Bright prospects for the Jaguar Land Rover (JLR) division and the cyclical turnaround in domestic automobile sales bode well for Tata Motors. Existing shareholders with a horizon of one to two years can subscribe to the rights issue, which opened on April 17.

The company is issuing six shares for every 109 held — at ₹450 for ordinary shareholders and at ₹271 for differential voting rights (DVR) shareholders. The issue prices are at a 16-20 per cent discount to the current market price of ₹535 (ordinary shares) and ₹341 (DVR). At market price, the shares also trade at a reasonable 7 (DVR) to 11 (ordinary shares) times the trailing 12-month consolidated earnings.

Though the ₹7,500-crore offer is expected to result in an equity dilution of about 5 per cent immediately, the company will repay borrowings up to ₹4,000 crore from the issue.

This will bring down leverage in the standalone balance-sheet and, hence, the interest cost (debt-equity ratio of 1.2 currently). It is also expected to help fund about ₹1,500 crore of capex requirements, predominantly in the domestic business, without taking on additional debt.

Over the next two years, a recovery in domestic vehicle sales and expected volume growth at JLR from new launches will make up for the impact of the dilution in the earnings per share.

Sound prospects

For the nine months ended December 2014, consolidated net sales grew 16.5 per cent over the same period last year to ₹1,95,200 crore. Net profit rose 22 per cent to ₹12,270 crore. With the standalone operations making losses, both top- and bottom-line growth was entirely supported by JLR. Consolidated operating margins stood at 16.8 per cent.

JLR ended 2014-15 with a volume growth of 9 per cent. But double-digit volume growth will come in the months to come, with sanguine prospects for the recently launched Discovery Sport, the new Jaguar XF and XE, and the upcoming Jaguar F-Pace.

Launch expenses, along with the beginning of local manufacturing of the Range Rover Evoque in China (through a joint venture), are expected to weigh on EBITDA margins in the next two/three quarters.

But expansion in capacity utilisation in China and a richer product mix from the launches will mitigate the impact to some extent.

Back home, the turnaround in domestic truck and bus sales is expected to gain further traction as the economy heats up.

Besides, launches such as of the Bolt and the Zest in the passenger vehicles segment will stand the company in good stead as inflation and interest rates come down and demand for new cars inches up.

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