Tata Motors Ltd’s post-tax consolidated loss of Rs2,505 crore in 2008-09 should have rattled investors, though the initial response in the US market seems to be sanguine.
On Friday, Tata Motors’ American depository receipts were up 0.3 cents to $9.74 (Rs272) at 8pm India time, even though consensus estimates from analysts suggested its losses would be marginal. Local trading in its shares will resume on Monday. If one were to account for the fact that last year’s results included profit from the sale of investments and the buy-back of currency convertible bonds worth close to Rs900 crore last year, the losses are colossal. While there is a near consensus on the street that the Jaguar Land Rover (JLR) acquisition was a mistake, few expected the negative impact to be evident so quickly.
The most worrying part about the JLR (Jaguar-Land Rover) acquisition, as has been pointed out in this column earlier, is that the company is burning cash and Tata Motors’ involvement hasn’t stopped at the initial $2.5 billion (Rs12,125 crore) it paid for the acquisition.
The company disclosed on Friday that it has invested an additional $1.4 billion in the company post-acquisition. One reason for this was that JLR wasn’t able to raise money on its own books to fund its working capital.
Tata Motors’ chief financial officer C. Ramakrishnan said on Friday that JLR burnt cash at an annualized rate of $479 million at the operating level last year (£290 million converted at current rates). It spends another $1.1 billion in normal capital expenditure and product development expenses. While the company is striving to cut these expenses and trim the flab at JLR, there are obvious limits since JLR’s very sustenance would depend on new product introduction. Research and development, therefore, cannot be cut beyond a point. Unless the company’s operations start generating cash, Tata Motors may soon need to make another round of funding. As it is, its debt-equity ratio has ballooned to 2:1, and the consolidated interest cost of Rs1,930 crore was only slightly lower than its operating profit. Matters have improved a bit. Tata Motors is in the process of being lent $560 million by European Investment Bank. The firm says its cash requirements for the next 12-18 months would be taken care of.
Considering that JLR continues to burn cash at a rapid pace, the acquisition is turning out to quite a liability. Sandeep Bhatnagar / Mint
But considering that JLR continues to burn cash at a rapid pace, the acquisition is turning out to quite a liability. Soon after the acquisition, the company was forced to raise funds through a rights issue and the resultant high dilution in its equity base had led to a sharp fall in share prices.
Since March, though, the company’s shares have risen sharply, on expectations that the recovery in the domestic economy would help its prospects. Some analysts feel the JLR liability was conveniently forgotten in the past few months, and in this light the subsidiary company’s huge losses would come as a rude shock to many.
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