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BL Research Bureau

Tata Motors’ announcement that it would reduce the size of its proposed rights issue to the extent of Rs 3,000 crore is welcome relief to investors in the stock.

Worries over a 40-45 per cent dilution in equity base, arising from the Rs 7,200-crore issue to part-fund the JLR acquisition, had badly beaten down the stock since end-May, prompting a decline to its 52-week low of Rs 374 in early July. It has since made a 12 per cent recovery.

The company now expects to raise the foregone Rs 3,000 crore through partial divestment of its investments, which will avoid additional burden on either the debt or equity side of the balance sheet.

Given the company’s huge funding requirements and an unfavourable macro-economic scenario, this move comes as no surprise. The company had already initiated the process of unlocking funds from its investment book in the third quarter of last year.

During the third quarter of 2008, the company had sold 11.11 per cent in HV Axles to a group company, Tata Capital for Rs 65 crore.

In the fourth quarter, Tata Motors sold a 15 per cent stake in HV Transmissions and a 3.89 per cent stake in HV Axles to again Tata Capital, earning about Rs 73.75 crore.

This continued into the first quarter of this year as well where the company earned about Rs 114 crore from partial divestment of its stake in Tata Autocomp Systems.

Though this move gives investors a reason to cheer, unease over subdued volume growth in vehicle sales, thin operating margins and higher interest burden remain on the core business.

The company reported a 30 per cent decline in profits on net sales growth of 14 per cent in the first quarter. The rise in revenues was driven by a 7 per cent increase in prices, though total volumes grew by 4 per cent during the same period.

Apart from the rights issue, the company had, in March and in June this year, announced plans to raise $1 billion (about Rs 4,300 crore) from the overseas markets through a combination of debt and equity.

Apart from part-funding the JLR buy, these funds were also slated for the company’s ambitious expansion plans of Rs 13,000 crore over FY07-10.

This was primarily towards setting up a new plant at Uttarakhand for the mini-truck Ace, developing new platforms for the Indica, Indigo, a global truck and a new utility vehicle, besides the Rs 1-lakh car, Nano.

More Stories on : Rights Issue | Announcements | Tata Motors Ltd | HCV/LCV/Tractors

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