Tata Motors

Tata Motors is in a phase that cricket commentators would call consolidation — that is, the period where the side chasing runs rebuilds its innings after the fall of a couple of quick wickets. The company is slowly but surely picking up the threads once again and assuming that the overall domestic economy gets back on rails and there are no more shocks hereon, the company should be back in the chase by the end of the third quarter of this fiscal.

The biggest worry remains Jaguar Land Rover, its falling sales and rising debts.

Shareholders can continue to hold the stock, trading at Rs 337, given the incipient signs of recovery. However, fresh buying can be put off till the signs of revival become stronger and commercial vehicle (CV) demand begins to show firm growth signs. The stock has more than doubled since March and a rise in valuation from hereon will depend on the sustenance of the market recovery.
Emerging from the wilderness

Sales of commercial vehicles, the bread-and-butter business of TML, literally fell off a cliff in the October-December ’08 quarter (drop of 46 per cent compared to the same period in the earlier year). However, the period since then has seen an improvement with monthly volumes returning to levels that prevailed in the first half of 2008-09.

The credit goes largely to the stimulus measures announced by the Government; excise duty rates on commercial vehicles were reduced while depreciation rates were increased to 50 per cent. This coupled with the gradually easing credit markets and lower interest rates helped put commercial vehicle demand on the recovery path once again. Every month since December 2008 has been better than the previous one with March seeing the highest commercial vehicle sales in 2008-09.
Financially scarred

The industry’s troubles, however, have left deep scars on TML’s performance in 2008-09. The earnings picture would have been bleaker were it not for some generous help from the government directive on accounting for foreign exchange transactions which buttressed profit by Rs 418 crore, net of tax. Also buoying the bottomline was a profit of Rs 520 crore on sale of long-term investments during the year. Yet, despite its troubles, the declaration of a Rs 6 per share dividend (face value of Rs 10 per share) is a sign of the company’s confidence and the comfortable liquidity position that it is now in.
Careful optimism

The CV market is beginning to show the first signs of a recovery. Demand is growing again in the light commercial vehicle (LCV) segment but heavy commercial vehicles are yet to see return of interest. Indeed, TML’s Uttarakhand plant, which produces the Ace light commercial vehicle, is running close to capacity. This is good news as the Ace enjoys the highest margins among all of TML’s products.

Liquidity in the market is improving even as interest rates at the borrower level are gradually beginning to soften. The critical aspect for return of truck buyers will be a sustained revival in the manufacturing sector, which has been sending out mixed signals in recent months.

The prediction of a normal monsoon is encouraging for CV demand which is driven by sentiment. With export-related cargo down to a trickle, fleet operators will be looking to a bountiful harvest for business.

There is reason to be optimistic on the costs front as commodity prices are way off their highs. TML says that it expects raw material costs to soon return to levels that prevailed in early 2008.

The company is gradually rebuilding its finances which were in disarray following the Jaguar Land Rover (JLR) deal. While a part of the bridge loan taken to fund the JLR deal has been paid off by the Rs 4,200 crore bond issue made on favourable terms, the balance of $1 billion has been rolled over for another 18 months.

The bonds may push the debt:equity ratio close to 1.3:1 from 1:1 at the end of 2008-09 but it will still be at a comfortable level. With capital expenditure scaled down, the company will be looking to fund its requirements from internal accruals as much as it can.

TML is maintaining a tight inventory position of just over two weeks which means that working capital will not be strained. It has also embarked on a programme to shave Rs 1,000 crore off costs in the next three years.

Cost control is in the DNA of the company and was a vital factor in its turnaround after posting a loss early this decade.

As the market gradually recovers, orders for buses from state transport corporations under the Jawaharlal Nehru National Urban Renewal Mission will provide the much-needed cushion in the next three months.

TML’s passenger car business was hit more than that of competition as the bulk of Indica’s demand comes from the taxi segment which has been hit by the slowdown in sectors such as IT and BPO. There is relatively lesser worry on the cars front and an economic recovery will see the return of buyers.
JLR worries

Amidst the encouraging signs, one big spot of worry is JLR. North America and UK account for about half of JLR’s sales and the recession in these markets has hit business hard.

Tata Motors, which will put out a detailed report on the JLR business in a month’s time, says that things are beginning to improve. Among its other markets, China is said to be doing significantly better now while Russia is just about recovering. The West Asia market continues to be challenging.

JLR was bought debt-free, but its loans have already crossed $1 billion in the last one year. Given the change in mileage and emission regulations in the US and Europe, JLR has to invest in product development and technology if it is to remain competitive.

Given the downtrend in JLR’s revenues, TML may find itself either pumping more money into JLR or guaranteeing its loans. This could be tricky, especially if conditions in the domestic market do not improve.

That brings us to the final risk that TML faces — delay in CV demand recovery. Though overall signs are promising, if CV demand fails to take off by the end of this calendar year, TML could find itself in a spot. That would be somewhat like the fall of a couple of more wickets just when the run-chase has been put back on track.