The Hindu Business Line : Tata Motors 3-year FD looks attractive

Fixed deposits offered by Tata Motors may be a good investment option for investors looking to park excess funds for three years. The company is accepting a minimum deposit of Rs 20,000 with additional amounts in multiples of Rs 10,000 for a maximum of three years.

Three-year deposit: Attractive

The offer of 11 per cent interest for a three-year deposit is an attractive option, as there may be few alternatives available for this term, with similar rates on offer. The deposit offers 0.5 per cent additional interest for senior citizens, employees and shareholders in Tata Motors. Therefore, investors can buy a small lot of Tata Motors shares and avail a higher rate on the fixed deposit.

Even at an 11 per cent interest compounded quarterly, the yield on the cumulative plan works out to an attractive 12.83 per cent at the end of the deposit period. Currently, only smaller banks, such as Tamilnad Mercantile Bank and Karur Vysya Bank, offer similar interest rates for a three-year deposit. On the other hand, the quarterly income plan appears attractive for senior citizens seeking to earn regular income from their investments. These investors may note that the company also offers a monthly income plan for deposits of Rs 1,00,000 and above.

Choices aplenty

But those with a one- to two-year perspective should consider term deposit plans available from banks ahead of this FD. Tata Motors is offering an interest rate of 10 per cent for one-year deposits and 10.5 per cent for those investing for two years. That translates into yields of 10.38 per cent and 11.52 per cent respectively, with interest compounded quarterly. Though some banks have revised their deposit rates downwards recently (with effect from December 1), there are still several others who offer 10.5 or even 11 per cent for one and two years. Investors should note that company deposits carry a higher element of credit risk than bank deposits. Apart from being safer than company FDs, bank deposits are protected by deposit insurance (up to Rs 1 lakh), not available on company FDs.

Tough times

Tata Motors is authorised to raise up to Rs 1,931.48 crore from the public through fixed deposits. The money raised through this instrument is expected to be used towards repaying the bridge loan taken to acquire Jaguar Land Rover, maturing mid-2009.

Tata Motors has been faced with several challenges over the past year.

First, its commercial vehicles business was hit by a cyclical slowdown and stiff interest rates. Falling demand due to non-availability of finance and the slowing of the economy has resulted in production cuts in three of its plants last month. In the first seven months (April-October), CV sales volume has fallen by 5.54 per cent compared to the previous year.

Passenger vehicles too have now joined the slowdown. This has been compounded by the pull-out of the Nano project from West Bengal resulting in reinvestment costs, a delay in the launch and a possible change in the original production schedule.

The $2.3-billion acquisition of the Jaguar and Land Rover (JLR) brands also poses difficulties for Tata Motors. It happened when the US and European auto industry (which accounts for about 50 per cent of JLR’s sales) is losing steam.

Although JLR operations have been profitable at the operating level for the first six months (January-June), Tata Motors is in for the long haul, considering the additional investments it may have to make towards working capital and R&D. The new emission norms likely to be implemented in the EU from 2012 might also require further investments towards making these vehicles compliant.

Besides, this deal was done when the credit crisis had just begun to unfurl. The company has since been exploring several options – unlocking of investments in subsidiaries, a rights issue, a preference share issue (later withdrawn), raising money in the international markets and, now, fixed deposits – to fund it.

Given the deteriorating global economic environment and the falling investor confidence, the company has had a tough time procuring the necessary funds. However, a three-year window may also offer enough room for the company to tide over many of the above problems, which are a function of the domestic slowdown and the ongoing credit crunch.

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