The Hindu Business Line : Tatas takeover: Analysts see areas of concern

Mumbai, March 27 Analysts are still full of questions about the Tatas’ acquisition of Jaguar Land Rover. Where do the synergies lie? What are the cost containing measures that can be taken? How will the Tatas cope with the huge R&D fund requirements? These are some of their concerns.

“Unlike in the Tata-Corus deal, here it is not clear in what way the costs will come down and how they will improve margins,” said an analyst with Prabhudas Lilladher.

One big issue of contention is that of the seemingly lack of cost cutting measures that Tatas can undertake, feel analysts.

“With Tata Motors having committed to no job cuts and no outsourcing of manufacturing activity in the near term, significant cost savings would be difficult to come by,” said Mr Ramnath S, Director, IDFC-SSKI Securities.

“They have made it clear that there will not be any outsourcing and the set up will be the same; in that case, there is no scope for cost cutting on the operational side and even in case of employees cost,” said an analyst from Dolat Capital.

The fact that global auto sales have been hit due to the sub-prime crisis is another reason that adds to anxiety about the future, said analysts.

“Global auto sales have slowed down substantially and in that too the worst hit are the premium brands,” said one of them. “The slow volume growth in the domestic commercial vehicle segment would also be taxing on the company.”

“Though the management has stated that the JLR acquisition would be debt free in the hands of Tata Motors, the company could be up against some challenges in terms of higher product warranties as well as other immediate liabilities of the order of $2-3 billion,” said Mr Ramnath.

Furthermore, Tata Motors would also have to garner enough resources for JLR’s R&D programmes, especially, given that these companies together are unlikely to generate substantial cash in the near term.

“In the context of the limited information available at this point of time, we believe that the acquisition would be negative for Tata Motors in the short term and benefits, if any, are likely to be realised only in the long term,” he said.

FINANCING

The views on the financing aspect are more varied. The decision to replace the short-term financing with a mix of debt and equity does not seem to be a major problem, said one analyst. But on the positive side, the Tatas are going to unlock value of their investments in subsidiaries. This will definitely reduce the interest burden,” said an analyst with Dolat Capital Market Ltd. Equity funding might be a problem in such choppy times in the market, another analyst said.

An analyst with K R Choksey said that Tata Motors would face problems regarding interest rates on the loans that they are taking to finance this deal.

“The amount of R&D spend on JLR is close to Rs 3,600 crore and that might add to the burden. Tata Motors currently spends around Rs 800 crore on R&D,” said the Dolat Capital analyst.

The outlook for the long term was positive. “In the long run, this is an excellent synergy, as Tata Motors can use the technology used by Land Rover in their own MUVs and SUVs,” the analyst with K.R Choksey added.

“Tata Motors could face some pain in the short run and there might be some strain on their balance sheets, but in the long run, it is definitely very viable for Tatas,” said Mr Alex Mathew, Head of Research, Geojit Financial Services Ltd. Tata Motors Ltd shares closed at Rs 655.20 on Thursday, which is 3.56 per cent down from its previous close.

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