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Mumbai, April 26

VEHICLE financing business should contribute up to 12 per cent of Tata Motors' profit before tax in 2005-06, the Tata Chairman, Mr Ratan Tata, said at a court-convened meeting on Tuesday seeking shareholders' approval for the merger of Tata Finance Ltd (TFL) with the company.

The result of the related poll will be known on Wednesday. Tata Motors will get a tax benefit of Rs 50 crore from the merger, which does not include Nishkalp Investments and other associate companies of TFL.

It may be recalled that a major portion of TFL's losses had been incurred in Nishkalp.

Following TFL's financial trouble, the Tatas had pumped fresh funds into it and since August 2003, TFL had been functioning with Tata Motors' Bureau of Hire Purchase & Credit (BHPC) as a virtual financing entity.

During its restructuring phase, TFL had returned to its core vehicle financing business in which form there is a fit with BHPC's operations.

The larger BHPC, having 10 per cent market share in Tata Motors' sales does not have direct market channels. TFL has direct market channels but a higher cost of borrowing.

Besides helping to reduce the cost of borrowing and cut duplication of support systems, a bigger in-house financing arm is also seen to cushion Tata Motors against business cycles.

Globally, captive financing usually funds 40-45 per cent of an automobile manufacturer's retail sales with contribution to profitability that varies from 15-150 per cent.

A captive financing arm also helps the manufacturer to capture a greater share of value from the life cycle of a vehicle.

"It is a move that we believe is good for both the companies," Mr Tata said defending the merger and addressing criticism from some shareholders.

At least one investor, who referred to TFL as a "sick company", alleged the merger was detrimental to Tata Motors and allowed the promoters to indirectly hike their equity holding in the automobile manufacturer.

He later conceded that the change to promoters' equity stake would be "negligible".

Citing TFL's profitability for the last seven quarters, Mr Tata said the company was not sick. Further, according to Mr Praveen Kadle, Executive Director, Tata Motors, all NPAs and liabilities at TFL had been provided for.

Such provisioning in 2003-2004 was only to the extent of Rs 34 crore.

"There will be no debt coming to the general reserves of Tata Motors. In a worst-case scenario, that will be just Rs 8-9 crore," he said.

"The merger at this point is not a bail out for TFL. It is because we believe that is the best for both companies," Mr Tata said, arguing that a bail out was when Tata Sons had intervened with fresh equity infusion for the ailing financier.

(This article was published in the Business Line print edition dated April 27, 2005)
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