rs4,210 crore in FY09. This includes product development expenses that are part of the company’s capital work-in-progress.
Some analysts have reservations about the large extent to which expenses are capitalized. If all of the company’s product development expenses were accounted for in the P&L statement, the resulting increase in expenses would offset about 90% of the increase in Ebitda in FY10.
Does the cash flow statement also reflect a different picture compared with the P&L? For this, one needs to look at free cash flow, adjusted for capitalized expenses.
The company has returned to free cash flow generation, which stood at Rs794 crore. It was helped here by a large increase in trade payables, which rose by 42%, higher than the 30% rise in net sales. The free cash flow generation was much lower than net interest payments of Rs2,580 crore (net of interest and dividend income). Needless to say, the company had to raise equity and debt funds to fund the gap.
This portrays a completely different picture than the traditional interest cover ratio, which compared the Ebitda with the interest outgo. The large differential between Tata Motors’ free cash flow and Ebitda, as well as its negative tangible net worth are disconcerting.
While there has no doubt been a turnaround in operations, the financial picture is not as rosy as the firm’s P&L suggests.