Tata Motors Ltd’s $450 million (Rs1,845 crore) zero coupon convertible issue has been structured very innovatively, with the CARS (convertible alternative reference securities) convertible either into alternative securities or ordinary shares or American depositary shares (ADSs).
The intention is to convert them into non-voting shares, so that there is no dilution in the group’s voting rights in the company. The bonds, which are convertible in 4.25 years at Rs960.96 per share, have been priced at a low yield to maturity of 5.6% and were oversubscribed around four times, according to people close to the transaction. The firm will also exercise the greenshoe option, which lets the company retain some of the oversubscription, and will take the total proceeds to $490 million.
In January last year, when Vedanta Resources Ltd had offered a bond with a similar conversion to non-voting depositary receipts, the issue bombed, with Barclays Capital, the arranger, having to take a large part of the issue on its books. The keen appetite among investors for the Tata Motors issue is therefore welcome, although their issue is more flexible, as it also has the option of conversion into ADSs. The flexibility is important, because the restricted voting stock will likely be less liquid.
Tata Motors’ stock had moved up on Wednesday, after the company announced the launch of the Magic and the Winger—small-capacity passenger transports for the rural and urban segments.
While car and heavy vehicle sales have declined in the first two months of the year, the company’s light commercial vehicles have seen a 10% rise.
The stock has fallen from around Rs900 at the beginning of the year to its current price of Rs686 and investors will be looking to the launch of the new passenger vehicles to stop the slide.
Incidentally, Citigroup, who is the sole global co-ordinator to the issue, has a research report that has a 12-month price target of Rs1,029, well above the conversion price for the issue.
L&T: multiple triggers
Larsen and Toubro Ltd’s stock is up 50% since the beginning of the year, easily beating the BSE Capital Goods (BSECG) index. That’s because the stock now has multiple triggers, some of which are riding on the momentum of infrastructure spending, some are in new areas of activity, while others will ultimately unlock value for the company.
The boost to the stock on Thursday, for example, was provided by news of a large shipbuilding order. The company is looking for an appropriate location for a shipyard, where it can build large ships. Reports say it’ll have to invest around Rs2,000 crore for the new shipyard. Projects such as these have traditionally been viewed with trepidation by investors, because there’s a long gap between the funding and the returns. In Larsen and Toubro’s case, however, investors have been completely unfazed, as is seen by the 20% rise in the stock in the past one month.
One reason is that Larsen and Toubro is already in the shipbuilding business, with small ships being built at its Hazira shipyard and the company already has the required marine engineering and steel sourcing skills.
More importantly, there are other positive developments that have boosted the company’s outlook. Larsen and Toubro’s March quarter results, for instance, beat the Street easily, with a surprise expansion in operating margins—margins increased by 300 basis points in FY07 and analysts believe the improvement is sustainable, thanks to internal efficiencies, such as rationalization of sites. There’s a huge backlog of orders and the management has guided for a 25-30% rise in the order book this year. Analysts say that Larsen and Toubro Infotech Ltd, the company’s IT services arm, could be listed this year, unlocking value for shareholders. Larsen and Toubro is present in almost all segments of the booming infrastructure sector, including real estate, with 30 million sq. ft under development. The company has also said that it expects a lot of traction from its defence business. And finally, the gap in Larsen and Toubro’s exposure to the rapidly growing large-scale thermal power generation business will be filled by its joint venture with Mitsubishi Heavy Industries to manufacture super-critical boilers.
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