The Tata Motors Ltd share has been the toast of the markets this year, quadrupling from its lows of Rs130 earlier this year. The rise in the stock, however, has been a mystery to some, especially since the company’s balance sheet position is precarious. One portfolio manager with a domestic mutual fund says that he’s surprised at the sharp rise in the stock, considering that the company now has a negative tangible net worth.

What’s tangible net worth? Investopedia Ulc defines it as a measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. It also states on its website that net worth is the supposed liquidation proceeds a company would fetch if its operations were to cease immediately and the firm was sold off.

Tata Motors had a consolidated net worth of Rs5,830 crore adjusted for revaluation reserves at the end of the last fiscal. Its balance sheet also included intangible assets worth Rs12,057 crore. Goodwill and capitalized product development expenses accounted for two-thirds of this and the balance is made up of trademarks and brands, technology and software. Its tangible net worth, therefore, stands at a negative Rs6,227 crore.

Graphics: Sandeep Bhatnagar / Mint

If Tata Motors were to be liquidated, it may be able to recover some of the value of trademarks and brands. But the goodwill related to the Jaguar Land Rover (JLR) acquisition, in the opinion of most analysts, is a write-off. Capitalized product development expenses refer to funds already spent in developing new products and won’t be considered for valuation purposes. From a banker’s point of view, therefore, there doesn’t seem to be sufficient coverage in the event of a default. The physical assets don’t add up to the gigantic debt of Rs34,974 crore on the company’s books as on 31 March. In the light of this, the markets’ willingness to value Tata Motors’s equity at Rs23,475 crore is a mammoth mystery.

So why does Tata Motors continue to get access to debt from a large number of banks? About 24 banks including State Bank of India, Citigroup Inc., Standard Chartered Plc and JPMorgan Chase & Co. have agreed to provide funds to roll over loans worth $850 million (Rs4,173 crore). JLR, the cause of all of the company’s problems, has recently got access to working capital facilities from some banks as well.

The reason banks aren’t running scared yet is the strong backing of the parent group, Tata Sons Ltd. The implicit understanding in the financial community is that the group won’t let one of its companies default.

Of course, this understanding alone doesn’t work and the company and its promoters have had to pledge assets such as share holdings to get access to these loans.

The trouble, however, is that losses continue to mount at JLR, and this could well turn out be an instance of playing with fire for banks and equity investors alike.

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